Yamana Gold (AUY) Q1 2022 Earnings Call Transcript

Yamana Gold (AUY)
Q1 2022 Earnings Call
Apr 28, 2022, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

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 and 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 first 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 -- President and Chief Executive Officer

Thank you, operator. Thank you all for joining us today. Welcome to our first quarter 2022 conference call and webcast. Presenting with me today is Jason LeBlanc, our senior vice president of finance and chief financial officer; Yohann Bouchard, our senior vice president and chief operating officer; Gerardo Fernandez, senior vice president, corporate development, and investor relations; and Henry Marsden, senior vice president of exploration, will also be available to answer questions during the Q&A portion of the call.

The health and safety of our employees always come first, and despite our excellent track record, this is something we are always working on improving. Our total recordable injury rate was 0.25 during the first quarter -- 0.75 during the first quarter. And I would like to thank all of our employees for remaining focused and committed to our safety values. We continue to take action across the company to minimize the spread of COVID-19.

Notably, we are happy to report that more than 99% of our company's employees and contractors have received at least one dose of COVID-19 vaccine and more than 96% have received two doses. Approximately 76% of workers have received a third dose booster shot. We also recently opened a dedicated community relation office for the Wasamac project in Evain, Quebec to continue our dialogue with the community and local stakeholder. During the quarter, we published our climate action report, which includes information on our climate governance, strategy, and the steps we are taking to meet our science-based 1.5-degree Celsius greenhouse gas abatement target.

The document can be found on our website and I encourage all of you to review it. Yamana has the 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 continue improving our sustainable and responsible development strategy. Turning now to our first quarter highlights. We continued our track record of operational excellence and produced just under 211,000 ounces of gold, exceeding our plan for the quarter.

The exceptional results were driven by Cerro Moro and Jacobina. Notably, Jacobina achieved record monthly gold production in March. Silver production of nearly 2.2 million ounces also exceeded plan at Cerro Moro, delivering strong results with increased mill feed from higher-grade zones. Strong gold production at El Penon in the first quarter was expected to remain stable through the year.

Mine sequencing at El Penon will drive silver grade improvements throughout the year with more than 60% of the silver production at the mine expected in the second half of 2022. GEO production of nearly 239,000 ounces was in line with plan despite a weaker gold-to-silver ratio, while all-in sustaining cost was better than planned. We are maintaining our production and cost guidance for 2022. While I won't spend too much time on all the numbers on this slide, I do want to comment on the positive production trend we expect to see over the remainder of the year.

As guided, the previous quarter is expect -- the first quarter is expected to be the lowest planned production quarter of the year, and we expect to see increases in production and generation of cash flows and free cash flows throughout the remainder of the year. Turning to the individual drivers of our performance. Canadian Malartic delivered a strong first quarter in line with plan. We are also continuing to advance the development of the underground Odyssey project, which remains on budget and schedule.

Shaft sinking is scheduled to begin in the fourth quarter of this year, and we are expecting first production from Odyssey South during the first quarter of 2023. We continue to see huge opportunities at Odyssey in the future. Exploration work has delivered promising result at East Gouldie, extending mineralization to the East and at the Odyssey South internal zones, which demonstrate the potential to have mineral resources. Our commitment to exploration in the Abitibi region is one of the reason we pursued the acquisition of Wasamac and the Camflo property from Monarch Gold.

The Camflo property is not part of the Canadian Malartic Partnership landholding. Camflo has produced approximately 1.6 million ounces in the past. An initial evaluation has identified porphyry hosted gold mineralization that could be mined by open pit. Studies are on the way to fully evaluate the potential.

Jacobina had an exceptional quarter, driven by higher ore tonnes mined, which reached a monthly all-time height in March, delivering record monthly gold production. Underground mine development work continues to gain access to new mining panels, and together with the higher ore tonnes mined, provides additional flexibility through the development of stockpiles, supporting the higher throughput expected from the ongoing phase expansion. This positive trend should continue as the Phase 2 expansion is progressing ahead of the original schedule with 8,500 tonnes per day expected by the middle of 2022. Cerro Moro continued to benefit from access to additional mining faces, which supported the increase in mill feed coming from higher grade underground ore, which account for over 70% of the now-stabilized throughput.

At Cerro Moro, we are continuing to advance in parallel the scalable expansion study and the potential heap leaching project and are evaluating option for alternative source of power, which includes a connection to the grid and wind power. As planned, El Penon entered high grade during the quarter and delivered solid gold production results. We expect that gold production will remain stable throughout the year, but a strong second half will account for approximately 60% of the silver production due to mine sequencing. One of the key strategies to increase value at El Penon is to establish additional mining sectors and increased mining flexibility.

