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Yamana Gold (NYSE:AUY)

Q2 2012 Earnings Call

August 09, 2012 11:00 am ET

Executives

Peter J. Marrone - Founder, Executive Chairman and Chief Executive Officer

Ludovico Costa - President and Chief Operating Officer

Charles B. Main - Chief Financial Officer and Executive Vice President of Finance

Evandro Cintra - Senior Vice President of Technical Services

Darcy Edward Marud - Senior Vice President of Exploration

Analysts

Brian Christie - Desjardins Securities Inc., Research Division

Joung Park - Morningstar Inc., Research Division

Pawel Rajszel - Veritas Investment Research Corporation

David Haughton - BMO Capital Markets Canada

Don MacLean - Paradigm Capital, Inc., Research Division

Steven Butler - Canaccord Genuity, Research Division

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Yamana Gold's 2012 Second Quarter Results Conference Call and Webcast. [Operator Instructions] Please note that certain statements made during this call today may contain forward-looking information and actual results could differ from the conclusions or projections in that forward-looking information, which include, but are not limited to, statements with respect to the estimation of mineral reserves and resources, the timing and amount of estimated future production, cost of production, capital expenditures, future metal prices and the cost and timing of the development of new projects. For a complete discussion of the risks, uncertainties and factor which may lead to our actual financial results and performance being different from the estimates contained in our forward-looking statements, please refer to our press release issued yesterday announcing our second quarter 2012 results, as well as our management's discussion and analysis for the same period and other regulatory filing in Canada and the United States. I would like to remind everyone that this conference call is being recorded and will be available for replay today at 2 p.m. Eastern time. Replay information and the presentation slides accompanying this conference call and webcast are available on Yamana's website at yamana.com. I would now turn the call over to Mr. Peter Marrone, Chairman and CEO. Please go ahead, sir.

Peter J. Marrone

Thank you, Mohammed. Good morning, and thank you to all of you, for joining us this morning. I will begin with a general review of our second quarter results, and as we've done in the past, I'll then turn the call over to the members of our senior management, as highlighted here, to provide further insights and highlights into our financial information and more detail on the quarter.

Dependability. Dependability means for us that we can rely on our existing operations to meet plans both on production and costs and that our operations will generate the production we expect at our estimated costs so that we can generate the cash flow that we expect. Dependability also means that we can get production and generate cash flow from that production from a new operation within a reasonable and predictable timeframe and that, that cash flow will be within a tolerance of what we are forecasting when we first make a decision to construct a project and then as we start up operations. Financial performance and what we have described as the financial growth of the company in terms of revenue, cash flow and earnings are very important to us. And while we have a long growth runway with significant production increases that are in progress beginning in the end of this year with 2 mines that come in to production, the middle of next year, with another mine that comes into production, when we look at the development of new projects, we have some confidence that the returns are sufficiently high to justify the investment and that they will generate the cash flow that we are forecasting.

Our business model looks at gold ounces from the ground but all the way up to sales. Although always with a focus on cash flow generation and profitability, not all gold ounces are the same and our emphasis is on sticking to what we know where we know it for the generation of new ounces and increases in cash flow, always with an eye on the dependability, as much as possible, of an operation. In the end, the operation mining enterprise in the business and we have to run it as a business. Increasing resources and production are important in the first step, although they have to generate cash flow return and value. Sometimes every operation performs according to plan, although our focus is to ensure that at least the core operations and those are the ones that best contribute to cash flow, performed at or better than our plan, and other operations perform within a modest tolerance of plan.

Sometime ago, we evaluated what were the niche areas that could distinguish us and thereby create value. We begin with the philosophy of sticking to familiarity of operational and technical requirements, manageability of operations, both on size and on costs, and operating in jurisdictions that are familiar to us. Our sweet spot in terms of size of operation is 100,000 to 200,000 ounces per year, mostly because of the manageability of capital, comparative ease of discovery and development, while at the same time positively contributing to our production growth.

We focus on exploration for new better discoveries, wherever possible, although the focus is on familiar geologies, familiar countries and at or near existing operations. We are geographically focused in operations and in new discoveries in the countries in which we operate. While globally, we're a Latin Americas company and more generally an Americas company, these are the core jurisdictions in which we operate. This is a core part of our business model.

So on to Q2. We produced just over 288,000 ounces, which exceeds Q2 of last year and Q1 of this year. We plan to produce more quarter-over-quarter from Q1 to Q2 as we had stated at the beginning of the year and which we have done from Q1 to Q2 and we anticipate being able to do into Q3 and Q4. And our metal production cumulatively met or exceeded our plan production with gold production on plan and copper production in excess of plan.

Our metal production was also on plan for the first half of the year. We produced just over 567,000 ounces in that area, which positions us well for the second half of the year and for the entire year. We indicated earlier this year that the second half of the year would provide us with a higher production level, mostly due to the following things: the continuing ramp up of Mercedes, which is going very well for us; the start up and ramp up of the PTR plan for tailings reprocessing at Minera Florida; the steady improvement at Chapada after our maintenance of our mill in Q1; and the sequenced expected higher grade at El Piñon.

Our guidance of 1.175 million ounces, up to 1.3 million ounces, which we have generally rounded from 1.2 million to 1.3 million ounces for ease of reference for this year is on track as we complete H1, the first half of the year. And given the quarter-over-quarter production increases that we anticipate into Q3 and Q4, all as we've indicated in our prior guidance.

As we now progress through Q3 now being almost halfway through Q3, we expect to be above our low end of 1.175 million ounces and likely above 1.2 million ounces, well within our guidance range for the year. And with a couple of new projects now at or above 85% completion level that are expected to start up by the end of this year and with Pilar advancing to start up, now past the 55% completion level by the middle of 2013, we should continue to see an increase in production next year also. We produced gold in Q2 below $250 per ounce, which was our guidance also, and we will continue our efforts for the rest of the year and the years to follow on costs containment. And as you've heard us say before, the cost-containment for us includes by-product credit that comes from copper.

