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Yamana Gold (NYSE:AUY)

Q3 2012 Earnings Call

October 30, 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

Joung Park - Morningstar Inc., Research Division

Richard Gray - Cormark Securities Inc., Research Division

Steve Parsons - National Bank Financial, Inc., Research Division

Steven Butler - Canaccord Genuity, Research Division

Alec Kodatsky - CIBC World Markets Inc., Research Division

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Yamana Gold's 2012 Third Quarter Results 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 third 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 will now turn the call over to Mr. Peter Marrone, Chairman and CEO. Please go ahead, sir.

Peter J. Marrone

Melanie, thank you very much. Good morning and thank you all of you for joining us. I'd like to begin, we wish for the health and safety of those affected by this storm in the Northeast and for a speedy recovery and return to normalcy. Our thoughts and hopes and wishes are with you this morning. We recognize the devastation that can be caused by natural occurrences, and we will look to ways we can help our stakeholders and others. We are in community with you this morning as we have been with others, other more local stakeholders, in particular, in the past when they've experienced natural occurrences that caused damage and risks to health and safety.

We are somber this morning, ladies and gentlemen, and give you our third quarter results with heavy hearts, but with the hope that it will return to normalcy and your health and for your health and safety will be assured. As we've done in the past, I will provide an overview and then I'll turn to operations financial and our development and exploration team for a bit more of the detail.

We have dedicated ourselves to our evolution for a more reliable precious metals company, and while we are focused on growth, we're also focused on sustainability. And if we look at ourselves across the measures that are important to mining companies, mostly resources, reserves and production growth, although also those financial measures that are and should be important to all companies. Increasing and sustaining new levels of absolute and per-share cash flow are fundamental to our strategic direction and focus. We tried to stick to what we know and where know it. There [indiscernible] relevance to the countries and regions in which we operate are important to us. We tend to lean to more conventional approaches to geology, mining, processing, although more importantly, approaches where we already have a competency and expertise.

That leads us toward more reliability which allows us to become better at looking at the achievability of growth and the sustainability of the company once that growth is achieved. That takes us a long way toward the delivery of value to our stakeholders.

Now I do not want to leave you to do with the impression that we're always going to get that right and always right across all operations in all circumstances. Sometimes things are unexpected and that is the nature of any mining enterprise. Although with a portfolio approach to asset management in familiar jurisdictions and regions focusing on our competency and expertise and with better planning, we can execute better and more reliably deliver value.

Better geological interpretation, reserve estimation and modeling, along with more development work, improved health and safety approaches leads to better production.

Saying that one mining company is the same as another is like saying that all mobile phone companies are the same because they all produce mobile phones. I've said in the past that not all [indiscernible] are created equally. We look to opportunities where, because of grade, tonnage, increases, optimizations, cost-containment measures, and exploration opportunities, we can produce a better ounce -- we can produce a better product over a longer term. We then look at better planning and improved execution toward ultimately creating value. As I said, we'll not always get it right, although we will focus on our portfolio approach and take time to optimize what is performing and try to improve what is not. We undertook to increase production year-over-year and quarter-over-quarter this year and we achieved that. This is a banner year for us with quarter-over-quarter production increases, which incidentally we indicated we would be in a position to do at the beginning of this year. It is a record for us on production in Q3 and year-to-date.

We have also delivered on another undertaking of ours, which is to increase production in comparable quarters. Our cash costs are lower and below the $250 per ounce guidance we provided at the beginning of this year. Margins are increasing and the cash flow trend line of increasing cash flow is intact. We still want all of our operations to perform and are undertaking measures toward that goal.

In the meantime, we are in line with plan on production and on costs and continue to generate robust and increasing cash flow.

And ladies and gentlemen, that trendline is important. The average cash flow as at Q3 for the last 3 years is well below the cash flows at Q3 so far this year. This is true in absolute cash flow and on a per-share basis. It is an almost constant number of shares outstanding, numbers that you see represented here in absolute terms will be comparable in terms of the growth and the increase in a per-share basis. This trend of increasing cash flow allows us to meet our capital obligations for growth and gives us a further flexibility, which is to return cash to shareholders in the form of dividends. As cash flow increases, we have favored increasing dividends also. And again that trend line continues to be intact as you see here.