With exploration success, such as the recent South Deeps discovery and other near mine veins, the objective at El Penon is to utilize the excess plant capacity and increased production. Lastly, Minera Florida delivered production in line with plan, and we're happy to have entered into a new long-term collective bargaining agreement with our employees at the mine. Operational efficiency remains an area of focus at Minera Florida, and we have identified several new opportunities to increase recovery at the processing plan, and we continue to work toward the plan debottlenecking study, which is expected to allow for increased throughput in 2025 when it's received its permit. Before I turn it over to Jason, I want to quickly recap some of the exciting responsible growth plan we detailed in our recent Investor Day.

While our formal 10-year outlook continue to grow -- to show growth, now to 1.25 million gold equivalent ounces, supported by our existing mineral reserves and resources. We have identified a path to increase production to 1.5 million gold equivalent ounces via project optimization with only modest long-term capital requirement. This responsible growth is fully aligned with our capital allocation strategy, which balances the shareholder return, balance sheet and low capital intense growth. One of the reason we have such exciting growth potential is that we have proportionally more generational mines than many peers, and disproportionate number relative to our size.

We define generational mines as those that provide meaningful production and cash flow over multiple decades to offset such generational mine in our portfolio, for example, our Canadian Malartic and Jacobina. Over the longer term, we see a clear path for Canadian Malartic to produce more than the current baseline production, assuming our initial plant-driven exploration potential and upside plant capacity optionality. Combined with the phased expansion at Jacobina and the other growth opportunity we outlined during our recent Investor Day, there is a significant growth within our existing portfolio. We will add further insight to our company -- into our company at our Annual General Meeting, which convenes later this morning.

And with that, I will now pass the call over to Jason, who can go over our quarterly results in more detail.

Jason LeBlanc -- Senior Vice President, Finance, and Chief Financial Officer

Great. Thank you, Daniel, and good morning, everyone. Turning to our first quarter financial performance, our continued operational strength helped revenue reach $441.9 million, up nearly 5% from the same period last year. Gross margin, excluding DD&A rose 5% to $262.7 million from $249.9 million in the year-earlier period.

Earnings during the quarter were $57.8 million or $0.06 per share or similar to last year. But on an adjusted basis, earnings were $0.09 per share versus $0.07 per share last year. Cash flows from operating activities before net change in working capital came in at $197.3 million, up over 7% from last year. We always have a first quarter working capital outflow based on normal yearly cycles, but it was a little higher this Q1 from higher stockpiles and an unbudgeted build in materials and supplies inventory in response to geopolitical events.

So cash flows from operating activities of $151.7 million during the quarter, compared with $160.2 million last year. We also generated free cash flow before dividends and debt repayment of $34.7 million during the quarter. And we ended the quarter with cash and equivalents of $516.4 million, including $218.3 million available for the MARA project. As Daniel already noted, we expect free cash flow to increase quarter-over-quarter with the strongest free cash flow generation anticipated in the second half of the year and, in particular, during the fourth quarter, which is expected to result in cash balances steadily increasing throughout the year.

I've noted before that in Q2, we always have our final cash tax installments from the prior year that will be true again this year with about 40% of our annual cash taxes occurring during Q2. Many people have been asking how inflation has been impacting our business. When we guided earlier this year, we had incorporated a modest impact from inflation that we are seeing at our operations at that time. Since then, geopolitical events have caused further price increases in many consumables, although the markets are very volatile.

During Q1, we didn't really see any significant impact on the business other than for diesel. We included $80 oil in our guidance for the year and for every $10 move in the oil price that adds about $5 per GEO to our ASIC cost structure. But with our footprint of primarily underground mines, we have a more modest exposure to the oil price. We'll continue to monitor global events and their impact on potential inflation.

Despite recent volatility, we have been successful in managing these risks to start the year and be more productive. Our costs for Q1 came in better than our planning. As detailed during our Investor Day and by Daniel earlier, we have some exciting growth prospects. That said, I want to emphasize that our responsible growth will adhere to a disciplined capital allocation strategy and that the capital requirements are very manageable in any given year.

While we pursue the Yamana 1.5 Plan, we expect continued growth in our cash balances of $50 million to $100 million per year during the guidance period. We're targeting $150 per ounce in sustaining capital to maintain the productive capacity of our mines and ensure mining flexibility. Net expansionary capital is not expected to exceed $175 million per year on average during the guidance period through 2024. Further, our three-year guidance period only contemplates a modest cost of studies and permitting for the Yamana 1.5 Plan.