Returning value to shareholders to us includes by means of returning cash by way of dividends. In the past year, our annualized dividend has increased by 55% and has increased 3x. If we go back to 2009, our dividend has increased by a full 550%. In Q2, we again increased our dividend, now with $0.26 per share. The current dividend level represents one of the highest dividend yields in the industry and our dividend philosophy is this: we believe that dividends should be sustainable, which we evaluate through cash flow levels, both current cash flow and cash flow we can confidently deliver, or expect to deliver in the near term. That also goes to that dependability point that I made before. We have clearly established this trend obtaining and increasing our dividends, and we anticipate that we will be in a position to be able to continue to do that as new minds come close to start up of operations and then the delivery of cash flow from them. This is a trend that we continuously deliver production growth through 2014 to that planned 1.75 million ounces in that year.

An opportunity to provide further production growth comes with our proposed acquisition of Extorre. We announced that acquisition in this quarter just completed on June 18. Cerro Moro is Extorre's principal asset. This asset already carries a large mineral resource base at high-grade, one where we see lots of potential for significant growth. Cerro Moro is a deposit type that we know in a jurisdiction that we understand. We believe this is another opportunity for us to deliver significant value and look forward to the anticipated closing, which is expected before the end of this month. We will be evaluating a plan for a 2015 start up of production that targets at or above 200,000 ounces of gold and gold equivalent per year. We plan to provide an update on our exploration and development plans by the end of this year.

We also have an opportunity to deliver value through other projects that are a little more advanced than already owned by Yamana, and I refer principally and in particular to Jeronimo and to Suyai. At Jeronimo, the components of the feasibility study were completed during the quarter. We have initiated discussions with our joint venture partner, Codelco, and at the same time, we are completing additional studies to provide further optimizations and advanced engineering studies to provide further certainty with costs and specifics of processing. That feasibility study shows, prior to these optimizations, an initial capital of $425 million, that includes a $50 million contingency, operating costs of at or below $650 per ounce. On an average annual production of 150,000 ounces per year with production in the first 4 years at a higher level, which accelerates our payback. This is based on a throughput of 1.5 million tons of ore processing per year and recoveries of approximately 86%.

As we continue to advance the project and advance our discussions with Codelco, we expect to provide further updates on Jeronimo sometime before the end of this year. We feel we have a significantly robust project although we also feel that before we commit our portion of this CapEx to the project at these levels, as suggested in our feasibility study, we want greater certainty in what we will get for it. That is a prudent practice and a prudent way to manage a business.

Let's come to the province of Chubut and where we have our Suyai product. A new framework for mining was introduced during this quarter. Once passed, this law will allow for mining throughout the province. Given the historic work that has already been completed on the project and in addition to certain additional desk top studies that have been ongoing for us, we hope to be able to deliver an accelerated timetable for the completion of the feasibility study and advance the Suyai project, always subject to the adoption of that mining framework.

Now we're encouraged. We're encouraged by the national, provincial and municipal willingness to create a framework for mining in Chubut and we will continue to monitor developments, while on a parallel path, we advanced certain study that will allow us, as I mentioned, to fast-track a feasibility study for the project. Our approach will remain to work cooperatively with local communities along with the municipal, provincial and national governments on creating a sustainable long-term mining framework and plan that will benefit Suyai along with other stakeholders. Make no mistake, however, that this is a high-grade deposit that fits within our wheelhouse of competency. It is similar to Cerro Moro, similar to El Peñón, and similar to Mercedes, geologically and from a mining and processing perspective. This is a deposit that can support a production profile of over 200,000 ounces per year at a low-cost, below our current cost structure. In addition to these more advanced projects, also, we have exploration from our explorations group that continues to pursue new projects and that continues to pursue new ounces of discovery at existing mines and existing projects that will further fill our growth pipeline and deliver further value to shareholders.

And with that, I will turn the call to Ludovico, our Chief Operations Officer on the operational aspects of Q2.

Ludovico Costa

Thank you, Peter. Second quarter production and cash reserves were within expectations. Gold equivalent production was 288,700 gold equivalent ounces, which represents an increase over the first part of 2012 and over the second quarter of 2011. This included gold production of 242,692 ounces and a similar production of 2.3 million ounces. We also produced 40 million pounds of copper from Chapada.

For the first half of 2012, we produced 567,530 gold equivalent ounces, which includes 4.5 million ounces of silver. Chapada produced just under 71 million pounds of copper in the first half of this year. Cash costs for the quarter were $244 per gold equivalent ounces on a byproduct basis and $536 per ounce on a corporate base.

For the first half of 2012, cash flows were $265 per gold equivalent ounces. We expect production growth in the second half just as we delivered in the previous years with quarter-over-quarter growth and the cost has decline. We are reiterating our production cost guidance for the year. We produced between 1.2 million to 1.3 million ounces at costs below $250 per ounce. At Chapada, 5.8 million tons are processed and expect the grade and record for the production of 35,697 ounces of gold and 40 million pounds of copper. The results for the quarter were in line with the expectation increased from Q1 levels as a result of long time permanent maintenance in the first quarter.

Gold product cash costs for the quarter were $302 per gold equivalent ounces, bringing the first half average down largely as a result of increased corporate margin and production in the quarter. In the second quarter, El Peñón produced 150,245 gold equivalent ounces, consisting of 680,275 ounces of gold and 1.28 million ounces of silver at the cost of $491 per gold equivalent ounces.

When compared to second quarter last year, production was impacted by lower grades and tonnes. Mining ore [ph] lower grade was expected as part of a normal mining plan, as was reduced tonnages to optimize recovery of the lower grade material similar to Q1. Accordingly to our mining plan, sewage mining lower areas grades we allow access to higher-grade areas for the remainder of the year. We expected increased production and lower cost for the second half in Peñón. Gualcamayo produced 38,297 gold ounces in the second quarter that has largely declined from the first quarter of the year when compared to the same period last year. Higher tonnage was offset by lower grades and lower recovery rates. The low recourse can be partially attributed to the long recovery timing experienced in the higher sales of the summer-rich bed. Into the end of Q2, materials now are being placed in the leash beds in the north valley, which is expected to positively impact to recall beginning the fourth quarter. Costs in Gualcamayo were impacted by the lower grades in recovery in the quarter and also reflects increasing inflationary pressures on labor and consumables, and increased maintenance costs which are expecting improved equipment and availability. The underground development of QDD Lower West continues to advance on schedule.

