Yamana Reports Mine Operating Earnings of $8.6 Million
(all figures in US$ unless otherwise stated)
Yamana Gold Inc. (TSX:YRI)(AMEX:AUY)(LSE(AIM):YAU) reports mine operating earnings of $8.6 million and $4.8 million for the year and quarter ended December 31, 2005, respectively.
Highlights
– Cash balance of $151.6 million as at December 31, 2005.
– Achieved average cash costs of $289 per ounce for the year and $282 per ounce for the fourth quarter from its Fazenda Nova and Fazenda Brasileiro mines. The following chart summarizes commercial production and cash costs per ounce for the end and quarter ended December 31, 2005:
——————————————————————— Quarter ended December 31, Year ended December 31, 2005 2004 ——————————————————————— ——————————————————————— Production Cash costs Production Cash costs (oz.) per oz. (oz.) per oz. ——————————————————————— Fazenda Nova 12,740 $ 177 28,780 $ 208 ——————————————————————— Fazenda Brasileiro 17,810 $ 357 74,570 $ 320 ——————————————————————— ——————————————————————— TOTAL COMMERCIAL PRODUCTION 30,550 $ 282 103,350 $ 289 ——————————————————————— Fazenda Nova Pre-operating – $ – 7,379 $ – ——————————————————————— Sao Francisco Pilot Plant 1,212 $ – 4,843 $ – ——————————————————————— TOTAL PRODUCTION 31,762 $ – 115,572 $ – ——————————————————————— ——————————————————————— – Cash flow from operations of $6.4 million before changes in non-cash working capital items. – Net earnings for the year after giving effect to certain non-cash items were as follows: ——————————————————————— Dec. 31, 2005 Dec. 31, 2004 (twelve months) (ten months) ——————————————————————— Net earnings (loss) per consolidated financial statements $ (4,111) $ 2,783 ——————————————————————— Adjustments: ——————————————————————— Stock-based compensation 2,303 2,191 ——————————————————————— Foreign exchange gain (369) (1,848) ——————————————————————— Unrealized losses on commodity contracts 8,615 – ——————————————————————— Future income tax (recovery) expense (4,447) (430) ——————————————————————— ——————————————————————— Adjusted net earnings (i) $ 1,991 $ 2,696 ——————————————————————— ——————————————————————— Adjusted earnings per share (i) $ 0.01 $ 0.03 ——————————————————————— ——————————————————————— (i) Non-GAAP measure – A cautionary note of non-GAAP measures follows this press release.
– Revenues of $46 million and $16.7 million for the year and fourth quarter, respectively, from its Fazenda Brasileiro and Fazenda Nova mines.
– Commenced commercial production at its Fazenda Nova Mine.
– Commenced the start-up of mine operations at its Sao Francisco Mine with ore being loaded on to the heap leach pads by the end of November, in accordance with the mine plan.
– Ahead of schedule with the construction of its Chapada copper-gold project.
– Raised gross proceeds of $49.6 million from the early exercise of its publicly traded warrants that otherwise would not have been available to the Company until July 2008.
– Raised $105.3 million in net proceeds from the public issue of 26 million common shares in October 2005.
– Drew down on debt financing in the amount of $100 million for the construction of the Chapada copper-gold project.
– Entered into smelter off-take agreements for 150,000 tonnes of copper concentrate from its Chapada copper-gold project currently under construction.
– Initiated a copper hedging program during the fourth quarter that is intended to help secure a less than two year payback at its Chapada copper-gold project.
– Subsequent to the year end, completed the purchase of RNC Gold Inc. whereby the Company acquired two additional mines: San Andres and La Libertad bringing total forecast gold production up to more than 500,000 ounces by 2007. We have also announced the takeover of Desert Sun Mining Corp (“DSM”) which is subject to their shareholder vote on March 31, 2006. DSM’s Jacobina mine produces gold at the 100,000 ounce level with an expansion plan to take it to 250,000 ounces annually.
– Advanced three projects through exploration to the point where they now each have the potential to become our next new mine.
– Increased proven and probable reserves by 1.2 million ounces which includes an increase in Sao Francisco gold reserves of 324,000 contained ounces and a grade increase of 22% in main ore.
