San Francisco Gold Show, 2005
Jim Puplava interviews Peter Marrone, Yamana
JIM: One of the countries we’ve been talking about here on the FSO Gold Show this weekend has been Brazil. We had talked to John Doody of Gold Stock Analyst. And joining me on the program is Peter Marrone, he’s President of Yamana, which has a considerable stake out in Brazil.
Peter, good to have you back on the program. Why don’t you give us an update and first of all let’s talk about Brazil itself, because a lot of investors are thinking of North America, Canada, Mexico, Africa. There are a lot of great things going down in South America, why don’t you fill us in?
PETER MARRONE: Let me begin by saying good to see you again Jim, and good to be back on your program.
Yup, Brazil’s a great country. It’s difficult for me to start any discussion about our operations without talking about Brazil. This is a country that is among the 10 largest economies of the world. It’s a country that is industrialized. It is a country that has exceptional infrastructure. With to boot, a country that is mining friendly. It has a mining culture. We don’t have to deal with expatriates coming into the country. This is a country that has been doing mining as long as Canada, and the United States, Australia, and other parts of the world. It’s a country that has well established mining laws, that deal with everything from the environment to mining plans. Finally, with 175 million people it’s a country that has – despite the infrastructure and industrialization – a cost basis that is the equivalent of developing nations. So, I’d summarize it by saying, all the benefits of a developed nation with many of the benefits of a developing nation. [16:50]
JIM: The other thing that Brazil has, Peter, which I think is going to be key even to anybody getting into the mining industry is energy. They’ve been farming sugar, they are using ethanol, and that’s got to be a key to any company getting into mining is energy as a cost factor.
PETER MARRONE: Again, another very fair observation. One of the unique things about Brazil is that this is a country that is self-sufficient in terms of its petroleum, and in terms of energy. It’s a country that subsidizes diesel. For a mining company that’s important. The country does not do that for the mining industry, [but] we benefit from it. Diesel is subsidized largely because of the trucking. The overland transport business which I would describe as subsistence, it’s not the way Europeans and North Americans understand it with large trucking companies, these are Mom and Pop type operations with one truck, two trucks, maybe five trucks. So, diesel is subsidized. We as a mining company get the benefit of the subsidized diesel cost which is roughly 2/3 to 70% of the world price. In addition to that, we also have power coming from hydroelectric sources. All of our projects connect to the national grid. 95% of power in Brazil is hydroelectric power. So it’s relatively inexpensive by comparison to many other parts of the world. [18:04]
JIM: You mention 2 things that are very key to mining companies. You’ve got to have the power, you have to have the transportation system, and you have to have the energy. Mining is a very energy intensive business, and we’ve all heard about companies that maybe have a great gold discovery but they don’t have the power or the infrastructure around the mine. And you can’t grow a mining project without all those things in place.
PETER MARRONE: The best example I can give is our São Francisco project which is our third mine which has just started production. We’ve just completed construction and started production as we’d undertaken to do by the end of this year. That project is just about in the center of South America on the Brazilian side of the Brazilian-Bolivian border. If you imagine a map of South America, it’s right at the center of South America. Remote, but even there there are paved road ways, and we connect to a national grid. There are several communities that are anywhere from 25,000 people to 75,000 people. Our Chapada copper gold project – our largest project – has exceptional infrastructure. It will be among the third or fourth largest mines in Brazil when it’s built, but this is a project that will cost us roughly $200 million. You could not build it in another part of the world without the industrialization that comes from Brazil, and without the fact that the infrastructure around this project is already built: towns that are within 50 km; that are 50,000 people to 500,000 people. 300km from the capital of the country, Brazilia, there are paved roadways that are two lane and four lane roadways on a national grid. So, experienced labor with infrastructure, that’s what’s unique about this country. [19:40]
JIM: I want to go back to this energy because a lot of the mining companies have seen their cost structures go up considerably – the cost of steel is going up, the cost of labor is going up – and you even have companies like Pierre Lassonde’s Newmont which is hedging by buying investments in the Canadian tar sands to hedge its energy costs. So, being in a country where you have access to energy as the cost of oil and natural gas goes up, and the fact that you have hydroelectric power, I couldn’t emphasize that [enough] to investors how key that’s going to be in terms of return on investment going into production.
PETER MARRONE: There’s no question that costs are going up everywhere, but again it’s a question of relative cost increases and how we compare to peers. And because diesel is subsidized and there’s an abundance of hydroelectric power – and by abundance [I mean] there is a significant inversion between supply and demand in Brazil on power – roughly 80,000 MW of capacity and 60,000MW of demand. So this is a country that went through an energy crisis about 7 years ago –six years ago – and has done a systemic change about how it approaches energy. Things that we in North America will likely have to do in due course. And so, here’s a situation where you’ve got an abundance of relatively inexpensive power, and that’s why this is a country that’s unique to be operating in.
