Yamana Gold (YRI) - High-Growth Dividend-Paying Gold Producer

Yamana Gold Inc. is a Canadian-based precious metals producer with a high quality, diversified portfolio, including significant gold and silver production; long-life production assets - including development stage properties and exploration properties located throughout mining-friendly jurisdictions across the Americas, Canada, Brazil, Chile, and Argentina.

Yamana plans to build on this base through sustainable expansion and optimization initiatives at existing operating mines, the development of new mines, the advancement of its exploration properties, and, at times, by targeting other consolidation opportunities with a primary focus in the Americas. The company is committed to operating responsibly and with transparency to strengthen sustainable returns to shareholders and align business and societal outcomes by creating transformational impacts for all stakeholders. 

Matt Gordon caught up with Peter Marrone, Founder, and Executive Chairman, Yamana Gold. Mr. Marrone has over 35 years of mining, business, and capital markets experience. He has been on the boards of a number of public companies and has advised companies with a strong South American and North American presence. He currently sits on the Board of Directors of Aris Gold Corporation.

Prior to Yamana, Mr. Marrone was the Head of Investment Banking at a Major Canadian investment bank and before that practised law in Toronto with a strong focus on corporate law, securities law, and international transactions. 

Company Overview 

Yamana Gold Inc. is a Canadian company that owns and operates gold, silver, and copper mines in Canada, Chile, Brazil, and Argentina. The company was founded in 1994 and is headquartered in Toronto, Canada. It is listed on the Toronto Stock Exchange (TSX-V: YRI), the New York Stock Exchange (NYSE: AUY), and the London Stock Exchange (LSE: AUY). 

Yamana Gold is a highly liquid company that has a 1Moz production platform and a significant growth potential. In 2021, the company produced over 1Moz. The company treats silver in gold equivalent terms. It currently produces between 9Moz - 10Moz silver on a yearly basis. It has 2 mines that produce gold and silver. By utilising a realised ratio of the gold price to the silver price, the company produced a little over 1Moz in 2021. This year, the company is looking to further increase its production profile. 

The company evaluates costs over 3 different metrics, namely operating costs, AISC (all-in sustaining costs), and cost of sales. The AISC comprises the operating costs, along with sustaining capital, G&A (General and Administrative expenses), and exploration expenses. 

In 2021, the company produced each ounce of gold at a $1,030/oz cost. Compared to last year’s guidance, the company is well within an order of magnitude for per ounce production cost. This places the company’s all-in costs in the $1,080oz range. In Q1 2022, the company produced about 238,000oz at a $1,084oz AISC. Compared to last year, the production budget and costs were slightly better. 

Since August 2021, the company’s share price has grown from $4.15 to $4.45. As per the company, the ongoing inflation will have an impact on all businesses, especially mining and precious metal companies. Despite the inflationary environment, gold prices have jumped by $40oz in Q1 2022. This has had a positive impact on Yamana Gold’s margins. 

Despite the increase in operational costs between Q4 2021 and Q1 2022, the company’s margins have increased. As per the company, there are other opportunities that can be used to compress the escalating costs. 

A mining-friendly jurisdiction is always preferred from a cost perspective. This is because such jurisdictions have relatively inexpensive power availability, along with experienced labour. Furthermore, permitting is less risky as the indigenous industries in these countries are supportive of the mining operations. 

Yamana Gold has assets spread across 4 jurisdictions, namely Canada, Brazil, Argentina, and Chile. All of these are mining-friendly jurisdictions that have supportive indigenous industries. The company also has multiple sources to buy raw materials and consumables, such as steel balls for the mills and cyanide. 

Power accounts for 5% of the overall costs, while fuel accounts for an additional 5%. The company needs to be sensitive to diesel prices as they are likely to increase. One of the largest components of costs is labour. There are jurisdictions with experienced labour where the currency has the potential to devalue the US dollar. Here, the company can hedge some of the currency exposure, placing it in a better position compared to other companies. Yamana Gold hires labour both through direct hires and by way of contractors. Labour accounts for about 45%-46% of the cost. The company is looking to gain better control over the currencies where it operates. 

Risk Mitigation

As per Yamana Gold, the business of mining is essentially risk mitigation. A part of the risk mitigation includes the health and safety of workers. The company provides health and safety equipment along with respirators to its workforce. During the onset of covid, the company ensured that its workforce remains protected from possible infective situations while also finding ways to get its workers vaccinated. 

During the start of the pandemic, in 2020, the company’s operations were affected. This was mainly due to the quarantine period which impacted the labour force and working shifts. However, by 2021, the company was able to bring the situation under control. 

Interestingly, the operations were based in jurisdictions that made social distancing possible. The company followed proper safety and quarantine protocols, which eventually became a norm. The company has achieved almost 100% vaccination for its workforce and it continues to follow safety protocols and provide respiratory equipment to its workers. It has been successful in mitigating nearly all the impacts of covid-19. 

ESG Considerations

As per Yamana Gold, the gold mining industry has a solid understanding of the ESG (Environmental, Social, and Governance) norms. The company promotes health, safety, environmental compliance, and community support. 

The gold mining industry recognizes the importance of the health and safety of its workers and the local communities. The companies understand that they are guests in these host communities and having a good dialogue with the locals is crucial from both an environmental and community perspective. 

For Yamana Gold, ESG goes hand-in-hand with profitability. It places a great emphasis on being respectful to the local environment, the broader community, and the health, and safety of its workers and their families. 

The global awareness around climate change has made the broader market aware of the changes that need to be implemented. Companies are now beginning to understand that taking care of the environment will also lead to better profitability in the long run. 

