Mr. Sebastien Bernier reports
YAMANA GOLD REPORTS THIRD QUARTER CASH FLOWS FROM OPERATING ACTIVITIES OF $157.4 MILLION, INCREASES EARNINGS, AND LOWERS DEBT; CASH FLOWS SIGNIFICANTLY EXCEED THE AVERAGE OF THE THREE PRECEDING QUARTERS
Yamana Gold Inc. has released its financial and operational results for the third quarter of 2019. All financial figures are in United States dollars unless otherwise noted. The company posted strong quarterly earnings and free cash flow and significantly improved financial flexibility with the retirement of $800-million of debt during the quarter. Gold equivalent ounces (GEO) production was in line with plan at costs in line with expectations.
Third quarter highlights:
Net earnings attributable to Yamana equity holders of $201.3-million, or 21 cents per share, basic and diluted, compared with a net loss of $81.3-million, or nine cents per share, basic and diluted, a year earlier;
Adjusted net earnings of $49.5-million, or five cents per share, basic and diluted, compared with adjusted net earnings of $23.6-million, or two cents per share, basic and diluted, a year earlier;
- Cash flows from operating activities of $157.4-million, cash flow from operating activities before net change in working capital of $152.4-million and net free cash flow of $99.9-million;
- Cash flows exceeded the average of the three preceding quarters as follows:
- Cash flows from operating activities exceeded the average by 72 per cent;
- Cash flows from operating activities before net change in working capital exceeded the average by 22 per cent;
- Net free cash flow exceeded the average by 36 per cent;
- GEO production from Total Yamana of 238,623, including 209,923 ounces of gold and 2.48 million ounces of silver;
- Total Yamana cash costs were $678 per GEO and all-in sustaining costs (AISC) were $1,039 per GEO;
- Gross debt decreased by $800.6-million in the quarter, resulting in a decrease in net debt of $810.3-million, to $948.9-million;
- Significantly increased mineral reserves and mineral reserve grade at Jacobina and reported strong growth in total contained and future potential ounces;
- Discovery of East Gouldie, a new mineralized zone at the Canadian Malartic mine.
(in millions of United States dollars)
Three months ended Sept. 30,
Net free cash flow $99.9 $49.1
Free cash flow before dividends and debt repayments $29.4 $(19.7)
Decrease (increase) in net debt $810.3 $(73.9)
"Our operations continued to show strong performance during the third quarter," said Daniel Racine, president and chief executive officer of Yamana. "We expect that to continue through the fourth quarter -- historically our strongest -- and beyond. This will have added financial benefits, including increased free cash flow, a stronger balance sheet, and greater financial flexibility to reinvest in the business, deliver growth and increase returns."
Net earnings attributable to the company's equity holders in the quarter were $201.3-million, or 21 cents per share, basic and diluted, compared with a net loss of $81.3-million, or nine cents per share, basic and diluted, a year earlier. Net earnings during the quarter were impacted by certain items that management believes may not be reflective of current and continuing operations and which may be used to adjust or reconcile input models in consensus estimates. The most notable item is a $273.1-million gain related to the sale of the Chapada mine.
Cash flow from operating activities increased markedly during the quarter to $157.4-million, a 72-per-cent increase over the previous three quarter average. Cash flows from operating activities before net change in working capital rose to $152.4-million, a 22-per-cent increase from the previous three quarter average, while net free cash flow of $99.9-million was 36 per cent higher than the previous three quarter average and more than double the $49.1-million generated in the third quarter of 2018. The change was largely driven by higher gross margins due to favourable metal price increases with stable costs across Yamana mines and a positive net change in working capital.
Cash costs during the quarter of $678 per GEO were relatively stable in relation to the first half of 2019, while AISC increased to $1,039 per GEO. The higher AISC was driven by the company's decision to increase exploration spend and concentrate sustaining capital spend in the second half of the year. The increase in exploration spend allows the company to build on the robust drilling results being obtained across the company's operations while the increase in sustaining capital spend supports the highest quarterly rates of mining and production during the fourth quarter and it improves access and flexibility in mining operations for 2020. Quarterly production from Yamana mines is historically strongest during the fourth quarter -- a trend that is expected to continue in the fourth quarter of 2019 and bring costs into line with the company's annual guidance.
In particular, operating costs are expected to be favourably impacted by strong fourth quarter performance from the El Penon and Minera Florida mines, primarily from grade improvements compared with prior quarters. In addition, at Cerro Moro, four underground mines are expected to be in development and production during the fourth quarter, including the commencement of stope production from the Zoe high-grade underground mine. These underground mines are expected to also enhance mine flexibility and efficiency. Furthermore, Jacobina, which exceeded its production plan once again in the latest quarter, is well positioned to meet or modestly exceed increased annual production guidance of 152,000 GEO.
Unitary costs were in line with expectations of plan and guidance, with AISC for the nine months ended Sept. 30, 2019, at $967 per GEO.