Now with that as an introduction, I will turn the call over to our Chief Operations Officer, Ludovico Costa, to review our operations results.

Ludovico Costa

Thank you, Peter. In the third quarter, we delivered equity production, production was 11% higher than last year. We produced over 310,000 ounces. Production will grow again in the fourth quarter. And full year productions is expected to be within guidance. Compared to Q2, [indiscernible] down, both by byproduct and core products. Byproduct costs were $201 per gold equivalent ounces. Costs [ph] were $531 per gold equivalent ounces. For [ph] the year, we will still be as expected.

Chapada performed as expected both production were consistent with plan. Losses increased slightly versus last year due to the lower corporate credits, recoveries, and grades. Increased capacity in the CAL projects is planned for 2013. 2012 and 2013 are transition years as we aim towards production of 150,000 of gold -- ounces of gold and 135 million pounds of copper, which will come from the Main Chapada, Corpo Sul and Soruca.

El Peñón performed as expected this quarter. When compared to Q3 last year, gold production increased 9% and silver production was slightly down. This was related grade and consistent with our mine plan, process are expected to decrease in Q4 as grades improve.

Gualcamayo products was up compared to Q3 last year due to better recovers. This was due to production on the new [indiscernible] beds and the older beds. Losses are up versus last year due to the higher labor, consumable costs and the rear handling of waste. Mine [ph] was up as some of our [ph] as part of the planned transition from Phase II Phase III at the mine. QDD lower west is scheduled for completion in the immediate of 2013

Production at Jacobina was down slightly versus Q3 last year due to the lower feed grade and lower tonnage, but with the higher recoveries. There's an open pit access to the higher grade ones should improve the grade in Q4. Minera Florida production was down slightly, while the silver production was up compared to Q3 last year. Production at Florida is below expectation due to the lower than expected ramp up of the teams reprocessing. The ramp-up continued in the quarter. This project will add 12,000 to 16,000 gold equivalent ounces to production this year. In 2013, production from the tailings should be 40,000 gold equivalent ounces.

Production cost at Mercedes improved versus both Q1 and Q2 this year. Mercedes performed very well and consistent with plan. At the end of this year, [indiscernible] still contributed to the production in the quarter. Both operations performed as expected.

I will now turn the call to Chuck Main to review our financial performance.

Charles B. Main

Thank you, Ludovico. Record revenues of $612 million in the third quarter were 14% higher than the previous quarter, mainly due to higher sales volume of gold from the production at Mercedes. Adjusted earnings of $178 million were 32% higher than in the second quarter this year, an increase of approximately $43 million due to higher volume of gold sales and increased equity earnings from Alumbrera.

On a per-share basis, adjusted earnings increased to $0.24 per share from the previous quarter's $0.18 per share. The 2 largest adjustments to the GAAP earnings are the tax adjustment from Chile of $84 million and the write-down on an initial interest repurchase [ph] were done at a higher price than take over price. Accounting rules have required us to treat these as 2 separate transactions, write down the value of our tool hold shareholding to the acquisition price, a write-down of $9 million.

The tax adjustment in Chile relates to a change in the tax rate from 18.5% to 20% in the third quarter. We indicated that this was a possibility in our second quarter MD&A. The adjustment reflects the historical deferred taxes that were recorded, the 18.5%, and a result of the rate change must now be adjusted to reflect the 20% rate. These taxes would only be paid in the event of a direct disposition of the asset which may never occur.

This adjustment of the Chilean deferred taxes is a non-cash event.

Our equity pickup from Alumbrera this quarter has been higher than historical levels as the operation caught up on delayed sales that occurred in the second quarter. We expect that this cash [ph] jump will continue to a lesser degree in the fourth quarter.

Operating cash flow before changes in non-cash working capital items increased 19% from the previous quarter to $286 million or $0.38 per share. Yamana's margin increased to $1,479 per ounce, reflecting the continued effort towards cost containment.