Gualcamayo is expected to achieve the 200,000 ounces sustaining production level beginning 2014. Production at Jacobina's second quarter was 28,005 gold ounces. High recoveries were slightly offset by lower grades in the slightly recurring tonnage resulting in increased costs in the quarter compared to Q2 last year. Costs are also impacted by inflationary pressures and maintenance costs, which include the roof support improvements made during Q2. Maintenance expenses are expected to decrease with the arrival of new equipment engine harvest [ph]. The long-term cost structure is expected to be closer to Q1 average. Minera Florida produced 33,978 gold equivalent ounces in the second quarter, which includes 19,179 ounces of gold and 239,901 ounces of silver. The lower grade that it covers on fuel tonnage resulting in likely lower production level and increased costs, which were also impacted by inflation and the higher power cost after they compared to the Q2 last year. The expense actually to which involves the retreatment of historic tailings continues. The treatment plant was completed in May, however, the ramp up is taking a little longer than expected, which can be partly attributed to the installation of the zinc recovery plant, which is expected to help reduce costs. For the remainder of the year, we expect [indiscernible] to be in the range of 12 to 16 gold equivalent ounces.

Beginning 2013, the contribution from this expansion is expected to be in the range of 14,000 gold equivalent ounces per year. Costs are expected to improve with the contribution from the teams reprocessing due in the lack of mining processes. To ensure this move deliver this project, 2 new additions to our senior leadership in Chile have been charged with this project and delivery is their top priority. Production at Mercedes in the second quarter was 28,900 gold equivalent ounces, consisting of 26,646 ounces of gold and 111,729 ounces of silver. Gold production increased 21% and silver production increased by 16% compared to the first part of 2012. Cash equivalent declined by 16% relative to Q1 to $499 per gold equivalent ounces. Costs are expected to trend lower throughout the second half to average $475 to $500 per ounce for the year. Mercedes continues to perform very well. At the end of the delivery, over 16,000 ounces of the lower cost in the second quarter are expected. Alumbrera production increased by 13% over the same period last year. Our attributable production was over 12,000 ounces of gold and 10.5 in millions pounds of copper.

I will now turn it to Charles to review our financial performance.

Charles B. Main

Thank you, Ludovico. We continue to deliver strong financial results this quarter despite a gold price that was only modestly higher and significant declines in the prices of our other commodities. The company remains focused on the delivery of our liable and predictable financial performance.

Now onto the actual results. Revenue in the second quarter was $536 million. This revenue reflects sales in the quarter and the modestly increased full price, which was up by 6% compared to the same period last year, the decline in copper prices of 15% and silver prices, which were off 29%. Sales in the quarter slightly lagged production, both gold and copper. Revenues generally are impacted by the timing of shipments. For the remaining quarters of 2012, we expect to sell closer to 100% of production. Q2 was the exception rather than the rule.

In the second half, we will focus on reducing the GAAP between ounces produced and sold, in addition, we will reduce the level of finished product. This reduces the cycle from the time of production to the point in time that we have cash in our hands. Adjusted earnings were $135 million or $0.18 per share for the quarter. Earnings were impacted by lower sales volumes and commodity prices. They were also impacted by the lack of an equity pickup for our ownership at Alumbrera, which was driven by the lack of sales in the quarter. On an attributable basis, Alumbrera only sold 2.3 million pounds of copper of the 10.5 million pounds produced. This represents only about 20% of production. Sales were delayed as a result of the new export revenue repatriation regulations that had been revised and in July, Alumbrera resumed exports sales. As the buildup of inventory will be sold over the course of the rest of the year, we expect enhanced equity pickup over the next 2 quarters. I think it's important to point out that copper production at Alumbrera was up 13% over the same quarter last year.

Operating cash flow before changes in working capital was $241 million or $0.32 per share in the quarter, which is an increase of $0.02 per share from the first quarter of 2012. Cash flow was impacted by lower earnings, the lack of a dividend payment from Alumbrera, which is related to the sales in the quarter and their payment of $40 million of cash taxes relating to the prior year. Without that payment, cash flow would have been $0.05 higher. It was good to see the strong cash flow contribution from Mercedes in the quarter, this is impressive given the rarity of a smooth ramp up when a mine first starts to operate. We do anticipate receiving dividends from Alumbrera sometime in the fourth quarter. Our cash margin, which I have described in the past as a good gauge of cost containment, was $1,361 in the quarter. When compared to the first quarter, the margin declined by 3%, however, the gold price declined by 5%, this demonstrates an improved cost structure in the quarter to a net margin expansion of 2%. We expect this improvement in margins to continue throughout the remainder of the year.

I've highlighted in the past, our disciplined approach in view of our financial performance, we have committed to continually improving the financial strength of our balance sheet. This approach is again reflected in our second quarter results. Our capital spending in the second quarter was $263 million. This includes capitalized expiration of $37 million, which includes property purchases of $17.5 million. Expense exploration for the quarter was $14 million, taking total expiration spending to $51 million. Expansionary capital is $138 million and sustaining capital is $88.5 million. Our capital spending year-to-date is on budget and we maintain our guidance of $665 million for annual expansionary capital for 2012 and $340 million for sustaining capital. We continue to diligently monitor capital expenditures to keep it under control.

We expensed $36 million for corporate G&A as a result of growing operations, net finance expenses for the quarter were $21 million, an increase over 2011 and the first quarter, which was largely driven by noncash foreign exchange losses. Depreciation, depletion and amortization for the quarter was $95 million, higher than previous quarters, mostly attributable to a full quarter production and therefore, more depreciation at Mercedes. At the end of the quarter, we had cash, cash equivalents of $699 million, debt of $766 million and cash in available credit of $1.4 billion. Our balance sheet at the end of the second quarter, which remains sound, will allow us to execute on our growth plans without additional external financing. We expect the trend of predictable delivery of strong financial results to continue throughout the year as driven by operational success.