Net debt decreased by $810.3-million during the quarter to $948.9-million. The decline primarily reflects the retirement of $800-million of debt announced in August, 2019. This debt retirement was concluded ahead of schedule providing a catalyst for further debt reduction from interest savings and free cash flow generation. The company's primary focus is now on further increasing free cash flows and building its cash balance.
The company's balance sheet as of Sept. 30, 2019, included cash and cash equivalents of $99.9-million and available credit of $750-million, for total available liquidity of $849.9-million.
During the quarter, the company announced increases to mineral reserves and mineral reserve grades at Jacobina of 8.6 per cent and 2.6 per cent, respectively, versus year-end 2018. This movement is in addition to overall mineral reserve grade growth in 2018, which when combined with the mid-year update, represents a 5.3-per-cent increase from year-end 2017.
This increase in mineral reserves and mineral reserve grade supports annual gold production above 170,000 ounces, which was previously guided as the target after the completion in mid-2020 of phase 1 of the mine's planned expansion. This first phase involves a modest plant optimization to a sustainable throughput level of 6,500 tonnes per day (tpd).
The increase also further supports the potential for phase 2, where production is expected to increase above 225,000 ounces per year, with a likely scenario for plant throughput in the range of 7,500 tpd to 8,500 tpd, while maintaining gold recoveries of between 96 per cent to 97 per cent.
A prefeasibility study (PFS) to identify optimum mining and processing expansion scenarios, evaluate project economics and determine a project development schedule, including the timing for permit applications, is expected to be completed in the first quarter of 2020. Investment for phase 2 is expected to occur mostly in 2021 and 2022, with the objective of being at the higher throughput level at the beginning of 2023. No expansionary capital will be committed to the plant expansion until the PFS is completed. The company's hurdle requirement for expenditure on the phase 2 expansion is an after-tax internal rate of return (IRR) exceeding 15 per cent. The decision to proceed with the investment will be driven by the expansion of the plant throughput, thus bringing forward cash flows but also an extension of mine life from continued exploration success and improvements to Jacobina's average mineral reserve grade, which would support the investment decision.
Furthermore, during the quarter, the company announced positive exploration results. The Canavieiras and Morro do Vento sectors continue to provide high-grade, wide intervals of mineralization, indicating excellent potential for mineral reserve and mineral resource growth at grades better than current life-of-mine grades. The Joao Belo area demonstrated excellent potential for long-term mineral resource growth immediately adjacent to the existing Joao Belo mine, historically the most important producer at Jacobina.
For further details, please refer to the company's Sept. 5, 2019, press release.
In the prior quarter, the company increased guidance for Jacobina to 152,000 ounces from 145,000 ounces, representing an approximate 5-per-cent increase. The company is well positioned to meet or modestly exceed this revised target.
Expansion opportunities at Canadian Malartic, Canada
Exploration programs are continuing to evaluate several deposits and prospective exploration areas to the east of the Canadian Malartic open pit, including the new mineralized zone discovery of East Gouldie, as well as the Odyssey, East Malartic, Sladen, Sheehan and Rand zones. These opportunities have the potential to provide new sources of mineralization for the Canadian Malartic mill. These are mostly underground zones, the mineralization from which would initially displace a portion of the lower-grade open-pit mineralization thereby increasing production and extending mine life. Access for additional underground drilling and possible mining would be by ramp extending from the Odyssey zone. The permit allowing for the development of an underground ramp was received in December, 2018.
Drilling at East Gouldie has yielded a number of positive intercepts and results indicate that the East Gouldie, East Malartic and Sladen zones are converging at depth, increasing the level of confidence in the economic potential of overall mineral resources below 1,000 metres. These results contributed to the new disclosure of updated mineral resource figures for East Malartic at year-end 2018. Further definition and exploration drilling will also test the high-potential area between the Odyssey and East Gouldie zones, located under and east of the current open-pit operations.
For further details, please see the company's Sept. 9, 2019, press release.
Agua Rica, Argentina
The company continues to advance its alternatives for the development of the Agua Rica project and pursuant to the previously announced integration agreement; the Agua Rica project would be developed and operated using the existing infrastructure and facilities of Minera Alumbrera Ltd. in the Catamarca province of Argentina. Yamana, Glencore International AG and Newmont Goldcorp Inc. established a technical committee to direct the advancement of the integrated project. The technical committee oversaw the PFS for the integrated project, which was completed in mid-2019.
The integration significantly derisks the development of Agua Rica due to the ability to rely on the current Alumbrera plant and infrastructure, which was previously identified as a principal risk of development of the project. Furthermore, the risk of obtaining permitting for tailings is also curtailed due to the ability to integrate, as is the environmental footprint of the project.