Cash and available credit at the end of the third quarter is significant at $1.15 billion. Cash and cash equivalents were $400 million. During the quarter, $37 million was spent in G&A and net finance expense decreased to $15 million due to lower unrealized exchange losses.

Depreciation and amortization expense increased to $101 million in the quarter. There is a relationship between DD&A and ounces sold. As we have sold more than expected, there is a corresponding increase in depreciation. Exploration expense was $15 million and our debt totaled $766 million at the end of the quarter and capital expenditures were $276 million for the quarter. We were on budget for sustained -- annual sustaining capital of $340 million and we expect to be lower than budget for expansionary capital, which was budgeted at $665 million for 2012.

The metric that we have always used to better demonstrate effective cost containment is unit cash margin. The company is effectively containing costs and the cash margin exceeds changes in the gold price, net margin, which is shown on this slide. From Q1 to Q2 this year, the gold price declined as did our margin, but our net margin actually expanded by 2%. In the third quarter, gold price and our margin increased compared to the second quarter. Net margin was 4%.

We are very focused on cost containment. We've highlighted a few examples on this slide. Some initiatives are low hanging fruit that will provide some impact right away, such as centralized dispatch, fuel control, improved maintenance efficiency and a focus on processes to maximize the utilization of manpower with a view towards headcount reductions and productivity improvement.

In Brazil, a new government initiative will result in lower power cost for all of our operations in that jurisdiction and will modestly reduce cost. Other initiatives will provide results in the medium term such as automation, moving to 1 ERP, which will take a longer period to implement. You will have to bear with us as we execute on these plans and realize the benefits of these medium-term initiatives.

Another important strategic focus is on higher grade and reducing dilution and obtaining or finding higher quality ounces that also for enhanced cost containment. A good example of this is highlighted by our acquisition of the high-grade Extorre [ph] Gold Mines [ph] deposit.

One variable that we don't have control over is the metal price, which should be noted that if we were to apply the higher 2011 third quarter metal price to our 2012 third quarter production, then revenues would have increased by approximately $36 million. This would have dropped directly to bottom line and is equivalent to $0.05 per share. I think this clearly demonstrates that there are some variables outside of our control that can significantly impact our results. However, we continue to be focused on pursuing our corporate objective while employing strategy to sustain and grow cash flow to plan and execution to create value.

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

Evandro Cintra

Thanks, Chuck. During the quarter, work continue to advance at our 3 development projects, and thus far Pique is now 96% complete and commissioning has begun. C1 Santa Luz is over 90% complete, a planned [ph] physical completion will be by the end of 2012 and they set up our operations is planned before early 2013. Initial production for both projects is expected by the mid year 2013. Pilar construction is now 66% complete, underground development at both Pilar and Calamar progressed well. Pilar is on schedule for expected to start up by mid year 2013.

Our older growth projects also continued to advance. It is [indiscernible] that Minera Florida continues to ramp up as Ludovico mentioned before. The development of QDD Lower West is on track to be completed by mid year 2013 and thus the production at Gualcamayo is expected to be sustainable up to 200,000 ounces beginning in 2014. Working also continues on the optimization of Geronimo and discussions with our joint venture partner, Codelco, are ongoing.

I will now turn the call over to Darcy.

Darcy Edward Marud

Thanks, Evandro. Our 2012 program objectives remain constant through the year. The first is to replace the mineral reserves and resources at all of our operations. We also look to increase our mineral resource base across the company and accelerate development of our new discoveries at our development projects. We're also focused on developing new projects and preliminary resources at those new projects and we're always on the outlook for the new projects in the jurisdictions where we currently operate. Our current budget for exploration this year is approximately $125 million.

Looking at some of the highlights that we've had through the first 3 quarters of the year at Chapada, the Corpo Sul mineral resource has now been extended to the southwest as we outlined in early August. We now have about 16 kilometers of straight lengths that's centered by the main Chapada pit. The prefeasibility study of the Corpo Sul deposit is expected to be completed at year end.