Now I'll turn presentation over to Evandro for an update on our development projects.

Evandro Cintra

Thank you, Chuck. During the quarter, work continues to advance our 3 development projects and as thought, being the first over the 3 new mines expect to come into production is now 92% complete. During the quarter, mine development and electromechanical works continued as planned. Q1 Santa Luz is 89% complete and continues to advance on schedule.

During the quarter, silver works power lining construction and electromechanical works continued as planned, thus, Ernesto and Santa Luz are only scheduled to be completed by year end. The project Pilar is now 53% completed. During the quarter, civil and electromechanical works continued in underground development of Caiamar was initiated, delighted and expected to start by mid-2013 and remains fully schedule to do so. We are also advancing other projects to create value and to continue to deliver growth. At Chapada, we are advancing a development plan for Suruca and Corpo Sul to enhance the future production profile. Suruca alone, we have contributed closer to 50,000 gold ounces, beginning in 2013. The finished retreatment at Minera Florida is ramping up more slowly than we anticipated, as Ludovico explained. But beginning next year, it will -- we had the 40,000 gold equivalent ounces of annual production.

At Gualcamayo, QDD lower west development is on track to be completed by mid-2013 and are already being loaded on the North Valley pads. These projects through Gualcamayo sustainable production level to 200,000 ounces beginning in 2014. We also have other projects that will fuel our future project by a delay [ph] that are currently being advance. At Jeronimo as Peter mentioned, discussions with our joint venture partner have begun. At the same time, we have begun optimization on some components of the feasibility work and initiating advanced engineering studies, normally done once a construction decision has been made. These additional studies will provide for better certainty of costs, and to ensure more confidence in the details and the specifics of processing. Peter also mentioned Suyai and the new mining framework, we continue with our desktop studies in leveraging the historical work already completed to advancing this process. At Cerro Moro, ending the closing of the transaction, we will be evaluating our plan for 2016 for production to start happening of approximately 200,000 gold equivalent ounces production level. Now Darcy will provide an update on exploration.

Darcy Edward Marud

Thank you, Evandro. It's a brief, brief review of exploration on the heels of a news release that was put out earlier in the second quarter. The highlights being at El Peñón, where we've got a new discovery at Fortuna Este, a continuous vein zone with approximately 1 kilometer strike length currently outlined. Also at Peñón, the Providencia structure has resulted in the discovery of 2 new subparallel veins that have been discovered in the hanging Monastery of Providencia and are currently being outlined by diamond drilling from the underground development. At Dorada West, we have the discovery of the Dorada West 1 and 2 veins, which are both new veins in the hanging wall of the Dorada discovered between Dorada at Providencia. And the Elizabeth, a new high rate discovery is being delineated, which is due east of the Victoria discovery where current resource and reserve is being developed from the underground. At Mercedes, we have the Marianna discovery, which is the extension of the Barrancas deposits to the Northwest. Diamond drilling during the second quarter and the third quarter will define an initial resource, and hopefully, a reserve by the end of the year, as well drilling in Lupita is increasing the confidence and will upgrade the mineral resources from the inferred category into indicated. At Chapada, our most significant discovery during the second quarter, Corpo Sul has now been defined along a straight plate of about 4.5 kilometers -- sorry, and has opened a long strike, down dipped and remains open up dipped as well. Economic gold and copper mineralization has now been identified as Chapada over combined strike length of 16 kilometers when you include Corpo Sul, Chapada and Suruca to the north. At Pilar, Maria Lazarus drilling has returned significant results that are similar to Jordino in both grade and width. The deposit is open in both directions and at more so in the southeast direction where current drilling in the second quarter has extended mineralization significantly. Jordino and Maria Lazarus continue to confirm that mineralized zones represent possible ore sources for future production. With that short, expiration review I pass it back to Peter.

Peter J. Marrone

Darcy, thank you very much. I'd like to take a few moments before we complete the call and open it to questions, beginning with what I would describe as Q2 in retrospect. And what I would like to do is talk about what we liked in Q2, what we did not like in Q2 and where we are enthusiastic. We like that we met our production target in Q2. We met our cost target on a byproduct bases. We advanced our development stage projects to be completed end of this year for 2, and at Pilar at the middle of next year. We advanced our studies for new projects and principally the continuing efforts in Suyai and the feasibility study efforts on Jeronimo. We improved our asset portfolio with the pending acquisition to be completed this month of an asset that is like our other mines and assets with high grade and in a familiar jurisdiction.

What we didn't like about Q2 is that while we increased our cash flow to Q1, we didn't increase our earnings. We did not maximize our sales, which would have contributed toward those earnings. We could not realize full value from our investment on Alumbrera. We have a positive investment there, but we could not realize our full value from that investment as there were understandable impediments to sales, but all of which have been dealt with since the end of the quarter. We fell behind in our ramp up of the PTR plant in Florida, which will have a corresponding impact, both on our production and our cost at our Minera Florida mine.

What are we enthusiastic about that perhaps compensates for some of those dislikes? The missed sales that were not realized in Q2 and including Alumbrera, were realized at the beginning of Q3. In addition, as Chuck mentioned, we have developed a plan that optimized the sales, that better matches sales to production every quarter. This quarter, we had approximately 32,000 ounces in inventory on the gold side, the average is between 24,000 and 26,000 ounces. We're looking at how we can better that 24,000 to 26,000 ounces that consistently remains on a rolling basis in inventory at the end of every quarter.

The concentrated in Alumbrera has since been sold, which will positively impact revenue, cash flow and earnings in Q3 and for the second half of the year. As Evandro and Ludovico mentioned, the PTR plant is now running and in ramp up, and as a result of the zinc recovery plant that had caused the delay, we should be getting the benefit of zinc recovery that will improve the cost structure. In addition, we're enthusiastic because gold production is on track in H1 and copper production was ahead of plan in the first half of the year and gold production in the second half is planned to exceed the first half, our guidance in other words, remains intact. We have 7 operations, 5 performed very well, a couple need improvement. Florida's production and improvement in costs will come from the PTR gold production. We would have wanted to be complete in the ramp earlier, although we're there now. Jacobina's cost improvement is a function of production. We should see more ounces and lower costs as the year progresses and into next year. As Ludovico mentioned, it is about availability of work and maintenance and we've now initiated plans to improve on those.