Expansionary capital subsequent to the guidance period to achieve the additional 250,000 GEO per year to reach the Yamana 1.5 Plan is expected to be between 250 and $300 million and will be supported by our increasing production platform. With this approach, sustaining and expansionary capex is not expected to exceed 50% of operating cash flow during the guidance period based on our 2022 planning. With strong cash flows and a growing cash balance, we also expect to be in a position to increase our sustainable dividends while continuing to target share buybacks with a residual cash after other capital allocation priorities. Our balanced approach to capital allocation has positioned Yamana to invest in its organic growth projects, while at the same time continuing to generate free cash flow, which provides the opportunity to continue enhancing shareholder returns.

And with that, I will pass the call back over to Daniel.

Daniel Racine -- President and Chief Executive Officer

Thanks, Jason. And with that, I will turn it back over to the operator for question. Operator?

Questions & Answers:

Operator

Thank you. We will now take questions from the telephone lines. [Operator instructions] Our first question is from Anita Soni with CIBC World Markets. Please go ahead.

Ms. Soni, your line is now open.

Anita Soni -- CIBC World Markets -- Analyst

Sorry, I put myself on mute. Good morning, everyone. Thanks for taking my call. So I just wanted to ask in terms of the capital spend that you have over the course of the year.

I think you spent about 21% or 18% somewhere in that range. Can you just give us a little bit of color on where you expect -- how that to play out over the course of the year? Will it really like sort of pickup in Q2? Or is there more of an even spend over the course of the year?

Jason LeBlanc -- Senior Vice President, Finance, and Chief Financial Officer

Yes. Pretty even by quarter now, Anita, over the balance of the year. So both you look at sustaining or expansionary capital, it'll be pretty flat, take our guidance minus what we spent in Q1 divide by three and it should be pretty good.

Anita Soni -- CIBC World Markets -- Analyst

Yeah. And is there any -- the reason why it was a little bit underspent, is that because of any sort of inflationary COVID-related impacts? So is there any kind of risk to higher capital into next year or delays in anything in any of your projects?

Jason LeBlanc -- Senior Vice President, Finance, and Chief Financial Officer

No. Not really. I think you always see that we tend to start the year a little bit slow on the capital spend. I think that aligns as well with the lower production in the quarter.

But no, we're ready to -- we want to spend our capital for the flexibility it provides.

Anita Soni -- CIBC World Markets -- Analyst

OK. And then the last question I have, again on capex is, I saw -- or actually a couple of questions more. But the -- I think the major capex difference was Malartic. And I'm just curious, is -- it was stripping pick up on that? Like I said, is that, at the correct level for capital spend throughout the year? Or is there a higher uptick up in stripping over the course of the year?

Jason LeBlanc -- Senior Vice President, Finance, and Chief Financial Officer

So you're talking in sustaining?

Anita Soni -- CIBC World Markets -- Analyst

Yes, sustaining both. Both sustaining and development capital there.

Jason LeBlanc -- Senior Vice President, Finance, and Chief Financial Officer

Yes. I think our share is probably $50 million to $60 million less around sustaining. So again, divided by three pretty good.

Anita Soni -- CIBC World Markets -- Analyst

OK. All right. And then the last question was in terms of the care and maintenance costs at Alumbrera, is that a good number to use for the remaining quarters of the year?

Jason LeBlanc -- Senior Vice President, Finance, and Chief Financial Officer

Yes. You can just roll that out. That's good.

Anita Soni -- CIBC World Markets -- Analyst

OK. All right. Thank you very much.

Operator

Thank you. Our next question is from Tanya Jakusconek with Scotiabank. Please go ahead

Tanya Jakusconek -- Scotiabank -- Analyst

Great. Good morning, everyone, and thank you so much for taking my questions. And first of all, Jason, thank you so much for providing us the sensitivity to the oil price. I just wanted to check, does fuel represent about 8% of your cost structure? I'm just trying to understand what percentage I'm working with that sensitivity, please.

Jason LeBlanc -- Senior Vice President, Finance, and Chief Financial Officer

Yeah. We look at everything on ASIC cost structure. I mean, you may be a little bit closer on pure opex. But when we look across ASIC, it'd be about half that amount, I'd say.

So it's there with our power. Those are our 2 biggest contributors to consumables.