At El Peñón, additional drilling is completed at -- completed at Dorada, west on Elizabeth vein at the Pampa Augusta Victoria vein system. At Dorada, discoveries -- the new discovery this year with first bill results being obtained in early February. The mineralization at Dorada West has been outlined for about 900 meters strike length to date, still remains open lying straight to the south and locally down dip and up dip as well. We expect initial mineral resource estimates for both Elizabeth and Dorada West in the first quarter of next year.

At Cerro Moro we outlined $5 million for drilling in 2012. And currently, we've competed about 37 holes of that program for about 8,000 meters drilling. So we're well on our way to completing that program that will be focused on increasing and upgrading the mineral resources to and from inferred to indicated before the end of the year and the end of the first quarter of next year. Evaluation and development and further exploration is underway and we're currently evaluating how we will tackle the exploration program going forward in 2013.

At Mercedes drilling at the rate ore discovery is identified in new wide zone of mineralization. Local intervals of up to 30-meter width. And at Pilar, in field drilling is being completed at Giardino to upgrade the resources from inferred to indicated with full impact our resource and reserve base and we're also focusing on the delineation of the newly discovered Maria Lazarus deposit which is about 10 kilometers west of Jordino.

With that I'll pass the call back over to Mr. Peter Marrone.

Peter J. Marrone

Ladies and gentlemen, thank you for that -- for participating. And thank you, gentlemen, for these updates.

And with that, we'll open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Joung Park of MorningStar.

Joung Park - Morningstar Inc., Research Division

First of all, could you give us an update on Agua Rica? Are the lower copper price since the agreement was signed in 2011 having any impact on the decision to go ahead on that project?

Peter J. Marrone

Yes, and Agua Rica continues through the evaluation phase and the completion of a feasibility study that's being undertaken by Alumbrera and managed by Extorre, which will continue into 2013. It's advancing very well. So we're not seeing anything that would suggest that there would be a different decision that would be made on the project. And adding to which is that this a -- if we look at Agua Rica from the point of view of its integration at Alumbrera, expected synergies that would be developed would occur as a result. And if we look at it from the point of view of the cost per pound of copper with credits coming from gold and coming from molybdenum, this is a low-cost deposit. And from that perspective, we can't see a reason why even in an environment $3.50 per pound of copper, which is still a great copper price, by a decision would not be made. For now it is advancing to feasibility study all as planned and it's very steady state.

Joung Park - Morningstar Inc., Research Division

Okay. And I'm really impressed by your performance at Mercedes this quarter. It looks like if you annualize that rate, it's 135,000 ounces, which kind of seems in line with the upper range of your target for 2013. So when you talk about that increasing in production in the press release, I'm kind of confused what you mean there.

Peter J. Marrone

Well, I hope we could clarify any confusion. We'll stand by the guidance that we've provided that we'll produce this year as it is a ramp up year, over 105,000 ounces. Approximate -- in prior periods, we said approximately 105,000 were a small range. It does become apparent to us that we should be able to exceed that 105,000 ounces with a big margin. We're not in a position yet to say what is the upper end of the expectation, although in the range that we've provided in the past, it looks as if we will be at the upper end of the range and probably above the upper end of the range. I don't believe that we'll get to 135,000 ounces this year. I think that, that is an expectation that you and our stakeholders should have for next year as we complete the ramp up in going to some of the higher grade areas. But it has gone well. The pace [ph] plant has started operations very well. The benches have started and they've done a great job on the mining from the benches. It has gone, in many respects, not only according to plan, but better than planned. So if we were a bit cautious in our expectations because it was a new operation, we're really pleased to say that the caution was warranted, but they did better than what we were cautioned. We will exceed 105,000 ounces. We will go to the higher end of the guidance we've provided, we may exceed that based on what we see so far this year. Next year will be a very important year because we expect its production to be well above its nameplate of the original 120,000 ounces per year.

Joung Park - Morningstar Inc., Research Division

Okay, fair enough. And just third question on Gualcamayo. How much of the cost increase would you attribute to mining cost inflation and how much to operational issues, such as the lower grades and rehandling?

