Yamana CEO proves his mettle

SITE VISIT

ALTO HORIZONTE, BRAZIL — Settling into the cramped seat of an eight-seater jet, Yamana Gold (YRI-T, AUY-N, YAU-L) chairman and CEO Peter Marrone says he hasn’t had a chance to breathe since the launch of a three-way takeover deal with Meridian Gold and Northern Orion Resources last summer.

There was neither toast of celebration nor pause of recognition when the US$4.4-billion deal that seemed impossible to many finally went through at more than twice the original offer last October.

“We just moved right in to figuring out how to integrate Meridian,” says Marrone, voice raised over the roaring engine.

Marrone is en route from the company’s Chapada open-pit copper- gold mine 330 km north of Brasilia, to Sao Paulo, where he will catch a red-eye flight back home to Toronto. The dark skies have cleared and what started out as a shaky flight is now smooth enough for Marrone to relax.

It’s the end of back-to-back analyst and media tours and Marrone’s been bouncing between Yamana’s South American projects showing just how the integration is going. He’s even wearing the new uniform for the El Peon mine, formerly under Meridian, which now bears the Yamana Gold emblem.

“The integration has gone well by country, location and by skill set,” Marrone says during a presentation at Chapada’s mine office.

The Chapada deposit, which has been in commercial production since February 2007, has been under Yamana’s belt since 2003 — the same year the company listed on the TSX.

Yamana expects to produce 170,000 to 175,000 oz. gold and 155 to 160 million lbs. copper at Chapada this year, increasing to 200,000 oz. gold by 2012. Over the course of a 19-year mine life, Yamana expects to produce 1.3 million oz. gold and 2 billion lbs. copper.

Overall, Yamana produced 933 million gold-equivalent oz. in 2007 (773,000 oz. gold and 8.6 million oz. silver), 123 million lbs. copper and 3,500 tonnes of zinc.

With its latest multibillion-dollar shopping spree, the company’s interests now include 11 deposits in operation, raising the production bar to 1.3 million gold-equivalent oz. for 2008. The company earned US$110 million for the first three quarters of 2007 compared with a loss of US$76 million in 2006, and plans to spend US$575 million in capital investments.

But Yamana has even bigger plans — raising annual production to 2.2 million oz. gold by 2012.

“And that’s gold production,” Marrone clarifies. “It doesn’t include copper, it doesn’t include silver, it doesn’t include silver as a gold equivalent.”

Marrone says that if silver were included as a gold equivalent, the company would be looking at another 200,000 oz. gold.

It’s a tall order — 2.2 million oz. –but Marrone is eager to prove to investors that Yamana can fill it.

“We have lots of things that we’ll be delivering on and I think its fair to say that some look at it and say, ‘Show me that you start to deliver on some of these things,'” Marrone says.

What are investors waiting for? For starters, an updated feasibility

study on the Amelia Ines and Magdalena satellite deposits at Gualcomayo, a gold project in northern San Juan province, Argentina, where mine construction is under way. The company expects to start production by mid-year to produce 85,000 to 95,000 goldequivalent oz., ramping up to 240,000 to 250,000 gold-equivalent oz. per year (200,000 oz. gold) by 2009 at a cash cost of $270 to $290 per oz. Yamana is also planning to release a resource estimate for the QDD lower west deposit at Gualcomayo by the end of March and a full feasibility study by the end of the year.

Yamana plans to start production at the nearby Sao Vicente open-pit heap-leach gold mine in the fourth quarter with the goal of producing 55,000 to 65,000 goldequivalent oz. per year over about five years.

Coming soon will be the first resource estimate for the Mercedes gold-silver deposit in Sonora, Mexico, where 2004 drilling returned an impressive 21-metre intersection grading 24.7 grams gold per tonne and 215 grams silver. Yamana plans to start a feasibility study for the project as well.

In January, the company released a feasibility study for its C1 Santa Luz project in Bahia state, Brazil. The study looked at building a conventional open-pit mine with a throughput of 2.5 million tonnes per year or 6,800 tonnes per day. Using a carbon-in-leach flotation circuit, annual gold production over 10 years would be 103,000 oz. per year with production starting in 2010. The project would cost US$139 million and cash costs were estimated at US$390 to US$410 per oz.

El Peon

Also released was the first resource estimate for the newly discovered Bonanza and Al Este veins at the El Peon high-grade gold-silver mine in the Atacama Desert of Northern Chile. The mine is slated to produce 425,000 to 435,000 oz. gold this year, but with the latest addition of resources, Yamana wants to increase production to 500,000 gold-equivalent oz. per year by 2010.