I thought I would take an opportunity to do a cost analysis that might be helpful for the benefit of those listening on the call and hopefully gives you the confidence that we have that our cost structure remain intact. We indicated that we believe that it is prudent and reasonable to treat copper as a byproduct credit. It's a natural offset to the inflationary pressure on costs. But even if we look on a co-product basis, not including copper as a credit, Chapada produced gold in Q1 and Q2 at a better cost structure than in Q1 and we should see for the rest of the year the cost structure be somewhere between Q1 and Q2.

El Peñón was slightly higher in Q2, but because of great improvements in the second half of the year, we should see a cost structure that comes down and should be somewhere in that range of between Q1 and Q2. Gualcamayo was up because of inflationary pressure in Argentina, but again, we should see because of improvements in production because of the North Valley that is now where we're loading or on to the pads, we should see improvement in cost structure and we expect to be somewhere in that range of Q1 to Q2.

Brasileiro performed well. Did better in the second half than in the first half, and we anticipate being able to replicate in Q3 and Q4 what we've done in Q2 and Mercedes, as Ludovico mentioned, came down in cost in Q2 from Q1 by about 4% and we should continue to see that trend improve so that we would expect to be in a range of $475 to $500 per ounce as Ludovico mentioned. I've excluded Jacobina and I've excluded Florida in that analysis. We know what we have to do to improve the cost structure of those 2 mines, but there are manageable things that we have to do. If we do not include those 2 mines, our cost structure between Q1 and Q2 this year was up a modest 4% from $477 to $496, below the $500 target that we set out and strived to achieve and we indicated at the beginning of this year. I hope that, that gives you the confidence that it gives us. That when we indicated that we would we in the range of $500 per ounce on a co-product basis, we will be in that range for the year and when we indicated that we would be below $250 per ounce on a byproduct basis, Q2 at $244 per ounce bodes very well for the rest of the year.

And finally, we're getting closer to our production target of 1.75 million ounces that gives us enthusiasm to the continuing development of this company. What should you expect from this company in the second half of this year? We expect to meet our guidance as Ludovico indicated. We will deliver Ernesto/Pau-a-Pique and C1 Santa Luz to start up of operations by the end of this year, commercial production into next year. We intend to advance Jeronimo through our discussions with Codelco and the further work that we're undertaking. We will Pilar towards its plant start up, expected in the middle of 2013, commercial production to follow within some months after that. Pending the successful closing of the Extorre transaction, which is in progress, we will provide an exploration and development plan for what will become one of our better opportunities at Cerro Moro. And over the remainder of the year, we will continue to advance Suyai and we will continue to provide updates on our exploration program. And when I'm asked what is my personal favorite, I am encouraged by Corpo Sul, because Corpo Sul is delivering to us. Extensions of known ore body, significant improvements in grade on copper in particular that allows us, as Evandro mentioned, to be able to sustain a high production level on gold and a high production level on copper at comparatively low cost.

In summary, I'd like to reiterate what you get when and what you should expect from us. We're a growth company. We provide growth and resources in ounces of production, but we also look to revenue cash flow, cash margins, as Chuck mentioned, through cost containment and other measures. We provide risk appropriate growth with planned superior returns. You can count on us to continue with our geographic focus in the Americas. What I said before, what we know and where we know it. We will continue to focus on projects that are our size and of a type that we know. We will stick with our technical competency and continue to develop those competencies. We will continue to provide organic growth through our existing asset base or with the small tuck-in acquisition of Extorre and then the continuous organic growth that we'll follow from there. That's how we think we best deliver value to shareholders.

And with that, perhaps if I can open the call to any questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Brian Christie.

Brian Christie - Desjardins Securities Inc., Research Division

Chuck, maybe you could give a little clarity. It looks like your sales were about 50,000 ounces light versus production and you suggested that you had already sold that material in Q3. So should we be looking for an extra 50,000 ounces of sales in this quarter?

Charles B. Main

No, that would be an incorrect conclusion. If I can just take you through a little bit of a reconciliation, production was at 288,700. Of that, Alumbrera production was 12,359. And we backed that out because when we give our sales number, it excludes the Alumbrera production. So from that 276,000 number, then there's approximately 2,000 ounces of gold that's produced at Chapada, that's in concentrate, that subject to a payable factor. Therefore, there's 2,000 ounces that you don't get paid for in that production. And then as we've talked about, we were about 6,000 ounces short in our sales compared to our production which we plan to improve on in the third quarter. But if you deduct that 6,000 ounces, then that would take you to our stated sales of 268,000 ounces. We had -- there was a shortfall in production at Alumbrera, they did get it off to a good start in the third quarter in shipping that out. The total catch up for Alumbrera will take the full 6 months. We did make mention of 30,000, 32,000 ounces of gold inventory. But as Peter mentioned, about 25,000 of that is kind of an ongoing flow for ounces in basically in transport. So we'll try to call back that 6,000 shortfall that I mentioned, plus we will be catching up additional production that was in shortfall at Alumbrera.

Peter J. Marrone

Perhaps if I could also wade in. Just to clarify, that 6,000 ounces, approximately it represents $0.01 per share and the Alumbrera production, sales of production, is approximately another $0.02 of earnings pickup that we would have received. That $0.03 would have been added to the $0.18 had we had the benefit of the Alumbrera sales in the quarter and reached a normalized level of our flow, as Chuck described, of about 24,000 to 26,000 ounces as compared to where we were at the end of the quarter of 32,000. We had an inventory of an additional 6,000 ounces, but because of timing and sequencing, we're not so. So we intend to sell those in this quarter, but in addition to that, progressively, you'll through this quarter into next quarter, it will take a period of time. We're going to try to reduce that float to something that is sustainably at a lower level. 26,000 ounces per quarter as the running float in this company is reasonable, but we think we can do better than that.

