‘Dividends create a financial discipline’: Yamana’s Peter Marrone on how to run a gold company at the Global Mining Symposium

Executive chairman and founder of Yamana Gold (TSX: YRI; NYSE: AUY), Peter Marrone, spoke on the second day of the Global Mining Symposium about the company’s assets, its strategy, and his views on the price of gold. 

Marrone started his career practicing law in Toronto, focusing on corporate, security and international law and then became the head of investment banking at a major Canadian bank before founding Yamana in 2003. 

In a wide-ranging interview with Northern Miner editor-in-chief Trish Saywell, Marrone explained how he made the jump from investment banking to mining, noting that it involved the sale of a mining project that he had been asked to handle by the bank. 

“It was one of those rare cases where, either by luck or by circumstance, the bad news was that I couldn’t get the asset sold as an investment banker for a client, but the good news was that I saw potential in it, which has since materialized, and now happens to be one of our core assets.” 

The best offer for the asset, he noted, which at the time was an advanced-stage exploration project and very close to a feasibility study, was $5 million. The asset, he continued, was put into production by 2007 at a cost of $240 million and generated $200 million in cash flow per year from 2007 to 2019. 

 It was sold in 2019 for a total cash consideration of $900 million, he added.

“It was one of those cases where someone didn’t see the potential for it, but we did,” Marrone said. “So, I decided to give up my shingle as an investment banker, buy the asset, form a management team, and create this new company.” 

Saywell noted that she’d first interviewed him during The Northern Miner’s Canadian Mining Symposium at Canada House in London last year, where Marrone told her that he came to Canada from Italy as a young boy and didn’t speak a word of English. 

She then asked him how that experience shaped him and helped him prepare for later challenges in his life and career.  

“It’s so many decades ago for me to say here’s the exact pinpoint moment that has shaped this or that,” Marrone said. “Mathematics is always interesting, and for younger viewers who don’t know chalk on blackboards, I could always see the equations and understand them on the backboard, but it was the language that was more difficult.” 

“I do have one recollection where I was answering in Italian to a math question that was on the blackboard but could not get the teacher’s attention to what I was saying and so walked up to the board to write the answer. It made me recognize that I had a lot of up-hill to climb, but also there were some universalities. It also gives you a certain tolerance in some respects; my ear picks up on accents that perhaps others don’t and gives you a tolerance of other differences of cultures.” 

Saywell then steered the conversation to Yamana, noting that, since 2019, shares of the company had gone up by 171%. While many companies had reduced their dividends and others have cut their dividends to zero, she added, Yamana raised its dividends four times over the last twelve months for a cumulative increase of 250%. Not only that, but the company has set up a dividend fund backstopped with a cash reserve to sustain its dividends for the next three years, no matter what happens to the gold price, which, she noted, is a little unusual in the industry. 

“I mentioned the asset that was the starting point of this company,” Marrone said. “We started production there in late 2006 and declared commercial production in early 2007. Based on the conviction that the asset would generate the cash-flows that we had anticipated, we began to pay dividends.” 

The company, he added, has been paying dividends for over 13 years on the asset, and had paid over $900 million in dividends by last year, which, he believes, is much higher than Yamana’s peers and other companies in the industry over the same period. 

“Dividends create a financial discipline for a company, and that’s critical,” Marrone said. “We’re somewhat agnostic to the gold prices, but we certainly care about our share price and the importance of improving our share price. However, we recognize that investors may want to invest in gold, as there is no operational risk. When one has operations, there will be a risk that something may happen to those operations.” 

“So, I look at the dividend as compensation for that risk,” he explained. “I also recognize that we are competing for investor dollars for those who invest in gold as a metal versus gold as equity or an equity class. As a consequence, we need to distinguish ourselves.”   

One way the company distinguishes itself, he said, is to say that they compensate for that risk and, he continued, there are many ways to look at the dividend. 

