Yamana keeps the drills close to home, as it looks for ‘higher-quality ounces’

VANCOUVER — Yamana Gold (TSX: YRI; NYSE: AUY) says the best return on its exploration capital will be realized through brownfield initiatives at its producing mines. The company is in the midst of a $75-million program to “unlock value” via drilling, find “higher-quality” ounces and boost near-term cash flow across its portfolio of actives mines.

On Oct. 2 Yamana provided an update on its exploration activities, and tabled production statistics for the third quarter wherein it mined 390,000 oz. gold equivalent at all-in sustaining cash costs within an annual guidance range of US$825 and US$875 per oz.

Overall, the company saw a 17% quarter-on-quarter increase in production from its mines in Brazil, Chile, Argentina, Mexico and Canada.

Fourth-quarter production is expected to rise even further, with increases coming mostly from Chapada, El Penon, Canadian Malartic, Mercedes, Pilar and Jacobina operations. Yamana expects to produce in excess of 1.4 million oz. gold equivalent this year.

On the exploration side Yamana had spent $50 million so far this year through the end of August, and has results from work at its El Penon and Minera Florida mines in Chile, Chapada mine in Brazil, Mercedes underground mine in Mexico, Gualcamayo open-pit operation in Argentina, and the Canadian Malartic and Kirkland Lake assets in eastern Canada.

“The strategic direction of our 2014 exploration program is to focus on infill drilling to upgrade the significant mineral resource increase we achieved through last year’s program,” noted senior vice-president of exploration William Wulftange in a release. “We are continuing to demonstrate success by delivering on the plan we set out at the beginning of the year. Impressively, we have been able to deliver results with a budget that decreased substantially from the previous year, as we focus on being ever more efficient with our [efforts] in support of the company-wide cost containment initiatives.”

At El Penon, reserves are expected to be replaced at or above current grades by year-end. The company reports that “significant exploration opportunities” exist there, with a focus on the recent discovery of secondary structures parallel to historic north–south targeted trends. Exploration will establish reserves at the Dorada Sur and Dorada Oeste, Fortuna Este and Bonanza West targets.

El Penon hosts 10.5 million proven and probable tonnes grading 5.83 grams gold and 192 grams silver for 2 million contained oz. gold and 64.5 million contained oz. silver.

At Minera Florida, infill drilling seems to support another resource upgrade, with intersections registering above reserve grades. The project hosts 3.7 million proven and probable tonnes at 4.22 grams gold and 20 grams silver for 500,000 contained oz. gold and 2.4 million contained oz. silver.

Yamana’s exploration at Chapada to date consists of 344 holes totalling 74,000 metres. This has included programs at the Chapada Corpo Principal copper-gold porphyry deposit to outline an inferred resource, plus infill drilling at the nearby Corpo Sul deposit.

Chapada includes the Suruca deposit, which hosts gold-zinc mineralization associated with sericite-chlorite-epidote carbonate and an argillic-to-propylitic alteration that corresponds to an intermediate-sulphidation epithermal system. Yamana reports that its recent Santa Cruz discovery at the project suggests the “potential for a system that could be significantly larger than originally planned.”

Proven and probable reserves at Chapada total 480 million tonnes at 0.25 gram gold for 3.8 million contained oz. Measured and indicated resources tack on 155 million tonnes of 0.18 gram gold for 913,000 contained oz.

Drilling at Mercedes has focused on the GAP area, which lies along the Mercedes to Marianas structure. Results have reportedly been “positive,” and are being evaluated to determine if the two structures are linked, which could boost resources and mine life. Mercedes holds 5.6 million proven and probable tonnes at 4.69 grams gold and 47 grams silver for 845,000 contained oz. gold and 8.4 million contained oz. silver.

Gualcamayo’s exploration initiative has aimed on the Rodado Southwest target, which is interpreted as a near-surface structure close to underground mine workings.

The company reports that results support the potential for a large-scale, bulk-tonnage underground operation, with several intersections exceeding 100 metres.

Gualcamayo hosts 32 million tonnes at 1.33 grams gold for 1.4 million contained oz. Measured and indicated resources add 30.4 million tonnes of 2.08 grams gold for 2.03 million contained oz.

In Canada, Yamana and its new partner Agnico Eagle Mines (TSX: AEM; NYSE: AEM) are assessing the exploration potential and strategy at their jointly owned  Canadian Malartic open-pit gold mine in Quebec, acquired in June.

In August the companies updated the mine’s proven and probable reserves to 263 million tonnes grading 1.06 grams gold per tonne for 8.94 million contained oz. at cut-off grades ranging from 0.28 gram gold to 0.35 gram gold. Reserves are based on a US$1,300 per oz. gold price.

Two drill rigs are drilling the Upper Beaver and Canadian Kirkland properties, with details about an exploration program, budgets and a plan to develop assets slated for release later this year.

BMO Capital Markets analayst David Haughton — who has a stock “outperform” rating on Yamana and a US$10.50-per-share price target — wrote on Oct. 2 that “the focus on exploration to upgrade mineral resources at existing operations appears prudent in the current gold-price environment.” BMO Research notes that third-quarter production was ahead of its forecast of 346,000 equivalent oz. gold, and maintains its annual forecast of 1.2 million equivalent oz. gold at all-in sustaining costs of US$1,046 per oz.

Yamana shares have traded in a 52-week window of $6.45 and $11.86, and closed at $6.52 per share at press time.

The company reported working capital of US$126 million at the end of June, and it has 881 million shares outstanding for a $5.7-billion market capitalization.