Al Este now has an indicated resource of 611,000 tonnes grading 13.65 grams gold per tonne and 491.3 grams silver for about 268,000 oz. gold and 9.7 million oz. silver. Inferred resources for Al Este stand at 545,000 tonnes grading 10.98 grams gold per tonne and 392.5 grams silver for 192,000 oz. gold and 6.9 million oz. silver.

The Bonanza vein was found to have an inferred resource of 943,000 tonnes grading 18.37 grams gold and 220.9 grams silver for 557,000 oz. gold and 6.7 million oz. silver.

The smaller Esmeralda vein has an inferred resource of 146,000 tonnes grading 13.13 grams gold and 714.4 grams silver for 62,000 oz. gold and almost 3.5 million oz. silver.

“Here is a mine that, after ten years of production, a vein that is the second-highest grade ever, is discovered — and only this summer, during the time of the takeover,” Marrone says, discussing El Peon.

And to help meet its lofty goals, Yamana is planning to increase production at several other mines.

Production at the Sao Francisco open-pit heap-leach gold mine in Mato Grosso state, Brazil, will increase to as high as 155,000 oz. gold in 2009 from between 130,000 and 140,000 oz. gold this year. Production there began in August 2006 and operations are expected to last 10 years.

Yamana plans to boost production at the Minera Florida gold mine in central Chile to a rate of 65,000 tonnes per month from 35,000 tonnes, to produce 125,000 to 135,000 gold-equivalent oz. in 2009 at cash costs of $230 to $270 per gold-equivalent oz.

At the Jacobina underground gold mine in Bahia state, northeastern Brazil, which is in the middle of a two-phased expansion, production has risen from less than 100,000 oz. gold per year to 135,000 to 145,000 oz. gold this year, rising to 180,000 to 190,000 oz. gold in 2009. Cash costs are estimated at $290 to $330 per oz.

Yamana’s not only focusing on mining more gold — maintaining reserves and resources is also a concern and Yamana is spending the money to make sure it happens.

The company has a hefty exploration budget of $84 million for 2008 with the goal of generating 7 million new oz. of gold.

“That’s a big budget for a company our size,” Marrone says. “To put it in context, last year we had a budget of $32 million for Yamana, and Meridian had a budget of $30 million.”

As Yamana moves from a company known for its savvy deal-making to being a serious mid-tier producer, it has started off on the right foot.

Take the Chapada mine, for example. It reached commercial production six months ahead of schedule and on budget (US$241 million). Over the course of a 19- year mine life, Yamana expects to produce 1.3 million oz. gold and 2 billion lbs. copper. Total cash costs for gold in 2007 were US$190 to US$195 per oz. and US62 to US66 per lb. copper.

But Yamana wants to do more with it. The company is now evaluating the merits of selling pyrite concentrate from Chapada tailings to sell to end users to make suphuric acid. Further
gold and copper could also be recovered. Yamana has completed a scoping study that looked at producing 560,000 tonnes of sulphuric acid per year.

A sulphuric acid market study completed in January found that prices are expected to remain at current levels in the short term — US$150 to US$250 per tonne — but recommends using a long-term price of US$75 to US$95 per tonne. The study found that supply and demand for sulphuric acid in Central Brazil is expected to grow 80% over the next five years. There are opportunities to sell sulphuric acid locally and the study noted that a local source would be attractive to potential buyers because of the transportation cost savings. Yamana now plans to do a final feasibility study.

The company is also considering whether to process about 1.8 million tonnes of stockpiled oxide ore grading 0.52 gram gold per tonne, which could be processed through conventional heap leaching.

Right now, the mine employs 928 people, with 70% of employees from the local area.

Chapada has proven and probable reserves of 303 million tonnes grading 0.256 gram gold per tonne and 0.345% copper, totalling 2.5 million oz. gold and 2.3 million lbs. copper, achieving a recovery rate of 75% for gold and 88.5% for copper.

Copper-gold mineralization stretches about 3.5 km long, 900 metres wide, and to a depth of up to 220 metres.

The Chapada property is 157 sq. km and hosts several gold and copper anomalies. The company drilled 4,000 metres in 2007 but has bigger plans this year to do a district-scale and regional study to define new targets and assess resource expansion potential.

Hitting the mark

In the Chapada presentation room, Marrone says his focus for now is organic growth. In five years, the company has grown considerably through acquisition — perhaps Marrone’s specialty.