Tanya Jakusconek -- Scotiabank -- Analyst

OK. So then if I was to use this at $5, it would be closer to half, if I was just looking at it on total cash costs, would that be correct way of thinking about it, the sensitivity?

Jason LeBlanc -- Senior Vice President, Finance, and Chief Financial Officer

Yes. Order of magnitude might be a little heavy, but --

Tanya Jakusconek -- Scotiabank -- Analyst

OK. And just another thing, just on -- we've seen some wage inflation. So I just want to confirm with yourself and Daniel, that pretty much all of your labor agreements are in place for 2022, and we don't really have any large ones coming up. Is that fair to say?

Daniel Racine -- President and Chief Executive Officer

Good morning, Tanya. You're absolutely right. Like we mentioned last year, we signed all our agreement in '22, so -- in '21. So in 2022, we don't have any CBAs to sign.

So it's just normal discussion on inflation at each of the country where we adjust our salary, but it's already all planned in our budget.

Tanya Jakusconek -- Scotiabank -- Analyst

OK. And just wanted to check on that. And just -- you also mentioned in your press release you're seeing consumable increases in steel. I just wanted to have a little discussion if you're seeing any other inflationary pressures in any of your consumables, some have set cyanide or any supply chain issues that you're seeing?

Daniel Racine -- President and Chief Executive Officer

Well, on the supply chain, we have not seen any issues. And then like Jason mentioned, we have increased a bit our capital spending on the first quarter because of the -- what's happening in the Ukraine. So we didn't took any chance and then we increased our inventory. But on the cost, we have two choices in life, is to accept these cost increases and they are there and do nothing or do what our team is good to do is look at opportunities to mitigate these costs.

And they've been quite efficient in the past years and then so far this year in 2022. And then everyone in this team is their focus to make sure we have these increases, like all the other company like us personally when we go buy anything, we see it. But again, we made the choice to look at ways to mitigate these costs. I'm not saying we will be able to mitigate 100% of them, but we've been quite good so far.

And one of the best way to do it is to see how we can increase production from this year, what we've done last year and the year before. When the divider is higher, it's always helping even if the top line on cost is a bit higher.

Tanya Jakusconek -- Scotiabank -- Analyst

I appreciate that. And maybe just on the guidance that you provided and reiterated this morning for 2022. Should we still be thinking the same way as you gave guidance in Q4, which was that every quarter going forward should be evenly distributed on the gold side and then we have more silver in the second half from El Penon. Is that a fair assumption?

Daniel Racine -- President and Chief Executive Officer

Yeah. As you know, Jacobina will be in full Phase 2 production starting in the second half of this year. So you will see an increase in gold in Q2 compared to Q1, then Q3 and Q4 will be more stable, but all the other mines are basically almost equal each quarter. So that's the beauty of this year, most of the mines or all the mines have equal quarters.

Just Jacobina is increasing its production. And right, like I mentioned, Cerro Moro will be stable over the year on the silver, but actually, the planning, our plan shows a higher silver production from El Penon in the second half.

Tanya Jakusconek -- Scotiabank -- Analyst

OK. Perfect. And if I can ask one last question just on the inflationary pressures. We talked a little bit on the cost side.

As you look at Wasamac and thank you for mentioning that Canadian Malartic is on budget and on time. Anything you're seeing on capital at Wasamac?

Daniel Racine -- President and Chief Executive Officer

Yohann?

Tanya Jakusconek -- Scotiabank -- Analyst

Any pressures or anything you're doing there?

Yohann Bouchard -- Senior Vice President, Chief Operating Officer

Tanya, thanks for the question. Here, this is Yohann speaking. We are reviewing our cost, but so far, we don't see any impact on our -- for disclosure of 400, I think, $16 million to build that project.

Tanya Jakusconek -- Scotiabank -- Analyst

OK. I appreciate that. And I'll let someone else ask questions.

Operator

Thank you. [Operator instructions] Our next question is from Fahad Tariq with Credit Suisse. Please go ahead.

Fahad Tariq -- Credit Suisse -- Analyst

Hi. Good morning. Thanks for taking my two questions. First, Jason, if I could go back to one of your comments on just the sensitivity.

So you mentioned, I believe that the budget was at $80 a barrel and that $10 a barrel move results in $5 per ounce on GEO-basis higher cost. So if I look at your annual guidance for the year, which is $725 per ounce. And given that we're at, call it, $100 a barrel, is it fair to say like adding $10 an ounce rough math makes sense, assuming these oil prices stay for the rest of the year?