Still, he added, the most critical part is that it creates a financial discipline, and it provides a return to investors. It also provides recompense to investors, which “makes it more exciting for investors to buy a gold stock rather than buying gold as a metal.” 

The conversation then turned to listings, with Saywell noting that Yamana was preparing to list on the London Stock Exchange, adding to its listings in Toronto and New York. 

“In conducting our due diligence, we saw large pools of capital available with a London listing,” Marrone said. “Many of these funds, either by choice, by desire, by circumstance, or even by mandate, require a local listing.” 

The cost of complying with an additional listing was comparatively modest, he explained, and investors in Europe were looking for companies that could demonstrate cash flows that are strong and growing, which Yamana can. 

He also noted that, for such a distinguished exchange, the LSE had a shortage of precious metal mining companies, particularly of Yamana’s size and scale, which has a million ounces of production on a gold-equivalent basis, and also has an Americas-focus, which they were also looking for. 

“On balance, we saw that this was a good opportunity for us but does not denigrate at all what we do with Toronto and New York, which have been exceptional for us,” Marrone said. “We have excellent liquidity and appreciate being listed on those exchanges and having those investors in our shareholder profile.” 

He also said that he felt that every company has an obligation to go where the money is. 

Saywell then turned the conversation to Yamana’s five operating mines: El Penon and Minera Florida in northern Chile, Cerro Moro in Argentina, Jacobina in Brazil, and a 50% share with Agnico Eagle Mines (TSX: AEM; NYSE: AEM) in Canadian Malartic in Canada. 

She noted that the company’s El Penon mine in Chile, in particular, was an example of how Yamana has been able to get the most out of its assets. 

When the mine went into production in 1999, it had an estimated mine life of about four and a half years, and now it’s in its 21st year of production, with a possible further ten years of production. 

She also noted that the mine has more probable and proven reserves that it has ever had. 

“El Penon came into our portfolio due to a corporate transaction in 2007,” Marrone said. “One of the company’s executive officers that we bought referred to El Penon as ‘the gift that keeps on giving.’ At the time, I didn’t understand what they meant by that, but now I better understand it.”   

“If you look at the profile of the mine, in any one of the years in its 21-year history, we would never have had more than six to eight years of proven and probable reserves, and even at the best of years, it would never have had more than eight years, with the range between six to eight years, of mine life assuming only proven and probable reserves,” he said. 

The mine is “impressively endowed” and has already produced more than 5 million oz. gold and more than 120 million oz. silver, he said. It also “continues to give,” and has a further mine life of six years based on proven and probable reserves today. 

Moreover, Yamana continues to make new discoveries at El Penon, with extensions of historical vein systems and new vein structures that are being discovered, which may not necessarily increase proven and probable reserves, as in 2020, but demonstrate that it has more than in its mine life that it shows in its reserves. 

“For example, last year, we increased proven and probable reserves for gold, above what we depleted, by 15%, and we increased inferred resources by 60%,” Marrone said.” So, it bodes extremely well for the future of that asset.” 

The company estimates a 10 to 12-year mine life for the mine, which, he believes, is a conservative estimate. 

Saywell then pointed out that one of Yamana’s key strategies is low-capex growth at the company’s existing mines, with Jacobina in Brazil, an excellent example of that. Production there nearly doubled between 2014 and 2018 from about 75,000 oz. to 145,000 ounces. 

This year, the company expects production will reach 168,000 oz. and that Yamana’s optimization and feasibility studies suggest production could increase to up to 230,000 oz., for just $57 million in capex. 

Saywell also pointed to the Canadian Malartic mine, which offers a sizeable underground opportunity that the company is currently evaluating, and other low-capex opportunities at the company’s existing mines. 

“Our strategy is managed growth; we’re not looking for explosive growth,” Marrone said. “We’re looking for growth on the top line of anything from five to 15%, but which also contributes more meaningfully on the bottom line.” 