– Continued drilling and the development of E-Deep at the Fazenda Brasileiro Mine to further define and expand the size of the ore body.
Financial Results
Mine operating earnings were $8.6 million and $4.8 million for the year and quarter ended December 31, 2005, respectively. Mine operating earnings for the quarter increased by 227% from the third quarter ended September 30, 2005. Mine operating earnings for the fourth quarter reflect operations from the Fazenda Nova Mine coming on stream and the initiatives that the Company undertook to improve efficiency and reduce costs at the Fazenda Nova Mine. The Fazenda Nova Mine began commercial production as of May 1, 2005 and achieved cash costs per ounce of $208 and $177 for the year and quarter ended, respectively.
Since completing construction of the Fazenda Nova Mine, the Company has undertaken measures to accommodate a heavier than normal rainfall, implemented operational modifications to improve efficiency and reduce costs. With these initiatives, US dollar cash costs per ounce steadily declined during fiscal 2005. This occurred despite the strengthening of the Real vis-a-vis the US dollar with an average exchange rate for 2005 of 2.4348 compared to an average exchange rate for 2004 of 2.9319, an increase of 17%. Additionally, cash costs during the fourth quarter of $177 per ounce were 5% lower than that contemplated in the feasibility study of $186 (life of mine). Cash costs for the year at the Fazenda Nova Mine were $208 per ounce on production of 28,780 ounces of gold. During the month of January 2006, they averaged $196 per ounce. Historically, the rainy season extends from December to the end of March, during which period, in normal course, cash costs are expected to be higher.
Operations during the year at the Fazenda Brasileiro Mine were significantly affected by the impact of a strengthened Real vis-a-vis the US dollar, mining of lower grade material, lower recovery rates, and higher prices for consumables. A total of 74,570 ounces of gold were produced from the Fazenda Brasileiro Mine during the year at an average cash cost of $320 per ounce. Average cash costs per ounce in reais increased by 21% from the prior ten month period ended December 31, 2004 and 5.6% relative to the third quarter. Additionally, the average ore grade at the Fazenda Brasileiro Mine for the year was 2.44 g/t compared to 3.13 g/t during the comparative ten month period ended December 31, 2004, a decrease of 22%. The Company anticipated processing lower grade ore at the Fazenda Brasileiro Mine prior to gaining access to higher grade ore bodies and areas beneath the existing mine workings for further drilling and exploration. Mining of lower grade material will continue throughout 2006 as development work continues in higher grade lower areas at E-Deep.
Commercial production from the Sao Francisco Mine is expected to commence during the second quarter of 2006. Sao Francisco is in the normal start up phase of a mine. The gravity plant started operating in January 2006. We are on track to exceed design capacity and will be approaching full capacity at the gravity plant by the end of March. Heap leaching of ore commenced early March 2006.
Net earnings before giving effect to non-cash charges in respect to stock option expense, unrealized foreign exchange losses or gains, unrealized losses on commodity contracts and a future income tax recovery for the year was $2 million compared to $2.6 million for the comparative ten month period ended December 31, 2004. Net earnings before giving effect to these non-cash items for the quarter was $3.3 million. The Company believes that the presentation of adjusted net earnings is a better indication of the Company’s profitability. The net loss for the year and the fourth quarter after giving effect to these non-cash items was $4.1 million and $73,000, respectively.
During the fourth quarter, Yamana implemented an economic copper hedging program that is intended to help secure a less than two year payback at its Chapada copper-gold project and manage its exposure to copper prices, thus protect future earnings and cash flows from a decline in the market price of copper. The Company effectively sold forward 50 million pounds of 2007 copper production at a net price of $1.27 per pound, representing approximately 50% of projected copper production for 2007. However, the remaining 55 million pounds of copper production forecast for 2007 and all gold production remains unhedged. The financial instruments entered into were structured to hedge against the risk of declining copper prices on future copper concentrate sales, while permitting the Company to participate in market price increases at prices exceeding the $1.67 strike price of the call options involved in the transactions.
These economic hedges do not meet the requirements for hedge accounting under current generally accepted accounting principles, however, Yamana has concluded that the above mentioned financial instruments provide an effective means to manage metal price risk and enable business planning with greater certainty. As accounting rules preclude Yamana from reflecting the economic substance of these transactions, mark-to-market values on these financial instruments will be recognized period to period. As such, the recognition of unrealized gains and losses on the fair value of these financial instruments will cause net earnings to fluctuate period to period.