Operator

Our next question is from Joung Park.

Joung Park - Morningstar Inc., Research Division

Just had a couple of questions on Suyai, some exciting developments there. I think I did read a press release though by Pan-American that they said recently that they might abandon Navidad, which is another project in Suyai due to -- or in Chubut, due to the new proposed legislation, which also introduces higher royalty schemes. But it seems like you guys are looking at the new legal framework as a positive. So is that difference just due to the fact that Suyai has much higher grades and lower cost structure than Navidad?

Peter J. Marrone

It's difficult for me to comment on another potential operation and another company's prospects and opportunities. But what I would say to you is part of what you've said is a good starting point to the answer to that question. Suyai is a comparatively low CapEx high grade project, and it's also important to identify that we already have it in our portfolio. It came to us effectively as a legacy when we purchased Meridian in 2007. There's comparatively modest value to it because it just came as an add-on to the rest of the things that we were looking to buy when we bought Meridian. Principally as Peñón, Florida and Mercedes, and Jeronimo. So from our perspective, we are in a process slightly different position than other companies with other projects that may have already made investment into the purchase of projects or the development of those projects. But I also encourage you to look at it from our point of view, which is having the introduction of a mining framework, albeit it is only at this draft stage and this it is at the legislative stage. As with all things, it goes through a process. Having the introduction of a framework is better than having none. Because at least it indicates the willingness of the province of the local municipalities, the national government to work cooperatively toward the encouragement of mining across the country, but in this province, in particular. And that's why we're encouraged. Is the royalty structure higher than in other parts of Argentina as proposed in the draft legislation? Yes. It would be a pretense to say that it is not. We don't believe that, that is the final result, and we also believe that it will go through a process and we're encouraged by the formation of this organization called OFEMI, which is 10 governors in the province and the national government unified in a cooperative, deliberate, concerted effort toward the promotion of mining. And so we believe that, that structure ultimately will come more in line with other provinces in Argentina that have lower royalty structures.

Operator

Our next question is from Pawel Rajszel.

Pawel Rajszel - Veritas Investment Research Corporation

It looks like you might be ahead of schedule on C1 and Ernesto. I'm wondering if you see any possibility of a Q3 start up there instead of Q4?

Peter J. Marrone

We do expect to get a bit of production coming from one of the operations this year, but it would be very modest, Pawel. We're not anticipating that it's going to be a significant contributor to our production profile and certainly not to the commercial production and contributions to cash flow this year. Yes, we are ahead of schedule on the technical development of the project, but then what we have to do is we have to go through the start up process and that may take us a period of time. And so we're still standing to our guidance of start up by the end of this year and then commercial production in the first quarter or into the early part of the second quarter of next year.

Pawel Rajszel - Veritas Investment Research Corporation

Great, that's helpful. In the disclosure, you're targeting $340 million of sustaining CapEx for the year. You also mentioned that would be declining on a per-ounce basis maybe past 2014. Wondering if you're comfortable giving some guidance on where you think the sustaining CapEx might go on a per-ounce basis after 2014?

Peter J. Marrone

Well, I think we've also indicated that our sustaining capital would be in the range of $380 million to $400 million cumulatively into 2014 as we are at 1.75 million ounces. And I apologize I don't have a calculator nor can I do the math fast enough to divide that 1.75 million into that number, but that should give you a good indication of what the per ounce amount is expected to be.

Pawel Rajszel - Veritas Investment Research Corporation

But basically you would expect that $380 million, $400 million range sustainably beyond 2014?

Peter J. Marrone

With 1.75 million ounces, yes. Then we have to further evaluate what do we do with Jeronimo, Suyai, Cerro Moro, as they come closer to an evaluation of will they contribute to production then we'll be increasing the cumulative sustaining CapEx to account for those new ounces. So the total number will go up, but the number per ounce should stay flat or lower because of these new operations.

Operator

The next question is from David Haughton.

David Haughton - BMO Capital Markets Canada

Mercedes has been a very good start up. I noticed that you're achieving very good throughput of over 1,600 tons a day. At one stage you've been thinking about 1,800 tons a day. Firstly, is the 1,600 plus sustainable and how hard would it be to get to the 1,800 tons?

Ludovico Costa

This is Ludovico here. Actually, in terms of the 1,800 we have done some test in the plant and that is reachable. We see very few modifications there that we are going to add to. We are trying to ramp up, and we think we can get there in the mine over to the rest of the year here. It seems quite feasible that we are going to reach that.

David Haughton - BMO Capital Markets Canada

That's why quite positive. That's well in advance of what we'd been thinking previously based on the site visit earlier this year. So you're happy then with the mining rate, because I would understand it's more mining constrained than milling constrained.

Ludovico Costa

Yes. We, with the new detachments that we are ramping now there at the mining, we are hoping that we can get it to ramp up to 18,000 ounce per day.

David Haughton - BMO Capital Markets Canada

On a similar kind of vein, Chapada has also been outperforming on the throughput front. Last quarter I think was a record throughput for that operation. Can we expect over 60,000 tons a day going through Chapada?

Ludovico Costa

You mean on the database?

David Haughton - BMO Capital Markets Canada

Yes, they're talking about the throughput for Chapada being more than 60,000 tons a day on a sustainable basis.

Ludovico Costa

Yes, we are running there in between 55,000 to 65,000 tons per day. I expect that in the third quarter that we are going to reach a better throughput per day. But by the end of the year when you have the rainy season, we can expect a little bit of decrease on that.

David Haughton - BMO Capital Markets Canada

All right. And thinking about Corpo Sul, should we be thinking about that as simply being blended in with the Chapada or I understand has got a better copper grade. So would we just be thinking about it as the higher copper blend going forward, perhaps in 2014?