Jason LeBlanc -- Senior Vice President, Finance, and Chief Financial Officer

Yes. Well, as I gave you $10, so at a $20 spot, up to spot then the $10 per GEO on an ASIC basis.

Fahad Tariq -- Credit Suisse -- Analyst

On an ASIC basis?

Jason LeBlanc -- Senior Vice President, Finance, and Chief Financial Officer

Yes. I think in total dollar is about $10 million.

Fahad Tariq -- Credit Suisse -- Analyst

Got it. OK. That's helpful. And then just a second question.

Can you mention or going to some specifics on some of these productivity gains? Like what are the biggest ones across the portfolio? Because I mean, frankly speaking, Yamana in a very positive way has been an outlier when it comes to containing inflation. Thanks.

Jason LeBlanc -- Senior Vice President, Finance, and Chief Financial Officer

Yes. I think that goes through our -- it's a robust procurement effort. So it's a lot of work to do tenders all the time, but we're continuing to do those tenders. We're continuing to test different competing products.

And with those come not only cost but potential productivity savings. So I think those two things, we had been carrying a decent amount of inventory throughout. That was the case to start the year. And then mid-Feb, we pivoted to build up inventories on some of those items we felt were more at risk either from a supply chain or a price perspective.

So there's items we've got four months to six months of inventory sitting there. So that's taken the edge off any increases that have happened since then, but it's just -- I'd call it a mature and robust procurement and supply chain that's -- it's a lot of work, but it pays off.

Daniel Racine -- President and Chief Executive Officer

Maybe to add to that. Good question, but maybe I should add to that. We mentioned many time over the past years that we have what we call operational excellence, a team at our company at each of the operation by Yohann and his team. So each mine, they have project each year to try to beat inflation and/or cost increase.

And then it's everyone at the mine site. It's not our staff only. It's coming from our employees at working on the field, seeing opportunities for us to improve the way we drill the way we do things. And then we put these teams together, they work and they come with project saving at heat of the mine.

And then the mines are sharing in between themselves, if they find a way to reduce costs or be more efficient, they share between themselves. And we're proud to have this, and this work really, really well. And that help us to maintain our cost or keep our costs as low as possible.

Fahad Tariq -- Credit Suisse -- Analyst

OK. Great. Thank you very much.

Daniel Racine -- President and Chief Executive Officer

Thanks.

Operator

Thank you. Our next question is from Mike Parkin from National Bank Financial. Please go ahead.

Mike Parkin -- National Bank Financial -- Analyst

Hi, guys. Can you hear me OK?

Daniel Racine -- President and Chief Executive Officer

Yes, Mike.

Mike Parkin -- National Bank Financial -- Analyst

We're hearing about labor tightness ahead of Canada and Australia. And I was just wondering if you could make any comments in terms of how that -- how you're potentially protected or exposed on the Canadian Malartic Odyssey development? Is it a contract where you're kind of lock into rates that major labor price movement changes would not impact? Or is there a bit of a risk there to watch?

Daniel Racine -- President and Chief Executive Officer

Mike, very good question. Canadian Malartic is an employer of choice in the Abitibi. We're lucky there. We had a very long mine life in the open pit.

Now we're seeing decades of operation underground. So -- and Canadian Malartic is recognized to be a very good employers were paying above average salaries and then benefits. So it attracts people. So we had no issues to hire our staff last year to start planning the underground development starting this month, actually with our own employees.

And so far, we had no issues at all to hire people. It's tight, but we don't have [Inaudible] any problem.

Mike Parkin -- National Bank Financial -- Analyst

OK. Congrats on a good quarter.

Operator

Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to you, Mr. Racine.

Daniel Racine -- President and Chief Executive Officer

Well, thank you, operator, and thank you all for joining us today at our first quarter conference call and webcast. As our reminder, we have our annual meeting of shareholders later this morning, which will begin at 11:00 a.m. We welcome you to join us at the Design Exchange at 234 Bay Street in Toronto, or you can visit our website at yamana.com, for the detail to tune in online. We look forward to seeing many of you later today.

Please take care and stay safe. Bye for now.

Operator

[Operator signoff]

Duration: 31 minutes

Call participants:

Daniel Racine -- President and Chief Executive Officer

Jason LeBlanc -- Senior Vice President, Finance, and Chief Financial Officer

Anita Soni -- CIBC World Markets -- Analyst

Tanya Jakusconek -- Scotiabank -- Analyst

Yohann Bouchard -- Senior Vice President, Chief Operating Officer

Fahad Tariq -- Credit Suisse -- Analyst

Mike Parkin -- National Bank Financial -- Analyst

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