In addition to that there are some of the other things you mentioned: labor. Laborers in Brazil that work in the mining industry and collateral industries are paid very, very well but by world standards it’s lower that one would pay if one paid an expatriate to work in the jurisdiction. That’s just ordinary course. And in addition to that it has an industry that is tailored to mining and so when we buy our equipment, when we buy our trucking fleet, when we buy our mills, we are buying locally manufactured Brazilian made product, which is world standard but at a fraction of the cost. Steel [is] another excellent example. While steel prices have gone up all over the world, Brazil has amongst the best iron ore in the world, very modern steel mills and, as you know Jim, the cost of steel is largely a function of what the distance is between the iron ore mines and the plants in transportation. So, this is a situation where the distance between the mills and the mines is relatively short, and so you have steel that is produced at a lower cost than it would be produced in other parts of the world. [21:58]
JIM: This is also amazing too because people traditionally think of mining as being a very polluting type of industry, but if you take a look at Brazil you’ve got environmental people that are working with the mining companies. They recognize the economic role that mining plays in any industrialized economy. Whether you’re trying to produce steel, they have CRBD down there which is one of the largest iron ore producers. The Chinese have a definite interest in doing business there. So, you’ve got all the cost structure and infrastructure that you need.
I want to move on, Peter, and talk about this gold bull market. One of the things that we’ve seen is a big movement in the majors, their prices have moved up. Your stock has been doing nicely lately, but this market in this bull phase – I think a lot of investors are looking at $500 gold and I’m just judging by looking at the conference here, it’s the same type of people – I’m not seeing a lot of new investors coming here, the guy that’s buying Google, I’m not seeing him at the show yet. A passer-by was talking about he had mentioned to somebody that had lost money in the stock market and he said gold and he looked kind of starry-eyed. So this story of this gold bull market has not caught on with investors I don’t think.
PETER MARRONE: I would absolutely agree with that. I think like all bull markets the generalists will come in at some point in the market and then I think the overwhelming masses will come in at some point in the market as well. It’s very typical for other markets that we’ve seen and I think it’s going to be the case here. I believe that gold is sustainably above $500. In a radio interview last year – it may have been yours, Jim – I think that in a weakened moment I don’t normally predict the commodity price but someone asked where did I think it would be by the end of the year and I thought probably better than $500. We are almost there. I believe it’s sustainably above $500 and I believe that next year we may see gold that is significantly below about $500 [sic]. I can’t predict where it would be, and if I could I’d probably be doing something else. But I’m comfortable saying it’s at least $500 and it will go to significantly higher than $500 within the next few years.
What’s different in this industry in my view to others is this is an industry that is relatively small in comparison to other industries. If you take the market capitalization of every mining company out there it is less than one of the average-sized telecom companies. So it’s a relatively small industry, and when it does catch on with the generalist funds and with the overall masses it becomes, as I describe it, the Niagara Falls –the volume of water of the Niagara Falls – through a garden hose. It becomes a situation where you’ve got this massive inflow of money and massive inflow of investment into a relatively small industry, and that’s going to be very, very good for stock prices and companies in the industry. [24:48]
JIM: Yeah, because one thing that we’ve seen in this market and certainly since the downturn that came about in the Spring of 2004, a lot of investors – and I’m talking about the fund managers, the big money – they’ve come back into the market. But they’re going into the Barricks, they’re going into the Newmont’s, because they know if there’s a correction or if there’s an exit they can get out.
It hasn’t spilled over for the rest of the industry. You still have a lot of juniors that aren’t selling at the premiums that the majors or the intermediates are. And the thing that attracts me to this industry right now there are a lot of good companies out there that investors are totally ignoring and if you look at if this market catches on as I believe it will – as the price of gold stays to $500 and moves to higher levels – there isn’t a lot of selection. Everybody is focusing on the big cap stocks and I think this market needs to broaden. There needs to be more participation, there needs to be higher stock prices because that is what attracts institutions and attracts investors. Do you see that happening next year?