Peter J. Marrone

Yes. That's the way we're thinking about it now. And the range is approximately 20% to 30% of the ore coming from Corpo Sul. But Darcy and his team continue to find new discoveries. They continue to have extension holes that are several kilometers away from the area of known mineralization. Those drill holes continue to find -- that we continue to find that we have more than 100 meters of grades that are on the copper side in particular in excess of the copper grade that we're mining today. So from that perspective -- but we're evaluating what we can do with all of that. So as I said before, David, right now we're looking at it from the point of view of ore contribution, that's the end of the spectrum that we're on. But every day that passes, if you drill a hole that Darcy's team is putting in, Darcy's group is putting in, it in brings us -- if I drew a spectrum, a spectrum line, it would bring us at one end of the spectrum that ore contribution, the other end of the spectrum is potentially a new mine. We're not at the stage of being able to say that we have a new mine with Corpo Sul, but it continues to get bigger, it continues to show good improvement in grade over what we would have been getting in the pit at Chapada on the copper side. And so right now, we're 23% to 30% ore contribution. But over the course of this year and into next year, we might be evaluating that to something better.

David Haughton - BMO Capital Markets Canada

Okay. And still in that part of the world, looking at Suruca coming on stream early 2013. It's more of a pure gold contribution. Would you think about reporting that separately, so that we've got a sense of the more gold ore body compared to the copper gold ore body?

Peter J. Marrone

It's difficult to do because there's so much sharing of infrastructure and support in G&A. An so what we're currently thinking, David, is the opposite to that, which is we're going to blend it as part of the overall Chapada contribution to gold and to copper.

David Haughton - BMO Capital Markets Canada

Okay. A similar kind of question for Florida with the tiles, would you intend to show that as a separate stream going forward?

Peter J. Marrone

Again, the same thing, because there is in more than that in the case of Florida, the plant, the PTR plant can be used for ore processing. So we think that the best course for the delivery of information about Florida would be to accumulate it inside the overall Florida effort. It would be very difficult to distinguish between the 2.

David Haughton - BMO Capital Markets Canada

All right. For Cerro Moro, your goals of 200,000 ounces per annum is somewhat further ahead than what we had seen Extorre. Would you be able to give some broader kind of parameters as to what you're seeing there or would you rather wait?

Peter J. Marrone

Well, in the case of the 200,000 ounces per year, we are relying in part on what Extorre had already publicly said, and then our own due diligence that has over layered that. So I don't think -- we're not communicating a number that is different than what Extorre had communicated. In some respects, David, we're actually indicating a number that is below what Extorre has indicated at least for some of the early years. There is room for improvement here. There is room for the discovery of new ounces. There is room for improvement in grade, based on what has been published as a grade. There is -- we will know more as we look at drill data that is infill, that has been done to the time of closing and then what we would do to the end of the year. And we'll evaluate what that production profile looks like from that point forward. I'm confident in saying to you that insofar as I remember, Extorre had already indicated a number that was in excess of 200,000 ounces per year, we support that. We've downplayed it a little bit, at least on our own due diligence in providing a bit more conservatism to it. We may need to come back to that and show a higher number as and when we get more results from drilling, infill and extension and then the development plan that Evandro and his team are developing.

David Haughton - BMO Capital Markets Canada

And if they're looking it at an open pit and underground combined?

Darcy Edward Marud

Cerro Moro?

David Haughton - BMO Capital Markets Canada

For Cerro Moro, sorry.

Darcy Edward Marud

So the question was will you be looking at it as an open pit and underground combined?

Charles B. Main

Yes, yes. Will I look at the same approach as reported by Extorre? Maybe we would go a little bit more by underground, but we'll keep it at same mining production.

Peter J. Marrone

One of the things that we're evaluating now, David, and please bear with us because we haven't even closed the deal yet. But one of the things that we're evaluating is how would we define the ore body and where would we capitalize in terms of higher grade? As you've heard me say before, it is not of maximizing the asset base, but creating certainty. So part of what we're trying to do is not increase the number of ounces based on known information, but increase the certainty by providing higher grade. One of the other things that we're looking to do is to see if we can start the development work. Similar to what we did with Mercedes, where we excavated the development ramp into the ore body before we even made a construction decision. That allows us to determine continuity of grade. It gave us better access for further drilling, better understanding of the ore body and it also, in that particular case, treated, started the creation of a stockpile that has provided good springboard to that mine.

Operator

Our next question is from Don MacLean.

Don MacLean - Paradigm Capital, Inc., Research Division

Just following up on David's question about the Suruca, Corpo Sul. Do you have any kind of sense of timing or at what point it would be good enough to be a standalone mine? Peter, and maybe give us a little more color on that, because you did say it was your personal favorite.

Peter J. Marrone

It is my personal favorite, but I favor lots of things that we're doing on the exploration side that as you've heard me say before. Really difficult to give an answer to that, Don, because it is clearly the indicators seem to point to the prospect of more than 20% to 30% ore contribution coming from Corpo Sul. The indicators are showing that. And there is an end of the spectrum, there is a foreseeable possibility that we may have an entirely new mine there, but we have not done work on strip ratio maximizing the ore body to concentrate on higher grade, the contribution of copper to gold, where we could be maximizing copper production versus gold production, because we're already getting that gold production coming from Suruca. And these additional extension hole that Darcy and his group are providing to the management of the company continue to be encouraging, but it's too early for us to say. I would say to you that as a ballpark, certainly, by the end of this year we'll have a good better feel for it. We'll be able to provide an additional exploration update, and that will also allow us to be able to say this is what you can comfortably look at, at Yamana from the point of view of what happens with Corpo Sul. But in the development of the plan and whether or not it will become a new mine or increase the ore contribution above that 20% to 30% to something higher, that will take us into 2013.

Don MacLean - Paradigm Capital, Inc., Research Division

Right. If we look at, say, something. If it was capable of handling, say, 50% the equivalent thereof, would that probably nudge it into being worth doing a full pre-feasibility study?

