Yamana Eases Off On 2M-Oz Goal

Yamana Gold’s (YRI-T, AUY-N) production targets have been creeping downwards over the last year, but chairman and CEO Peter Marrone says the company’s focus is quality over quantity.

It was in the name of quality that Yamana got rid of its three most costly mines last month. For what Marrone calls a “fair” price of US$200 million, Yamana gave up about 220,000 oz. of annul pure gold production to junior base metals company Aura Minerals (ORA-T, ORAUF-O). Although analysts agreed that the mines were eating up Yamana’s earnings, they thought the price was on the low side and began to question the company’s ability to meet its stated goal to produce 2 million gold-equivalent oz. per year by 2012.

Marrone, who went down to Latin America after the Aura deal to review the company’s projects, isn’t letting the magic number in the company’s vision statement worry him.

“We continue to be committed to being a dominant intermediate producer, but whether or not we get to two million ounces by 2012 will depend on what we do with these development-stage projects and maximizing some of the producing mines that we have in the company,” said Marrone through a sometimes-fuzzy cell phone connection from Sao Paulo. “It will be as important to look at the quality of the ounces as it will be the number of ounces we report by a defined date.”

Looking back, it was right after Yamana completed a three-way merger with Meridian Gold and Northern Orion Resources in late 2007 that Marrone decided the company could achieve production of 2.2 million gold-equivalent oz. by 2012.

But after the second quarter of 2008, the company mentioned that 1.95 million oz. might be more realistic, though 2.2 million oz. was still a strategic goal. Then in November, when third-quarter results were out, the target inched back up to “more than 2 million oz.” and finally settled at an even 2 million gold-equivalent oz. at the start of this year.

Annual production has come up short of goals as well. Yamana forecasted production of 1.3 million gold-equivalent oz. for 2008, increasing to 1.6 million oz. in 2009, but Yamana finished off 2008 with just 1 million oz.

So in January, goals for 2009 and 2010 were cut back to 1.3 million and 1.4-1.5 million gold-equivalent oz., respectively.

Now, short three mines, Yamana is focusing on organic growth — also a part of its vision statement — with numeric production goals less confined by calendars.

Marrone points out that when Yamana was formed in 2003, the company set out to produce 400,000 oz. by 2008. “At the time I considered that to be a dominant intermediate company,” he says. But by 2008, Marrone decided that being a so-called dominant intermediate required more gold production.

“We think that it’s a larger number and we put as a target, two million ounces,” he says.

Yamana has a few key development- stage projects that will be key to reaching its goal but construction decisions at the properties haven’t yet been made.

“I’ve been reviewing all of our operations and near-development stage projects and having strategy discussions with our operations management on how we can take the company to the next leg and look at maximizing operations,” Marrone says.

One example is the Mercedes project in Sonora, Mexico. A prefeasibility study in February 2009 said the project would support production of 118,000 gold-equivalent oz. per year over six years at a cash cost of US$264 per oz. with an internal rate of return of 22.4%. Since then, Yamana has continued exploration, increasing reserves to extend the mine life.

“It continues to be a robust project, the economics continue to be good and getting better,” Marrone says.

The company will make a construction decision early next year.

In Brazil, Yamana is developing the Pilar project, which could produce about 100,000 oz. gold per year. The company is working to increase and upgrade the resource with a feasibility study, and a construction decision to be made by early 2010.

Over in Chile is Yamana’s Minera Florida project, where a mine has been in operation for more than 20 years. But the company has discovered some new prospective zones around the mine with grades higher than usual. Yamana plans to have a resource estimate out sometime in the fourth quarter.

Yamana is expecting to release an updated feasibility study soon on its C1 Santa Luz deposit in Brazil, followed by a construction decision. Average annual gold production at the planned open pit is projected at 100,000 gold-equivalent oz. per year over at least 10 years.

Yamana also wants to make a construction decision for its Ernesto/Pau-a-Pique project in Brazil by the end of this year. As a combination underground bench-and- fill and open-pit mine, production is projected at 100,000 oz. gold per year.

On top of that, Marrone says Yamana plans to focus on its core operating mines, which, unlike the mines it sold to Aura, have potential for growth. He says Yamana is not on the lookout to acquire any new projects or companies as analysts have speculated. The company originally allocated US$56 million for exploration this year but the exploration teams are now putting together a new budget to speed up the advancement of the company’s projects. And now Yamana is in a better cash condition to do so — it had about US$240 million in cash and equivalents before the US$200-million Aura deal.

“Right now, what we are seeing is that the best growth that we can deliver and the best value from that growth comes organically,” Marrone says. “We think we have better assets inside the company than what’s in the marketplace.”