Yamana Gold Inc

TSX:YRI

Earnings Call Transcript 2022-Q3

[Operator]

[Operator Instructions] This conference is being recorded. All participants please stand by, your conference is ready to begin. Thank you all for joining us this morning. Before I turn the call over, I need to advise that certain statements made during this call today may contain forward-looking information, and actual results could differ from the conclusions or projections in that forward-looking information, which include, but are not limited to, statements with respect to the estimation of mineral reserves and resources, the timing and amount of estimated future production, cost of production, capital expenditures, future metal prices and the cost and timing of the development of new projects. For a complete discussion of the risks, uncertainties and factors which may lead to actual financial results and performance being different from the estimates contained in the forward-looking statements, please refer to Yamana's press release issued yesterday announcing third quarter 2022 results as well as the management's discussion and analysis for the same period and other regulatory filings in Canada and the United States. I would like to remind everyone that this conference call is being recorded and will be available for replay today at 12:00 p.m. Eastern Time. Replay information and the presentation slides accompanying this conference call and webcast are available on Yamana's website at yamana.com. I will now turn the call over to Mr. Daniel Racine, President and CEO.

[Daniel Racine, executive]

Thank you, Operator. Thank you all for joining us, and welcome to our third quarter 2022 Conference Call and Webcast. Presenting with me today is Peter Marrone, our Executive Chairman. Jason is here with the rest of our senior management, and they will be available to answer questions during the Q&A portion of the call. As usual, I will start with a few words on health, safety and sustainable development. The health and safety of our employees always come first. Our total recordable injury rate was $0.85 for the first nine months of 2022. And I would like to thank all our employees for remaining focused and committed to our safety values. Despite our excellent track of record, this is something we are always working on improving and getting better at.

The company continues the implementation of its climate action strategy during the quarter, including work on assessing our scope three emission and evaluation of the establishment of an internal carbon price. Yamana has our longest story of prioritizing the health and safety of its people, protecting the environment and the communities where we operate, and we are committed to continuing to improve our responsible development strategy. Given our focus on ESG, I'm very pleased to highlight that we have recently received updated performance rating from three major ESG research and reading organization with ratings improvement, reflecting continued progress in the company's deep commitment to ESG excellence.

The company's 2022 S&P Corporate Sustainability Assessment score increased from 48 to 50. It's MSCI rating improved from BBB to A, and our sustain analytics score improved to 21.2% from 24.7%, where our lower score signified improved performance. Turning now to our third quarter highlights. We continued our track record of operational excellence and produced over 216,000 ounces of gold, exceeding our plan for the quarter. The standout result was driven by Canadian Malartic and Jacobina. Notably, Jacobina achieved record quarterly throughput and the gold production producing over 50,000 ounces for the first time. Silver production of over 2.2 million ounces was in line with plan. With production expected to sequentially increase in the fourth quarter due to mining sequencing at El Peñon.

We delivered strong GEO production of over 241,000 ounces despite the gold-to-silver ratio being near an all-time high and significantly above budget. With the strong year-to-date performance, Yamana is well positioned to meet its annual production guidance. At the gold to silver ratio being in line with our original forecast, we would be well ahead of both plan and guidance. As a reminder, we have guided for production in the second half of the year to be comparable with that in the first half, with the sequential increase in the fourth quarter over the third quarter expected to mirror that realized in the second quarter over the first quarter.

On the cost front, we continue to maintain solid margin against inflationary backdrop. While underlying costs for metals sold in the third quarter were within plan, the higher gold-to-silver ratio as compared to metal prices assumed in the guidance, increased unitary costs per geo sold by over $27 per ounce as compared to plan. The inflationary impact on cost in the third quarter was mostly offset by the productivity gains. Moreover, commodity input inflation on consumables that impact cost appears to have peaked in the second and third quarter, with many inputs of their recent high. Despite realized inflation being above what was assumed in the company's guidance for the year, all-in sustaining costs are expected to be within the upper end of our guidance when adjusted for the impact of the gold-to-silver ratio as noted above.

Notably, the Management Information Circular and related meeting and proxy materials in connection with the proposed business combination with Goldfield has been filled and made public - Gold Field in the public available ahead of the scheduled shareholder vote in November. Peter will speak more about the proposed deal. Turning to our third quarter financial performance. Our continued operations strength delivered strong revenue, gross margins, earnings and cash flow generation. Earnings during the quarter was $19.8 million or $0.02 per share. On an adjusted basis, earnings were $0.05 per share. Cash flow from operating activities before net change in working capital came at $157.1 million.

Cash flows from operating activities were $164.7 million during the quarter. We also generated free cash flow before dividend and debt repayment of $24.4 million during the quarter. We ended the quarter with cash and cash equivalents of $539.2 million inclusive of $211.3 million available for the use of the MARA project. Cash flow from operating activities are expected to increase in the fourth quarter with increased production contribution driving sequential improvement. And with that, I will turn it over to Peter to discuss the proposed business combination.

