On Tuesday, I presented a bearish view of Yamana Gold (NYSE:AUY), a mid-tier miner that is very popular with the investment community, including our
Motley Fool CAPS
participants. Peter Marrone, chairman and CEO of the company, requested a chance to respond to some of my criticism. In the spirit of encouraging Foolish debate, I was happy to oblige. We conducted the following exchange via email.
Toby Shute: Hi there, Peter. Let me start off by saying that I'm so pleased that you care enough to address the various concerns I aired in my commentary on Yamana earlier this week.
Peter Marrone: I appreciate the opportunity to speak with you and give you some additional thoughts on the company.
Toby Shute: The main thrust of my piece was not about your company's mining operations, which have overall been a tremendous success. Nevertheless, I'd like to give you the opportunity to address my comments on the assets you acquired in 2006. Am I reading too much into the production decline at San Andres and the high cash cost at Jacobina?
Peter Marrone: San Andres is a small mine with about 70,000 ounces of gold production per year. We purchased it with that expectation. Our purchase price was an estimated $36 million, net of certain other assets that came with the deal. As such, it was a very inexpensive deal as compared to the production and resource base.
Since that acquisition, we have engaged in a drilling effort that has doubled our gold resources, and our plan for San Andres would be to obtain a permit to expand our leach pads and expand our operations. Our internal view is that San Andres should support a production level of 100,000 ounces of gold per year for an eight-to-10-year mine life, at a cash cost per ounce of around $300 per ounce.
It is a robust although smaller mine now, although with the potential to become a more substantive operation. In the meantime, we paid a very low price for this mine in its current state, and for the opportunity it represented.
We have applied for that permit and are in an ordinary course process. The potential there is substantial, and this would provide significant upside for shareholders.
Jacobina is a complex of mines with a common plant for ore processing. The most mature and advanced is Joao Belo. While it carries most of the reserve, the future prospects lie with Morro do Vento and Canaveiras. The latter is the newest mine and carries most of the known resource, and [it] continues to grow. It is also at higher grade than Joao Belo.
This year, we plan to produce about 80,000 ounces at Jacobina, most of which would come from Joao Belo. The expected cash costs would be in the mid-$300-per-ounce level. However, Jacobina represents about 12%-15% of our value, and as such is not the dominant mine. At least, not today. We have an advancing development plan that would see a two-phase expansion at Jacobina, with production increasing to 150,000 ounces next year, and 200,000 ounces by 2009. Our cash costs are then expected to be below $290 per ounce. We are actively pursuing development work at Canaveiras, which will account for most of the expansion and production from 2009 and beyond.
One further point: Our dominant mines today are Chapada and Sao Francisco. These are lower-cost mines and account for most of our production. Also, we apply copper revenue as a credit toward cash costs for gold production. In Q1, we produced 120,000 ounces of gold at a negative cash cost of ($105) per ounce of gold. We generated about $69 million of cash flow and $47 million of adjusted earnings -- adjusting for certain non-recurring items -- in a quarter that is historically weak, and with our two largest mines having only recently started up and ramping up to full production.
Toby Shute: To your knowledge, have major shareholders of the companies you have acquired held on to the Yamana shares they got in exchange? That would say quite a lot for their belief in your vision.
Peter Marrone: I am highly confident that most of the major shareholders of the companies we acquired hold their shares. We completed the purchase of Viceroy late last year. Their largest shareholder was a portfolio manager with about 18% of the shares. I understand that they still own their Yamana shares, which we issued when we acquired Viceroy.
A point on acquisitions: While we completed three last year, our stock price increased significantly after completion of the acquisitions. With Viceroy, for example, our stock price had traded on the Toronto Stock Exchange at a level of CDN$9.50 per share, and from the beginning of this year, soon after completing that deal, we have seen our stock perform very well, reaching a level above CDN$17 per share. Even now, with the correction we have seen in the gold mining share prices, we are trading in the range of CDN$14-$15 per share.
In each of those deals, the management of the selling company found the growth profile and value upside in our shares compelling.
Toby Shute: What's your favorite Brazilian meal?
Peter Marrone: There is a restaurant concept in Brazil known as a churrascaria. It is a barbeque buffet with various cuts of meat brought to your table on skewers. It is a phenomenal meal. You have to be prepared to eat. Having said that, I will say that the restaurants in Sao Paulo are world-class. Also, there are many cuisines in the country, as it is so vast and culturally diverse.
Toby Shute: I pointed to your taking a sizeable-looking amount of shares off the table since early 2006. We like to see management with some "skin in the game." My best efforts to navigate Canada's insider transaction reporting system have come up a bit short; can you clarify your participation as a Yamana shareholder over the years?
Peter Marrone: I will proudly say that we have built a company in a bit over three years that is comparable to or exceeds companies that have been built over a multiple of that period of time. That has created significant value for shareholders, and also for management. I believe that it is wrong not to allow management to reap some of the benefits from their hard work. It creates a disincentive, in a sense. As an officer of a company, one would see significant appreciation, and it would be a distraction to have that officer constantly monitor the stock price, observing how his or her apparent net worth would go up or down. I have seen that distraction before. It is preferable to have people focus on the company and operations without distractions. Feeling that they are reaping some of the rewards for that hard work helps toward that end.
We have sold shares as management only on a few occasions, and I have encouraged our management to do so en block, rather than individually. We have selected the time outside of blackout periods, and as we have sold en block, it has allowed us to strategically position the shares largely to new portfolio managers or invested parties who were looking to increase their positions. It is always disclosed that the block is from management. We try to be strategic, with minimal impact on the market.
As to my position, what options I have exercised and sold constitute a small portion of my investment in Yamana. I continue to remain motivated as a shareholder and to make efforts to improve value for shareholders.
Read the second part of our interview with Peter Marrone.
To read more about Yamana, check out the following articles:
Yamana Gold has been highlighted as a "Tiny Gem" in our Motley Fool Hidden Gems small-cap newsletter service. To learn more about small-cap investing, consider taking a free trial today. You gain immediate access to our market-beating recommendations and subscriber-only community.
Fool contributor Toby Shute doesn't hold a position in Yamana. The Motley Fool has a golden disclosure policy.