Peter J. Marrone

I would say that roughly in the range of 50% to 60% would be inflationary issues and the balance would be more of the operational issues.

Joung Park - Morningstar Inc., Research Division

Okay. And then my final question just for Chuck. Could you elaborate more on the potential for lower power costs in Brazil that you mentioned? It looks like the presentation indicates that it could lower cash cost by about 2% if its implemented.

Charles B. Main

Yes, the government has come out with a new program to reduce power cost to industries. And I think we've estimated that it will reduce our cost by 2%.

Joung Park - Morningstar Inc., Research Division

So they're going to just reduce the electricity power rates? When will this start?

Peter J. Marrone

This year. Joung, I do want to caution though, thank you for your question, but I think it's important to say something that we've said before. The nature of the mining operation is such that while we see some improvement across some immediate things like power, we also have to be sensitive to the fact that we are subject to the other inputs. I said before that their costs have a tendency of being sticky. To the extent that we see improvements in costs, we'll be over a longer term not over a month or couple of months, but over a quarter or a couple of quarters. We saw that in 2008 and into 2009 with the input costs coming down. It took a period of a few quarters before we've began to see those improvements. Difference in some respects to 2009 is that the extracted industry has then immediately ramped up again. It appears that in this particular period, we have this unique situation where many of the extracted industries have held up on projects. We're tapering back. So the result of that is some of the pressures on the cost structure are reducing and it may be over a longer term. But I would ask you to be patient because it will take us, along with the rest of the industry, a few quarters before we begin to see some of the benefit of that.

Operator

[Operator Instructions] The following question is from Richard Gray of Cormark Securities.

Richard Gray - Cormark Securities Inc., Research Division

I was wondering if you could just elaborate on those operational permits you need at Ernesto. What's entailed there? And what's your timing for those?

Peter J. Marrone

Yes. Let's clarify that we did make reference to this and I know that there has been some discussion about this in the marketplace generally, Richard. EPAP is 2 distinct ore bodies with a common flat. One of the 2 orebodies is permitted, the other we're going to an ordinary course permitting program -- permitting process as we go through this commissioning phase. The government of Brazil has passed a new forestry law and they're in progress on passing a new mining law. This has been foretold and people have been aware of it and there's been lots of consultation for quite some time. The bureaucratic process relating to DMPM, which issues the permits, has indicated that they would prefer to issue permits for mining projects under the new law, and the government has indicated that it is its intention to complete the program with a new forestry law and the new mining law by the end of this year. So we don't see this as a delay to the permitting process -- that second part of Ernesto/Pau-a-Pique. We see it as just a process that one has to go through, as there's an evolution, as there's a transition perhaps, from the old law to the new law and then the passage of those permits under the new legislative regime. We're not being told that it's anything different than by the end of the year, the passage of that new law. It should not have any impact on the municipality.

Operator

The following question is from Steve Parsons of NDF.

Steve Parsons - National Bank Financial, Inc., Research Division

Just a couple of quick questions. First one on Jacobina. Could you provide a little bit of color on the expenses and costs associated with the roof support? Is this expected to continue, obviously, carried over from Q2? Just wondering to what extent this is a persistent issue and whether it's isolated in certain zones?

Ludovico Costa

Yes. We have improved the geomechanical standards at Jacobi because we are a little bit deeper. But as we progress with the planning and with the production there, we expect to have a reduction on that cost because we are experiencing this new standard that we put in place. As we grow probably by beginning of next year, we can see a reduction on the -- as we are going to improve in the way that we put in this roof support.

Steve Parsons - National Bank Financial, Inc., Research Division

Got it. Okay. Also just a quick question on Pilar. It sounds like there's a feasibility study in process for Caiamar, could you talk a little bit about what this is going to entail and when this is scheduled to be complete?