The former corporate lawyer, who specialized in mergers and acquisitions, switched gears in 2000 to run an investment bank — where he learned more about the resource industry.

Now that Marrone has pieced together the makings of a solid mid-tier gold producer, he needs to make sure Yamana meets its targets on time.

Chantelle Gosselin, an analyst with Genuity Capital in Vancouver, says Yamana is likely to succeed.

“I think Peter Marrone has been very clear that he wants to concentrate on the assets and realize the most value out of them before doing any other acquisitions,” Gosselin says, noting that if an outstanding opportunity came along Marrone wouldn’t pass on it.

Gosselin also points out that Marrone has assembled a strong management and operating team.

“After the acquisition of Meridian they had added a lot on the exploration side too, in terms of management expertise, so I think he’s concentrating on delivering as promised,” Gosselin says.

Gosselin is talking about Yamana’s chief operating officer, An-tenor Silva, a Brazilian with a good track record in operations, whom Marrone met in the mid-nineties.

Marrone says there was a lot of pressure to hire someone who was known to the “finance people” in Canada.

“But this guy had forty years experience,” Marrone explains.

So he ignored the pressure and went with Silva because he was the best person to get the job done.

Silva adds to the depth of Yamana, Marrone says.

“It’ll never be about one guy, one vision,” he says.

That’s what makes the integration of Meridian management easy, Marrone says — it’s an opportunity to bring the strengths of the two companies together — technical services and strong operational management on Yamana’s side and exploration on Meridian’s.

“Meridian was very successful with exploration,” Marrone says. “That’s not to say we were not, but we were just getting to that point of exploration being important while they were getting to that point of technical services being important.”

Having little geographical overlap between the two companies made combining the companies easier. Yamana’s projects were mostly in Argentina and Brazil, while Meridian’s main projects were located in Chile and Mexico.

Northern Orion’s assets were both in Argentina — a 12.5% interest in the Alumbrera gold-copper- molybdenum mine and the Agua Rica gold-copper-molybdenum mine.

But Marrone points out that merging mining companies is a little different from other businesses, because of the distance between them and the distinctness of each project.

“They operate as standalone mines,” he says. “A corporate purchaser coming in to buy a company that mines doesn’t really change the dynamic of what’s happening.

“I’m sure that this mine, Chapada, would continue to operate regardless of whether or not I’m the CEO of this company or someone else (is) after it’s been taken over,” Marrone says.

After targeting four companies in two years, could Yamana become a takeover target?

“No,” Marrone answers abruptly. “I don’t want to be. I mean, I share a position in this company and we’re trading at thirteen dollars per share. . . We’re trading at a discount to our peer group right now.”

The reason for the discount is the $4.4-billion acquisition of Meridian and Northern Orion, Marrone says, not to mention the $1.2 billion Yamana spent on takeovers in 2006.

“It’s what I describe as ‘transaction noise,'” he says.

That brings us today, Marrone says, describing Yamana as a newly listed company.

“You have to go out there and explain what it’s all about before it starts to capture its true value,” he says.

Gosselin agrees — Yamana is one of Genuity’s top stock picks.

“I think it’s one of the cheapest mid-caps right now,” she says.

That opinion came more than two months after Marrone’s comments, with Yamana trading at more than $16 per share. Gosselin’s Jan. 14 report says Yamana trades at a discount to its peers and her 12-month rating for Yamana is $22.50 per share.

In a Jan. 24 report, Blackmont Capital analyst Richard Gray says that the key to an increase in Yamana’s share price will be the consistent achievement of milestones in 2008.

Blackmont compares Yamana’s stock to the HUI gold index and the gold price, which have outperformed Yamana over the past seven months, increasing 37% and 31%, respectively, while Yamana has gained 20%. However, Yamana has done well since the end of December, when the takeover was officially completed — the stock is up 25% compared to 7% for the gold price and 10% for the HUI gold index.

And in that time, Marrone and his new blended management team have been travelling around North America, Europe, even Japan, to show how the deal will be good for shareholders.

Marrone seems to be getting the job done, though he admits he doesn’t sleep much.

“Maybe four hours a night? That’s either good or bad,” he chuckles.

Back on the jet, Marrone is confident and calm — even as turbulence throws the small aircraft about as it ascends above a thunder storm. An alarm blares and the jet sharply descends. Marrone, who has his back to the open cockpit, snaps his head around with a look of concern — or perhaps irritation.

The turbulence subsides and Marrone talks more about the takeover, and his plans for the company.

“We must seem overly proud of this deal,” Marrone says. “Nobody thought we could do it. . . We had to fight for it.”