In 2021, Yamana Gold set a goal to reach net-zero emissions by 2050, in order to get the earth’s rising temperature under 1.5 degrees Celsius. Recently, the company has published a comprehensive report highlighting the measures being taken to reach this goal. 

The company has taken several steps in order to reduce its carbon footprint. It has changed the hauling methodology at the Jacobina mine. It has entered into power purchase agreements at the Mineralization Florida mine where the power is now sourced from renewable energy. Additionally, the company is utilising wind energy to power its Cerro Moro mine in South America. Notably, the Cerro Moro mine is located in one of the windiest regions in the world. This consistent wind enables the company to rely on wind-generated power. Notably, the company has been successful in sourcing 25%-50% of its power requirements from wind energy. 

Given the recent developments, the company anticipates that it will be able to reach the net-zero emissions target before 2030. It is currently working on a Feasibility Study and is in the process of buying equipment to install wind turbines through contracting. Notably, the use of wind power at Cerro Moro will help the company reduce its climate impact, while simultaneously reducing its overall costs. This will also help in reducing the cut-off grade. A reduction in cut-off grades would enable the company to tackle additional areas of exploration, which previously didn’t meet the reserves cut-off grades. As a result, the company will be able to add more ounces at a lower grade and deliver the same type of production and cash flow at much lower costs. 

Yamana Gold understands the importance of ESG in today’s day and age. It is important to protect the planet for current and future generations. The gold mining industry accounts for 2%-3% of all greenhouse gas emissions. As per the company, an average airline generates about 14 times the emissions when compared to a mid-tier producer. It is important to take into account other industries that are the biggest contributors to greenhouse gases and emissions. 

Yamana Gold is a gold, copper, and silver producer. It understands that silver and copper are an essential part of moving towards a greener world. Meanwhile, gold has served an important purpose for people and cultures for thousands of years. Precious metals hold a cultural significance as well. 

The best way to mitigate climate change over the long term is to lift people out of poverty. If companies can help provide jobs, job security, and education for current and future generations, it will help lift people out of poverty which will also help reduce greenhouse gas emissions. This is because the places with the most poverty are often seen to have the worst greenhouse emissions. 

In the 4 countries where Yamana Gold operates, there is a recognition of the line to be drawn where a company is allowed to do its part while still remaining profitable. To be able to deliver cash flow and profitability to its stakeholders, while still giving back to the local community and contributing to the provinces and national communities on a broader level. 

This line can potentially move from time to time, but this happens in increments. In the countries in which Yamana Gold operates, there is a possibility that the royalties and stipends paid to the local communities, provinces, states, or governments can increase. But there is an understanding that the increase wouldn’t be extreme. 

Discussing the nationalisation of lithium assets in Mexico, the company said that the nationalisation of assets often makes headlines. However, it is important to understand that such a move has the potential to choke off investment which eventually leads to reduced employment and lost opportunities for the country. Countries need to focus on incremental needs rather than radical needs.

Chile is currently going through a constitutional assembly. The country is in the process of updating the constitution which was originally put in place in the 1980s. These changes include the nationalisation of certain metals and minerals. The broader assembly voted overwhelmingly against these changes because there is an understanding that these measures would not be supported by the broader population. 

Dividends Paid

Yamana Gold’s responsible growth strategy is made up of multiple components. The company focuses on growth and capital allocation strategy. The capital allocation strategy has 3 equal-weighted priorities that ensure that the balance sheet is strong and resilient. The company is looking to ensure that it can pay dividends, while simultaneously looking for ways to increase its dividends. In fact, from early 2019 to the present day, the company has increased its paid dividends by 500%. Since late 2006, it has paid around $1.1Bn in dividends while being a $5Bn-$6Bn company. 

The results of these returns have allowed the company to further improve its results. Over the course of the last month, the company has further developed a narrative for its capital allocation strategy. It expects to have about $150/oz in sustaining capital, which is critical for long-life assets. It indicated that during a 3 year guidance period between 2022-2024, the growth CapEx (Capital Expenditure) isn’t expected to be over $175M per year. This brings the yearly production to 1.25Moz, which can be increased to 1.5Moz, over time. 

Yamana Gold is looking to ensure that growth will be achieved without hindering other capital allocation priorities. Equipped with a $560M cash balance, the company is expecting to generate between $50M-$100M in excess cash above dividends, growth CapEx, and sustaining capital annually for the next few years. The company will look at the cash return or dividend side of the business later this year. 

Yamana Gold is not only meeting the growth objectives and capital requirements for its balance sheet, but it also has excess cash which enables it to further increase the dividends beyond the present-day 500% mark. 

Based on free cash flow conversion ratios that take into account revenue and per ounce metrics, the company is amongst the best compared to peers in terms of free cash flow conversion. Essentially, the company has a high free cash flow per ounce of gold produced. 

In 2021, the company generated $325 in free cash flow for each ounce produced. This means that each ounce of gold produced can be converted into free cash flow that is generated from the sale of the precious metal ounces. This enables the company to build cash balances which can help fund ongoing operations. The high conversion ratios ensure that the company does not need to fund its growth at the expense of other obligations. 

Yamana Gold continues to invest in the ground. In 2021, the company was successful in increasing its proven and probable reserves along with reserve grades. Over the course of the last 3 years, the company has increased its NAV (Net Asset Value) by 100%. As a result, the Jacobina asset has gone from a $700M NAV to 1.7Bn NAV over the last 3 years. This was made possible by spending a part of the cash flow and reinvesting it back into the assets. This has also helped the company in improving the overall life of mine for its assets. Yamana Gold has been successful in achieving these goals while still having surplus money that can be used to provide increased dividends for its investors.

To find out more, go to the Yamana Gold website