Peter J. Marrone

Well, there's an internal feasibility study. We're also as you are aware, giving -- we have started the development work with Caiamar. And that was Maria Lazarus, this new discovery that Darcy referred to, we'll see how we can fast-track and accelerate the development work there as well. The idea is to provide for 4 feet coming from Caiamar and from Maria Lazarus to the Pilar plant because you know that plant is being completed with a 30% capacity increase above its feasibility study. So we're looking for the optimal mix of ores from Caiamar, perhaps Maria Lazarus, as we continue to develop our view on that and from Pilar. The better way I think to look at Caiamar is that we're already doing the development work that should allow us to process some of that higher grade ore and given that the ore body is oriented in a way that allows us to better mine it, that allows us some our more flexibility in terms of what we process to Pilar in terms of how many ounces we should be able to get above its initial nameplate of 120,000 ounces and also to improve the cost structure of the overall operation.

Operator

The following question is from Steve Butler of Canaccord Genuity.

Steven Butler - Canaccord Genuity, Research Division

Question for you on El Peñón. It's wonderful to see the gold grade continuing to move higher up here. Was a lot of this due to the north block area in terms of -- or certainly and/or dilution control?

Ludovico Costa

This is Ludovico. That I would say came from both sides. We had a better dilution control and also we are seeing so much here from the north area.

Steven Butler - Canaccord Genuity, Research Division

The north area, I mean, would you say what percentage of sort of throughput it would have been in the quarter? And/or does it go higher going forward?

Ludovico Costa

No. It's going to be in the range of 25%, Steve.

Steven Butler - Canaccord Genuity, Research Division

Okay. So recoveries slipped a little bit in Q3, Ludovico, 78%, maybe this suffers a bit as a result of the continued higher throughput levels. But is there anything that you guys are looking at in terms of enhancing several recoveries back over 80%? Or was it may be just anomalous in the quarter?

Ludovico Costa

Two things that we are looking to doing there. one is to control the percent of some kind of Swartz that we distinguish [indiscernible] in the recovery mainly for sugar, because there you have a higher cyanide consumption. And the second thing that we are aiming there is to really have some improvements on cyanide control. So there's 2 things. It's better control on the percent of why we're seeing that we can improve sugar recover going forward.

Operator

The following question is from Alec Kodatsky of CIBC.

Alec Kodatsky - CIBC World Markets Inc., Research Division

Just a couple of questions. With respect to Chapada, you highlight in the release at you're looking at a study for increasing current capacity. Just curious what your preliminary thoughts might be on what you're looking at doing there?

Ludovico Costa

Well, at Chapada in order to improve the recoveries, we are trying to go to better fining grinding, in which that we can see a better performance of the plant. So is that your question?

Alec Kodatsky - CIBC World Markets Inc., Research Division

Is it a capacity expansion of 10%, 20%? Is it a replacement of existing equipment? I'm just sort of curious what it is that you're looking at doing there.

Ludovico Costa

No. In terms of capacity, next year, we are going to start implementing things -- pressure that we are -- it's going to allow us to have a better throughput and that's basically what we intend to do because as you know, we have now basically are going to have 3 question sections there. The [indiscernible]. With these 3 things we can think we can improve the throughput. We're also are doing some slight remodifications on the both size of the Sagnyu [ph] and we intend to increase the power of the Sagnyu utilization as well by changing some kind of big gears there.

Alec Kodatsky - CIBC World Markets Inc., Research Division

Okay, that's very helpful. And then just -- maybe with respect to any commentary on Argentina. I think you referred earlier in the call to some cost escalations, just interested to see the observations over the last quarter and any commentary you may have there?