PETER MARRONE: I do. And I couldn’t predict if it would be the next 3 months, but I certainly think within the next year, and I don’t think it will be longer than a year but I think we will start to see that more general flow of funds into this industry, and into the smaller cap companies. We’re somewhat unique as you know in that we have a growth profile that is by our estimation, and by the estimation of many, unparalleled. A growth profile that takes us to 260,000 ounces next year, more than 400,000 the year after, with a stated objective that we’re going to be at 750,000 oz before 2008, with a cost structure that will be below $200 per oz. So, from that perspective we are unique but there are lots of interesting stories in the marketplace –lots of interesting companies in the marketplace – that with a sustained gold price of more than $500 will do remarkably well from a cash flow point of view, from a growth point of view, and also from a profit point of view. And so I think once the focus starts to be paid, once there’s attention on those types of companies and what’s taking place I think that we’ll see the generalists, I think we’ll see the bigger population, coming into these investments. And I think it is a matter of time, but it’s not a long time, say within the next year in my view. [27:03]
JIM: You’ve brought up something that’s real important too. As the price of gold moves up one of the ways to capture that is of course by being a producer, and number two, if you’re also increasing production. Tell us a little bit about Yamana, where you’ve come from, where you are today, and where you see the future going?
PETER MARRONE: I’d be happy to do that. We put this company together – we took this company public by a classic reverse takeover. That was July of 2003. In July of 2003 we started with a market capitalization of roughly $90 million, where today at an enterprise value a market cap that exceeds a billion dollars. What we’ve done is take a company with one producing gold mine, our only underground mine, with roughly 90,000 oz of production per year, we took that to a second mine early this year but we declared commercial production early this Spring, and that production rate is now 125,000 oz.
Our third mine has just started operations, that’s our largest gold mine, São Francisco. And with São Francisco in a full year of production next year we will be at more than 260,000 oz of production.
And then Chapada, our copper-gold project will come into production in October of 2006, 5 months ahead of schedule. We announced that a couple of months ago, we are ahead of schedule. A mine that was supposed to be completed at the end of the first quarter 2007, we’re completing by October of 2006. With a full year of production in 07 we expect to be at a production rate of more than 400,000 oz of gold, and another 100 million pounds of copper. And that will then increase to 500,000 oz of gold in 08 and roughly 140 million pounds of copper.
So it’s a significant growth profile, and this is not a growth profile that takes us from zero to 400,000. It’s progressive, it’s about 50% per year over the course of a 3 year period, and what we announced about a month and a half ago was 3 new potential mines. We have an exploration program that is about $13 million per year, and that program is on roughly 700,000 ha. of mineral concessions, it’s within the 4 largest land positions in Brazil. We started spending it in January of this year, and by 10 months, and so about a month to two months ago, we came to the point where we had 3 projects that were at the advanced stage where we declared that we will be taking them to feasibility by the middle of next year. With those 3 projects and our existing mines, we should be at a production level that is more than 600,000 oz per year, starting in 2007 and extending in 2008, and that will take us into 2015. [29:36]
JIM: What do you see for the future profile of your company. You’re talking about production right now growing about 50% per year. You’ve got a lot of things in the pipeline at the development stage. Do you become a million ounce company?
PETER MARRONE: We put out – my memory is being tested in terms of the timing – in the last six weeks we put out what I describe as a strategic plan, or a strategic vision press release. In that press release we said this is where we are, this is where we expect to be. 2 ½ years ago we said this is what we would do, and by and large we’ve executed on that plan. Now what we are saying to our shareholders and others is what we intend to do in the next 2 to 3 years. And in that press release we publicly said we expected to be at 750,000 oz – sustainably 750,000 – from internal growth and from acquisitions. So clearly, ¾ of a million is a number that we think is achievable, and we think that we can probably can get better than ¾ million oz of gold by 2007, 2008. [30:33]
JIM: Youre growth in production is rather substantial. If you take a look at some of the intermediate companies, you look at Glamis now at 400,000, if you take a look at Agnico at close to 300,000, there’s a group of companies in that category. So by next year Yamana will be in that same category of what we call intermediate producers in moving forward just with existing projects.
PETER MARRONE: Very much. In 2006 – so we’re now at the tail end of 2005 – within the span of the next couple of months with 3 mines in full production we will be at 260,000 oz of gold, with a fourth mine that will start to produce in the last quarter of 2006. So, not even including the production that comes from that copper-gold project, we expect to be at 260,000 oz of gold production. That’s squarely in the intermediate ranks.