He added that Yamana wants to grow organically rather than using capital markets to raise money or increase debt, noting that the company is decreasing debt. The objective, he continued, is to have a strong balance sheet that will become stronger over the coming years. 

Marrone then addressed Jacobina, adding that the company is planning a second-phase expansion. 

“The $57 million capex you mentioned was calculated based on an exchange rate of four to one; the rate is now closer to five-point-five to one,” he said. “Much of the capex will be denominated in local currency and so is closer to around $50 million.” 

“For $50 million, we will increase the production platform to a full 230,000 ounces per year, and that’s over a mine life of at least a couple of decades based on what we currently have in mineable reserves and resources,” he said. 

He noted that the company intends to spend this money over the next 15 to 18 months, starting late next year. 

Canadian Malartic, he said, will cost more, with the company estimating that its 50% share of the cost could be in the range of $350 million to $450 million. 

“We’re at least three years away from when we start spending that money, and then it will take between four and five years before going into production,” Marrone said. “We’ll start to get some ores in advance of that, but that is a modest $90 million per year and a full three years out.” 

Given that Yamana had around $325 million in cash and $200 million in monetizable financial instruments and investments on its balance sheet at the end of the second quarter, he said, as well as generating very robust cashflows, “the company is fully-funded for these very impressive growth profiles.” 

Furthermore, he continued, Canadian Malartic has more than 10 million oz. in inventory contained in three underground deposits. It would not be unreasonable to expect it to be a multiple-hundred-thousand ounce production platform per year, he added. 

Saywell then noted that the company announced plans in February to spend about $53 million on generative exploration targets over the next three years, including $14 million this year, $18 million in 2021, and $21 million in 2022, and asked which were the most promising targets. 

“We have about seven identified opportunities, and although around 90% of our total exploration budget has been on increasing proven and probable reserves and resources at our existing mines, we have been drilling new targets as part of that generative program,” Marrone said. 

This year, Yamana has advanced these opportunities to the point that they now deserve a separate and distinct program. 

All seven opportunities, which are located in Brazil and Canada, he said, have been drilled and have returned mineralization, with some in Brazil showing significant copper expressions and grades of 5-7% copper. 

“Of the seven, two of those, one in Canada and one in Brazil, already have resources, with some in the indicated category,” he said. “Our long-term objective is to advance at least one of these seven, and it does look like Monument Bay in Canada and Lavra Velha in Brazil are the two top contenders, to a mineral inventory in the range of 1.5 million ounces, making it large enough to support a mine that can produce round 150,000 ounces of gold a year.”

Saywell asked about a transaction the company executed earlier this year within its portfolio of royalties, noting that instead of selling them all off, Yamana formed a spin-off company called Nomad Royalty, and took a 13% stake in the company. 

“Selling royalties for cash means that you’re selling them at one times their net asset value,” Marrone said. “So, instead, we thought, why don’t we support the sponsorship of a new royalty company — we will then vend-in these assets to the new company. We took $10 million in cash upfront, a deferred consideration for another $10 million in stock, and the balance, roughly $45 million in value, we took in stock.” 

“The idea was that we are better off seeing to the success of this company and have its stock traded at multiples of its net asset value rather than selling that portfolio of assets for cash at the net present value at the time,” he added. 

The strategy, he continued, has proven to be a success with the $45 million in stock now trading at around $65 million. 

Saywell then concluded the conversation by asking Marrone about the gold price, noting that he had written in a blog earlier this year that gold has much runway left. 

“When I wrote that several months ago, gold was trading at US$1,650 per ounce and so the thesis has so far proved to be true, with gold trading today at over US$2,000 per ounce,” Marrone said.  

“While we’ve seen a US$300 per ounce movement in the gold price since that time, I still feel that the fundamentals that existed at the time that I wrote that blog continue to be true today.” 

Monetary and fiscal policies, he said, will continue to fuel the gold price, which he believes will go a lot higher.