Peter J. Marrone

Alec, you heard me say before that we have a view on Argentina that perhaps maybe different from what might be a view of others and perhaps others that are outside of Argentina. We manage this company on the basis of in-country managers and rely on local experience and local depth of talent, and that includes what is happening geopolitically and socio-economically in a country. There are some rough edges to some of the decisions that have been made in Argentina, I said that before. But equally, our view remains that it is a country of great opportunity from a mining perspective, and it is a country that has dedicated itself to the promotion of mining. That is what this organization [indiscernible] is all about. It is for the first time that the national government 10 of its provinces have organized themselves to promote mining and to do that on a deliberate, concerted and organized basis. I think it's also important to say that what is relevant in Argentina is also what Province 1 is in. The Gualcamayo, in Santa Cruz province, no one can deny that Santa Cruz province is a good place from a mining perspective -- San Juan, I'm sorry. In terms of Sarah Mora and Santa Cruz province, no one can deny that is another good place from a mining perspective. And that is where Sarah Mora is located. Part of the issue in Argentina and its socioeconomic events relates to, the inflationary pressure in country. Part of that is what is happening with its currency. We continue to believe that what the government is attempting to do is to make sure that if there is a decline in the currency as against other currencies, in the U.S. dollar in particular, it is done on a deliberate basis, it is done on a longer-term basis and it is done on a basis where there is some element of control to it. The result of that is that there will be some containment of inflationary ravages that would occur if there were a currency devaluation that would be off of a cliff so to speak and that is good for us. So we think that over the longer term, there will be some containment of inflation as a result of some of these measures even though, over the shorter term, we will see some inflationary impact and there are some rough edges on some of the actions of the government. And I know it's difficult to say, but very much more than that. But I hope that gives you some sense of the fact that there are issues taking place in the country, but we've got a good management done on it, and it is important to understand what province 1 is in to determine what the consequences are. On the inflationary side, we are seeing some of that principally on labor costs, but we think that we can contain that and reduce it. And over the course of 2013, we'll begin to see some of the benefits of that, particularly in the latter part of the year, as we begin to develop a QDD lower west. As you've heard me say before, I think part of a challenge of any company is to say that where you see -- where you can foresee that there will be some possible consequence to your cost structure. What actions can you take in advance to plan for it? Part of what we've done in Argentina and in Gualcamayo in particular, is to plan for it with some of these optimizations that Chuck has referred to. Maintenance is a huge one with an improvement to maintenance is one of the lowest hanging fruit that we have in this company. Cumulatively in the company, in the next 2 to 5 years, we could recognize the benefit of anything from $3 million to $350 million of improvements with better maintenance protocols and the utilization of machinery and efficiency of machinery. But in addition to that, we've also taken plans at Gualcamayo that includes the development of QDD lower west. And with the development of QDD lower west and the production increasing as a result of QDD lower west as Evandro said, about 200,000 ounces per year from a full 2014 we will see an improvement each of our unit costs.

Operator

There are no further questions registered at this time. I'd like to turn the meeting back over to Mr. Marrone.

Peter J. Marrone

So again, I'd like to thank you for all tuning into our call today, ladies and gentlemen. And to conclude, this is what we expect of the year and into the intermediate term. We expect to be in guidance on production and below guidance on costs with Ernesto power peak in C1 along with Pilar in production between the end of this year and the middle of 2013. We expect to increase production in 2013 by approximately 25%, and again in 2014 with all of our operations in this new projects in full completing the ramp up and in full production, by another 20%. Ernesto power peak is now in the commissioning phase. So we've started that operation. C1 Santa Luz is not delayed on completion to the end of the year, although we are taking a balanced approach to its ramp-up, accumulating water in the reservoir, so that we can more effectively manage that operation and still within the tolerance of 4 to 6 months for commercial production into 2013. Pilar is on schedule to midyear next year.

We will take Gualcamayo and Jacobina through their transitionary periods in Q4 and early next year to higher production and lower costs into 2013 and 2014. We will continue with our optimization and cost containment efforts. We will further evaluate the huge potential of Corpo Sul and its contribution to Chapada by year end. We will continue to, in particular, evaluate our new projects, including Suyai, Geronimo and Tiera Morro and we'll provide an update on those projects by end of year. And in particular, our focus will be on our exploration and development plans for Sarah Mora by the end of this year. While these new projects give us an opportunity to significantly increase our production, very meaningfully increase our production, we will take this approach. We will evaluate them with a focus on increasing cash flow and cash flow per share in delivering returns to our stakeholders.

With that, thank you very much, ladies and gentlemen.

Operator

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

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