And as you know, Jim, and your listeners probably know the seniors that you described earlier, the senior companies are normally attracting good multiples – very good multiples – that then migrates down to the intermediates, and then to the juniors. And the juniors are usually trading at multiples that are lower than the intermediates, and lower than the seniors. As we’re migrating to an intermediate stage company which we expect to be within the next few months with 3 mines as I mentioned, I should expect, and we should all expect, that we will be getting the same type of multiple that a Glamis or an Agnico – and the companies that you mentioned – would get. But that means the stock price that is roughly trading at the $5.50 (Canadian) on the Toronto Stock Exchange should be seeing prices that are higher than that. [32.11]
JIM: You know, Peter, that’s one of the things that are kind of unique in this gold market. If you go back to the last one that occurred in the 70s, a million oz producer was rare. You had the South African companies but producing a million oz, or 5 million oz, just didn’t exist in that kind of market. And if we take a look at where the majors are today, I have a hard time – even with all of the money that has gone into exploration – we are not finding Cortez Hills every year, and so you kind of wonder where the majors are going to be going in terms of growth versus somebody, let’s say, the size of your company, a Meridian, or a Glamis that has a chance of becoming a million oz producer, or 750,000. I see you guys as the growth play in this kind of bull market, because you’re going to get good value with Newmont – you’re going to do well in a gold bull market – but you’re not going to be growing your ounces. And if you want to make a lot of money in my opinion [it takes a company with] a rising gold price and also rising production. You’re selling more product, it’s just like any other industry.
PETER MARRONE: I share that view. I believe we will be going through a consolidation phase in addition to all of that. You’re right a million oz producer is not as rare today as it was 20 years ago, or even as much as 10 years ago. But you cannot get the growth from a major that you would get from a junior mining company, and an intermediate mining company. But again, I think we’re at the early stages of this. On the exploration side, we’re only now starting to see the benefit of that money that has been spent in the ground for the last 3 years. What we all recognize is that it’s a cycle. It takes a period of time to put money in the ground for exploration and then take a drill point to where it’s actually at feasibility and then to construction. So, we’re going through that cycle the money that was raised 3 years ago is now starting to bear fruit today in terms of some of the exploration companies, and in terms of some of the junior companies migrating to intermediate companies, including ourselves.
Where I think we are uniquely positioned is that we not only have that growth profile that I described but we also have this incredible exploration package. So, if I were to say can you find a company or are there other companies where there is the growth profile I described to you, where we have exposure to gold and some exposure to another metal – copper – and where we have an exploration program that is the size of ours, it is very unusual. So, from that perspective we are unique, but on the other hand there are a lot of companies out there that are just at that point – that inflection point – where they are going start to produce uniquely, and start to grow their production. And those companies I think will do very, very well. And you mentioned some of them, and there are many others that are in that market place. But in addition to that I think we’re also going to see some consolidation in the industry. I’ve been saying it for a year, and I think we’re starting to see it now. The majors, to become larger, will have to buy other companies, but I think we are going to start to see some consolidation among the juniors and intermediates as well. And we are positioning ourselves to be buyers of some of these assets and some of these companies. [35:14]
JIM: That’s my next question. You have 3 mines in production...
PETER MARRONE: Yes
JIM: You have a big exploration program going on in Brazil. Do you see Yamana as a one country company? Are the resources so vast that there’s enough to keep you satisfied there for say the next decade, or do you see Yamana going beyond the Brazilian borders?
PETER MARRONE: We certainly could see ourselves satisfied for the next decade in Brazil, but as we look at it, and what people have seen in terms of our public disclosure, our focus is not Brazil, our focus is Latin America. Clearly, the initial platform is Brazil, but Latin America is our broader focus. That is what we understand. So we won’t only limit ourselves to Brazil but will limit ourselves to the Latin American area of the world. Now, Latin America is a broad area everything from Mexico down through Central America, and down to the tip of South America. It’s a broad area but we understand it, we understand the culture there, the terrain and the geology - the mining approaches to those parts of the world – so we’ll focus on those.
I think that as a company grows you have to outgrow a company specific platform. You have to go to a broader platform than that, and we will start to evaluate that over the course of the next year, perhaps sooner than that, to get to a point where we have Latin American operations not only Brazilian operations. [36:33]
JIM: Fantastic. Peter, if you were speaking to a group of investors, and you were to ask them to invest in your stock why don’t you give us 3 reasons to invest in Yamana?
PETER MARRONE: Clearly, growth. First and foremost is growth. We have a growth profile that is significant. Second is value, we’ve been at the stock price it is trading today – you mentioned some of these other companies – they’re still trading at a price – if you compare it to net asset value, our cash flow, our profitability – that is higher than ours. So, even independently of growth based on where we are today based on our current platform of production to where these companies are, we are trading at a discount to these companies. And so there is an immediate benefit to investing in Yamana today. So, value. And the third is it’s a mix and a match of the country that we’re in, with the reasons I described before, and also the exploration potential that comes from what we have in the company presently. Growth, value and an exceptional infrastructure, an exceptional place to be doing business from a mining perspective, and from an exploration perspective. [37:39]
JIM: Alright. Well, Peter, thank you very much for joining us on the Financial Sense Newshour, all the best to you, Sir.
PETER MARRONE: Happy to be here.