[Peter Marrone, executive]

Daniel, thank you very much. So just to recap, to begin, we have an all-share offer by Goldfields under a plan of arrangement under Canadian law at an exchange ratio of 0.6 Gold Field shares for each amount of share. The consideration represents a premium of just under 42% to the unaffected pre-announcement closing price or just over 30% on the weighted average price basis. Yamana shareholders alone as a result of this transaction, about 39% of the combined company, which is in line with the respective net asset value contributions brought to bear by each company. With the management information circular relating to the meeting and proxy materials in connection with that special meeting of shareholders have been filed and are publicly available. The Yamana Board has set the close of business on October 18 as the record date for determining the amount of shareholders who are eligible to receive notice of and to vote at that special meeting. And in addition to public filing of the information circular, the materials are currently being mailed to the amount of shareholders of record on the -- that record date of October 18.

The Yamana special meeting will be held at 10:00 AM, that's Toronto Time on November 21, subject to any adjournment or postponement of that meeting. The meeting will be held at the Design Exchange in the Toronto Dominion Center, 234 Bay Street in Toronto and will be broadcast online at the website noted below with the password as identified. Let me comment for a moment on certain points. Much has been said about the deal, the result of which may have cast some doubt, and we would like to address those points and those doubts for the benefit of our shareholders and other listeners. Our comments which follow can be drawn from our circular and underlie our Board's reviews. They underlie the process and the conclusions reached by our board.

To begin, some comment has to be made on structure. We believe the deal is very well structured. Indeed, we believe it is an excellent, well-structured and well thought through deal. We do not believe deals with premiums are poorly structured deals. Indeed, we believe premiums are warranted and important in many deals. We believe when there is an insignificant overlap of shareholders and one company trades at a comparatively low valuation and multiple, it is necessary and warranted to consider and to pay a premium as it is otherwise unfair and contrary to the duties of boards to allow that value to transfer from one set of shareholders to the other.

We believe and concluded that a premium was very justifiable in our deal. We believe and concluded the premium reflected nothing more than the recognition of fair value for our company. There is no overpayment and considerable value will accrue to the benefit of both sets of shareholders in this deal. Extensive diligence was done by both companies that was comprehensive and thorough, which included access and review of detailed block models, mine plans, exploration results and exploration potential and plans, all under confidentiality agreements, and that is far more information that is and can be accessed by market participants. We provided and gave access to management at all levels, and we got that access in return. We believe that our company has impressive value. We agree with our shareholders who have said that.

We concluded that there was considerable value in gold fields also. And on the question of remaining as a stand-alone company, a question that has recently been presented, this was considered by our Board of Directors and our conclusion was that we, however, formidable is our company, the combination creates an even more formidable one. We consider the issue of longer-term decline in production in Goldfields and much has been said about that. But our diligence shows that, that is a worst-case scenario and many, many years out. And it is not as pronounced as suggested by mine plans, which rely only on proven and probable reserves. There will be conversion of resources, new discoveries will be made, production levels will be higher and mine lives longer.

Any such apparent decline must also be seen in the context of impressive near-term production and cash flow growth. We concluded the Gold Fields asset portfolio is robust and well run. We were particularly impressed with the improvement plan at South Deep, impressive cash flows at Taqua and in Australia and the competency of building large-scale mines in the very near term, almost explosive production and cash flow growth that comes from Salares Norte. We consider that this combination will bring five of the best precious metals mines in the world in one company. We took into account the share price impact of event-driven funds and consider this would give way to a true higher value recognition in short order soon after the transaction completes.

We do not subscribe to the view that in combinations where there are premia, the share price does less well than those without premiums. We are aware of only one research report that's so concluded, but we took into account that the sample pool in that report was too small. The report did not look at other relevant factors such as how well went to the integration, where the operational challenges, what happened to gold price in the periods under review. We concluded that the quality of the portfolio in this combination and plans for management through integration would strongly support a much higher share price and no lag simply because a premium was paid. This combination creates a more robust, better capitalized larger company with a strong balance sheet, production and cash flow growth, most immediately from Salares with both companies contributing quality assets so that the whole is greater than the sum of the parts.

A larger, more liquid, diversified global platform and rules-based mining jurisdictions with size and scale, impressive near-term and longer-term growth in production and more importantly, cash flow and an excellent balance sheet. We have set out our process -- the process we followed more fulsomely along with the reasons for our recommendations in our information circular. We direct our shareholders to the sections of the circular in particular, that is entitled reasons for the recommendation of the Yamana Board. And based on the factors highlighted, the Yamana Board of Directors unanimously recommends that our shareholders vote in favor of this deal. Shareholders and others who are interested are strongly advised to read that information circular for a detailed description of the transaction and the reasons for our Board's recommendation, as I just mentioned. And once again, the Yamana Board unanimously supports the arrangement with Goldfields and unanimously recommends the Yamana shareholders vote in favor of the arrangement resolution. Daniel, with that, I will pass it back to you.

[Daniel Racine, executive]

Thank you very much, Peter. We'll open for questions. Operator?

[Operator]

Thank you. We will now take questions from the telephone lines. [Operator Instructions] Thank you for your patience. [Operator Instructions] And there are no questions registered at this time. So I'll turn the meeting back over to Mr. Racine.

[Daniel Racine, executive]

Thanks, Operator. I'm happy that we were very clear with our presentation this morning. Please all note that we are planning to release an exploration update on November 9th on our mines and our project. Thank you all for joining our third quarter conference call and webcast. Please take care and be safe. Bye for now.

[Operator]

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.