Peter J. Marrone

Still a lot of work to be done, Don. I go back to what I've said. We start to look at strip ratio, we have to look at the continuity of the ore body, we have drilling results at this point. We have a reserve and a resource vis-à-vis a portion of it, but not with vis-à-vis the extension holes that have occurred since late last year. So we still have a lot of work to be able to determine what would be the prospect for this company to go with the feasibility study for a new mine or is it ore contribution through the existing Chupada plant. We're going to have to continue -- the best way that I can answer that question is that we still have a little bit of work ahead of us, but it does continue to show encouragement and promise. What I can promise, however, is by the end of the year, we will have more drilling information and we will be able to better point to what our next steps are into 2013.

Darcy Edward Marud

Yes, Don, it's Darcy. We should have by the end of, I would say, the third quarter, start of the fourth quarter, we'll have about an additional 3 kilometers of strike length drilled out on 100-meter centers for Corpo Sul. That would be 3 kilometers from the end of last year's resource that's on Corpo Sul. So it would be substantially larger than what we had last year.

Peter J. Marrone

Drilling results show grades on the copper side of between 0.4 and 0.55, 0.6, those are drilling results. We now have to determine continuity, we have to determine strip ratio, we have to determine how best to optimize if we're going to have a new pit. How to best optimize that pit.

Don MacLean - Paradigm Capital, Inc., Research Division

Okay. I'll look forward to this question being asked again maybe at the end of the year. Maybe a more sensitive topic, Argentina, the operating environment there. Maybe how are you going to be able to avoid setting dangerous precedent for Suyai and the tax burden there if you come to an agreement? And how do you avoid a ring sense in a way that it doesn't start to have the implication to the other provinces expectations?

Peter J. Marrone

Yes. Don, I think it's important to say that these things are not a binary. It's not an either/or, it's not a black or white, it's not a yes or no. These things are cooperative and they're reiterative and they take a long time. And there is a process, and I do emphasize that our perspective is to be our approach is to be cooperative. And I think that, that is something that is valued when we deal with Argentine authorities. So from our perspective, we're not going to do something that has an adverse affect on other things that we do in the country. But I don't think that we will get to that point, because I think that where we will get to is a recognition that it has to be a structure of financial framework in the mining code that is not only consistent with other parts of the country and perhaps other parts of the world, but also one that creates an opportunity for investment. And I believe that, that is a topic that is well understood amongst the stakeholders that are in government, that are in authoritative positions, and we're encouraged by that understanding. I prefer not to take an adversarial approach. I prefer to take a cooperative approach, because I think that will get us to a better result, both from the stakeholder's perspective and from our perspective.

Don MacLean - Paradigm Capital, Inc., Research Division

And you're not in any position in terms of property ownership or the situation where the government can say we're going to take back that property?

Peter J. Marrone

No, we're not. You're asking the question is that a risk? We don't see that as a risk at all. Again, we have to go back to first principles because I appreciate that there is always a tendency to want to go to the fine points and fine detail in Manusha. But I do not believe that it is at that point. We have to start from the principal and from the philosophy. Philosophically the country of Argentina, philosophically at least 10 governors, including the governors Chubut, and the provinces of Chubut generally. And philosophically local communities have come to the conclusion that they need mining and mining is an important opportunity, an important enterprise for the country, as a nation, for the province and for the local communities, that's the philosophical bend. Now we're going to that next stage of what does the economic framework look like. But I'm confident that it will be an economic framework that is workable and does not prejudice everything else that is happening in the country, for us and others.

Operator

[Operator Instructions] The next question is from Steven Butler.

Steven Butler - Canaccord Genuity, Research Division

I'll ask a question, maybe not for the end of the year, but right on Don seals on Corpo Sul again. And Darcy talked about 3 kilometers drilled on 100-meter centers, what would that qualify as a resource or would then would be reserve status, because there was some reserve status on Corpo Sul last year.

Darcy Edward Marud

Yes, it will definitely be a resource, Steve. The majority will be inferred, there will be some areas that will be a little tighter than 100 meters that might get into the indicated category. Similar to what happened last year, we had a small part of what we drilled out last year got into the inferred ultimately or into the indicated and ultimately into the reserves. So I think it's too early to say right, now but definitely it will make inferred resource.

Steven Butler - Canaccord Genuity, Research Division

Right, okay. And Peter, just on CI again and the Chubut province, is there a sense of timing as to when the legislation may come to a better determination or more definitive structure and/or is it subject to negotiation case-by-case basis?

Peter J. Marrone

On the timing question, the draft legislation has been introduced, it is in front of the legislative body. There continues to be dialogue between the various ministries and secretariats in the national level with the provincial government and dialogue amongst the provincial governors directly. So I would anticipate that over the course of the next 2 months perhaps by the end of the year, that mining framework would be agreed. On the question of will it be on a case-by-case basis, I don't foresee that. What I foresee is that there will be the adoption of a mining framework that is applicable to all companies with some latitude in discussion as when we normally see it. In terms of beneficiation projects and the like, how much is contributed back to the social well being of the state, the social well-being of local communities. Those are things that would likely coming into negotiation, but in terms of the framework itself, it would we predetermined and codified in the mining well.

Steven Butler - Canaccord Genuity, Research Division

Peter, is government participation still as proposed or on the table or some form thereof?

Peter J. Marrone

The draft legislation does propose a profit participation. What it also provides and our read of it is that it provides that it is a profit participation with certain conditions. So in other words, it's after a payback, possibly after a hurdle beyond the payback. It appears to us that the model is very similar to what's been done with Alumbrera, with Imar in Catamarca province.

Steven Butler - Canaccord Genuity, Research Division

Okay. And Ludovico, are the grades coming up at El Peñón as per your second half plan? Or can you give any comment on July grades, or still too early to say?

Ludovico Costa

July grade was more or less in line with Q2. But a slight increase up to August and [indiscernible]. To give you a sense, I think the average for the for the first quarter was around 6.7 and it was going to above 7 for gold in the second half.

Operator

There are no further questions registered at this time. I would like to return the meeting back over to Mr. Marrone.

Peter J. Marrone

Ladies and gentlemen, thank you very much for participating on our call, and we look forward to further highlights over the course of this quarter. And we're encouraged by the questions that were asked. And as I mentioned, we're very encouraged by some of the positive developments in the company, and we look forward to providing a further update on our call for Q3.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.

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