Yamana recruits former Augusta execs to head Brio Gold

Looking to wring more value out of its non-core assets in Brazil, Yamana Gold (TSX: YRI; NYSE: AUY) is creating a 100%-owned subsidiary named Brio Gold.

Set to launch in the new year, Brio will hold Yamana’s Fazenda Brasileiro gold mine, Pilar gold mine, and C1 Santa Luz gold project in Brazil, as well as its Agua Rica copper-gold project in Argentina.

The reorganization will separate Yamana’s underperforming assets — in particular its Pilar and C1 Santa Luz operations — from its core assets.

The company has brought in several former Augusta Resource executives to manage the company, including former Augusta CEO Gil Clausen. Clausen will take the helm as CEO, with Joseph Longpré as chief financial officer, Lance Newman as vice-president of technical services, and Mark Stevens as vice-president of exploration. Augusta Resource was acquired by Hudbay Minerals (TSX: HBM; NYSE: HBM) earlier this year.

The team will be responsible for managing the projects and coming up with an optimization plan and assessment of the company’s “strategic alternatives” by the end of 2015.

Yamana has singled out Pilar and C1 Santa Luz as “previously underperforming assets that have yet to reach their potential.”

In a release, Yamana CEO Peter Marrone said the new management would “carry on Yamana’s efforts at operating … and optimizing our secondary portfolio of non-core assets, which will allow Yamana to focus on its core portfolio, while also providing oversight and direction to management of the non-core portfolio.

“This approach segregates our portfolios, better focuses our efforts, reduces our overall costs and allows us in the fullness of time to evaluate how to best maximize value for our non-core portfolio.”

For his part, Clausen said he and his team were excited to manage Brio Gold and confident about unlocking value at its operations.

“We have completed detailed due diligence on these assets and are encouraged by the potential they hold,” he said. “Moreover, we are impressed with the existing facilities, operational management and site personnel at the mines.”

Yamana will keep its Chapada and Jacobina mines in Brazil, but will scale back its management team in the country.

Brio Gold is expected to produce 130,000 oz. gold a year initially from Fazenda Brasileiro, in Bahia state, and Pilar, in Goias state.

Moreover, the troubled C1 Santa Luz project could nearly double production with an added 100,000 oz. gold per year — if the processing circuit at the plant is modified. 

Yamana has been working on improving metallurgical recoveries at the project, where ramp-up activities were suspended in the third quarter due to recovery problems at the carbon-in-leach circuit and lower gold prices.

Brio Gold will be initially 100% owned by Yamana, which will help Brio management assess its strategic options, and provide working capital in the form of a $10-million bridge loan.

While a spinoff of Brio — presumably one of the company’s strategic options — would cut 200,000 oz. gold from Yamana’s expected production in 2016, CIBC World Markets’ mining analysts Alex Kodatsky and Terry Tsui say any impact on earnings and cash flow would be cushioned by an improved operating structure.

“It remains to be seen if a spinoff of Brio Gold could be the catalyst for Yamana to regain part of the premium valuation it has lost over the past year,” the analysts wrote in a client note.

“At the very least, we think it is part of the solution, and moving past the disappointing delivery of the Brazilian project pipeline and refocusing on improving performance at its core assets should help positively influence investor sentiment. Despite recent challenges, Yamana still maintains a comparatively attractive near-term growth and cost profile relative to many gold peers.”

The analysts rate Yamana as a “sector performer,” with a $5.50 share price target.

Agua Rica

Yamana also announced the results of an independent technical review at the Agua Rica project in Catamarca, Argentina. 

The review was completed to facilitate a full or partial sale of the large porphyry open-pit project, which holds proven and probable reserves of 908.9 million tonnes grading 0.5% copper, 0.22 gram gold per tonne, 3.5 grams silver and 0.03% molybdenum for 9.8 billion contained lb. copper, 6.6 million oz. gold, 102.2 million oz. silver and 629 million lb. molybdenum.

Two scenarios were considered, both of them showing positive economics at metal prices of US$3.10 per lb. copper, US$1,300 per oz. gold, US$21 per oz. silver and US$12 per lb. molybdenum.

Under the base-case scenario, Agua Rica would use existing infrastructure at the Alumbrera mine, which is expected to be mined out in 2019. Yamana owns a 12.5% interest in Alumbrera and is discussing infrastructure access for Agua Rica with its partners.

Under this scenario, a low-arsenic copper concentrate would be produced for sale to smelters outside of Argentina for the first five years, after which the processing facilities would be modified to produce a dual concentrate — 80% of which would be low-arsenic and sold internationally. The rest of the concentrate would be treated through new pressure oxidation and carbon-in-leach (POX–CIL) and solvent extraction–electrowinning (SX–EW) processing facilities to produce copper cathode for domestic sale.

The 110,000-tonne-per-day operation would cost US$2.2 billion in initial capex (US$3.2 billion in total), and generate a US$1.1-billion net present value (after taxes and at a 10% discount rate), and a 19.2% internal rate of return. The mine life would be 24 years.

Another option would be to build a 90,000-tonne-per-day stand-alone operation using a POX–CIL and SX–EW process to make copper cathodes for domestic sale.

This would deliver more copper and gold through increased recoveries, reduce shipping costs and penalty costs related to arsenic, and improve margins — but it would cost more.

With an initial capex of US$3.9 billion and total capex of US$4.2 billion, the scenario would generate a US$935-million after-tax net present value, a 15.8% internal rate of return and extend the mine life to 28 years.

Yamana ended down 2% at $4.79 on the news. The stock has traded in a 52-week range of $3.93 to $11.86, and the company has 880.8 million shares outstanding.