Yamana ramps up exploration at El Penon

Of Yamana Gold’s (YRI-T, AUY-N) $125-million budgeted for exploration this year — a 10% increase over 2011 — about $29.5 million, or 23%, is earmarked for northern Chile, where it owns 100% of the high-grade El Penon underground gold-silver mine 160 km southeast of Antofagasta.

The exploration program includes 140,000 metres of surface and underground drilling and aims at replacing reserves and resources, as well as outlining new high-grade ounces that will sustain the company’s long-term production goals.

In the first five months of this year, Yamana completed 34,400 metres of drilling and made several discoveries, among them Fortuna Este, a new vein structure 400 metres west of the Fortuna deposit. The Fortuna deposit is 8 km from the El Penon mine.

It also came across two new targets: a mineralization zone south of the main Dorada vein and west between Dorada and Providencia, and a new high-grade deposit at the Elizabeth vein 400 metres east of Victoria within Pampa Augusta Victoria. Yamana geologists discovered the Pampa Augusta Victoria vein system in 2009, 30 km north of El Penon, and subsequent exploration identified the Elizabeth vein system.

Yamana believes the new discoveries present an opportunity to significantly extend the mine life at El Penon and enhance production above 440,000 oz. gold a year.

At the Fortuna deposit, exploration drilling completed in the second half of last year discovered a quartz-vein structure 400 metres west of the Fortuna deposit. Discovery hole 0001 returned 3 metres of 1.30 grams gold per tonne and 74.45 grams silver per tonne. Since the discovery the company has completed seven widely spaced surface reverse-circulation and diamond drill holes and three underground diamond drill holes along a strike length of 800 metres.

Commercial production at El Penon began in 2000, and an expansion of the Merrill-Crowe ­processing plant to 4,500 tonnes per day was completed in 2010. Last year El Penon, which has an estimated mine life of more than eight years, churned out 475,586 oz. gold at a cash cost of US$400 per equivalent oz. gold. Between 2006 and 2011, the mine produced an average of 330,000 oz. gold and 7.7 million oz. silver each year.

At the end of 2011, El Penon had proven and probable reserves of 11.4 million tonnes grading 6.03 grams gold and 182.18 grams silver per tonne, for a contained 2.2 million oz. gold and 66.5 million oz. silver. In the measured and indicated resource category, there were a further 1.9 million tonnes at 7.28 grams gold and 185.40 grams silver. Another 5.3 million tonnes at similar grades lie in the inferred resource category.

On May 1, Yamana announced that El Penon produced 110,675 equivalent oz. gold during the first quarter of 2012 compared to 115,798 equivalent oz. gold in the same quarter of 2011. Production for the quarter consisted of 72,742 oz. gold and 1.9 million oz. silver, compared with 73,568 oz. gold and 2.1 million oz. silver in the first quarter of 2011.

Gold production was marginally lower due to the lower tonnage of ore processed, partially offset by an improved gold-feed grade and recovery rate. Silver production was impacted by lower tonnage processed and lower silver-feed grade and offset by higher recoveries.

The lower tonnage processed was planned to optimize metallurgical recoveries. The mine is also focused on increasing stockpiles of ore for greater flexibility in future production.

Cash costs were US$442 per equivalent oz. gold in the first quarter, compared with US$397 per equivalent oz. gold in first-quarter 2011. The impact of fewer tonnes processed, increases in the prices of power, diesel and other consumables and other mining inflation, compared to the first quarter of 2011, contributed to higher-per-unit cash costs. Cash costs are expected to decrease as feed grades improve for the balance of 2012.

El Penon has a long track record of replacing ounces mined. The company expects its exploration efforts on high-grade areas at El Penon to return significant near-surface gold and silver values, improve production, provide mining flexibility for a sustainable production level of at least 440,000 equivalent oz. gold per year and ultimately increase mine life.

At the end of 2011 Yamana held cash and equivalents of US$550 million and debt of US$432 million. Its dividend has increased by 450% since 2009, and the company raised its dividend rate three times in 2010 and twice in 2011. Earnings last year grew to US$713 million from US$448 million in 2010, on revenues of US$2.2 billion, up from US$1.7 billion in 2010.

At presstime Yamana traded at $16.38 per share within a 52-week range of $10.96 to $18.09. The company has 746 million shares outstanding.