On July 19, 2019, the company announced positive PFS results that underscored Agua Rica as a long-life, low-cost project with robust economics and opportunities to realize further value, including converting economic-grade inferred mineral resources and expanding throughput scenarios to increase metal production and returns, among other opportunities. The integrated project generates significant synergies by bringing together the extensive mineral resource of Agua Rica with the existing infrastructure of Alumbrera to create a unique, high-quality, low-risk brownfield project with an optimized environmental footprint that will bring significant value to shareholders, local communities and stakeholders.
The PFS highlights include a long mine life of 28 years, annual production for the first 10 full years increased to 533 million pounds of copper equivalent production, cash costs decreased to $1.29 per pound, AISC decreased to $1.52 per pound for the first 10 years of production, net present value (NPV) increased to $1,935,000,000 and an increased IRR of 19.7 per cent. Furthermore, proven and probable copper mineral reserves increased from year-end 2018 by 21 per cent to 11.8 billion pounds and gold mineral reserves increased by 12 per cent to 7.4 million ounces.
Closing of Chapada sale, monetization of gold price instrument and related consideration updates
On July 5, 2019, the company completed the sale of the Chapada mine. The company received the initial upfront cash consideration of $800-million on closing. Additional consideration includes a cash payment contingent on the development of a pyrite roaster at Chapada, a 2-per-cent net smelter return (NSR) royalty on the Suruca gold project in the Chapada complex and the right to receive additional cash consideration of up to $125-million, based on the price of gold over the five-year period from the date of closing.
The gold price instrument was structured as a separate monetizable asset that Yamana had the right to sell at any time. The company exercised this right during the third quarter, divesting the gold price instrument in a competitive bidding process to a financial institution for $65.5-million in cash.
The decision to monetize the gold price instrument followed an in-depth analysis by the company to determine the fair value of the gold price instrument. This analysis factored in consensus views of long-term gold price, forward curves, the probability of gold prices being within the prescribed ranges based on observed volatility and discounting the value of the instrument for time-value at rates commensurate to the risk of the instrument. The company concluded that the value of the gold price instrument would be incorrectly stated as merely the present value of the maximum fair payment -- a conclusion that was corroborated during the bidding process.
The company estimates that upon the signing of the agreement to sell Chapada in April, 2019, the fair value of the gold price instrument was approximately $35-million based on the aforementioned criteria. On July 5, the date of the recognition of the instrument, the fair value was $54-million based on the aforementioned criteria. Based on its analysis, the company determined that it was prudent to monetize the gold price instrument, as the $65.5-million in cash consideration represents immediate recognition of nearly three years of the maximum payment under the instrument -- a value that due to gold price volatility may never have been received.
The company is currently evaluating additional opportunities to monetize its royalty portfolio, including the recently received NSR on the Suruca project. As studies and evaluation of the project continue, the potential at Suruca, particularly for sulphides, is expected to increase.
Yamana continues its exploration programs at its existing operations. As announced during the second quarter, the company has increased its exploration spending for the remainder of the year by approximately $10-million, with a goal of further building mineral reserves and mineral resources at key operations, as well as building a pipeline of exploration opportunities to ensure future growth. Exploration plans are focused on extending mine life at Cerro Moro, El Penon and Minera Florida while increasing grade, mineral resources and mine life at Jacobina and Canadian Malartic to allow increases in production at low costs. In particular, at Jacobina, over the course of the year, exploration spend is being allocated to support the planned expansion. The program is targeting new mineral reserves at a grade of three grams per tonne or better. Exploration updates for El Penon and Minera Florida will be provided during the fourth quarter of 2019.
For a full discussion of Yamana's operational and financial results, please refer to the company's third quarter 2019 management's discussion and analysis and financial statements, which have been filed on SEDAR and are also available on the company's website.
The company will host a conference call and webcast on Friday, Oct. 25, 2019, at 9 a.m. ET.
Third quarter 2019 conference call
Toll-free (North America): 1-800-273-9672
Toronto (local and international): 416-340-2216
Webcast: available on-line
Conference call replay
Toll-free (North America): 1-800-408-3053
Toronto (local and international): 905-694-9451
Passcode: 6784586, followed by the number sign
The conference call replay will be available from 12 p.m. ET on Oct. 25, 2019, until 11:59 p.m. ET on Nov. 15, 2019.
Scientific and technical information contained in this news release has been reviewed and approved by Sebastien Bernier (professional geoscientist and senior director of geology and mineral resources). Mr. Bernier is an employee of Yamana Gold and a qualified person as defined by Canadian Securities Administrators' National Instrument 43-101 (Standards of Disclosure for Mineral Projects).
About Yamana Gold Inc.
Yamana is a Canadian-based precious metals producer with significant gold and silver production, development-stage properties, exploration properties, and land positions throughout the Americas, including Canada, Brazil, Chile and Argentina. Yamana plans to continue to build on this base through expansion and optimization initiatives at existing operating mines, development of new mines, the advancement of its exploration properties and, at times, by targeting other consolidation opportunities with a primary focus in the Americas.
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