Yamana recognized an unrealized non-cash loss of $8.6 million on the mark-to-market of these copper hedging instruments during the fourth quarter. This unrealized loss does not represent an estimate of future losses or gains nor does it represent an economic obligation for the Company. It should be noted that the forward copper price used to value the hedge program at the year end was $1.62. If copper prices are at this level in 2007, then the unhedged portion of planned production for that year would generate additional gross revenue of $34 million as compared to the price assumption used in the feasibility study for the Chapada project.
General and administrative expenses were $10.4 million for the year compared to $6.2 million for the comparative ten month period ended December 31, 2004 and $4.6 million for the year ended February 29, 2004. The increase in general and administrative expenses is reflective of the Company’s growing infrastructure and accommodates production growth plans and acquisitions.
Investment income was $4 million for the fiscal year, compared to $0.8 million for the comparative ten month period ended December 31, 2004 and $0.5 million for the year ended February 29, 2004. Investment income for the year mainly represents interest income earned in Brazil at an average rate of 19% as the Company held higher cash balances denominated in Brazilian reais than the previous year in order to help offset the impact of the strengthening Real.
The Company recognized an income tax recovery of $4.3 and $8.2 million, respectively, for the year and fourth quarter ended December 31, 2005. The income tax recovery mainly represents the recognition of tax benefits from tax losses available in Canada.
Reserves Summary Reserve and Resource Table(i) ——————————————————————— Gold M&I Reserve Inferred Ounces Ounces Ounces (000s) (000s) (000s) ———————————– Fazenda Brasileiro (underground) 378.1 187.4 107.4 Fazenda Brasileiro (open pit) 66.1 19.3 — ———————————– 444.2 206.7 107.4 C1-Santa Luz 982.4 556.0 199.7 Fazenda Nova 114.2 92.3 1.5 Sao Francisco (Main ore) 1,288.3 1,079.2 546.7 Sao Francisco (ROM ore) 363.2 283.2 332.4 ———————————– 1,651.5 1,362.4 879.1 Sao Vicente (Main ore) 486.6 361.3 84.9 Sao Vicente (ROM ore) 173.9 108.7 26.1 ———————————– 660.5 470.0 111.1 Ernesto 141.8 — 71.4 Chapada 3045.5 2,547.5 1,226.0 ———————————– Total Ounces 7,040.0 5,234.9 2,596.1 ———————————– ———————————– ——————————————————————— Copper M&I Reserve Inferred Pounds Pounds Pounds (millions) (millions) (millions) ———————————– Chapada 2,620.4 2,349.7 1,393.7 ———————————– ———————————– ——————————————————————— (i) Reserve ounces are included in Measured and Indicated (“M&I”) ounces. Inferred ounces are in addition to M&I ounces. A table providing a breakdown of reserves and resources and additional information is attached.
As at December 31, 2005, the Company had proven and probable reserves of 5.2 million contained ounces of gold, an increase of 1.2 million contained ounces from the previous year end despite production of 115,572 ounces of gold. The primary changes in proven and probable reserves were:
Increase in contained Ounces (000′s) ——————————————- C-1 Santa Luz 556 Sao Francisco 324 Sao Vicente 309 ——————————————-
Successful exploration efforts and the impact of a higher gold price assumption used in 2005 resulted in an increase in reserves. Reserves as at December 31, 2005 were estimated using a gold price of $425 per ounce compared to $325-$350 used to calculate reserve estimates as at December 31, 2004.
Future Outlook
The long-term plan of the Company includes increasing shareholder value through increases in reserves and production thereby increasing earnings per share and cash flow from operations. The Company’s strategy involves optimizing operations, completing construction of projects currently under development, investing in high target exploration areas and growing through acquisitions of high quality accretive properties and projects.
The focus for 2006 and 2007 will continue to include the following:
– Advance exploration and development projects
– Complete construction of the Chapada copper-gold project
– Pursue acquisition targets
– Continue an extensive exploration program in Brazil and Central America
With the acquisition of RNC Gold Inc., (closed February 28, 2006) the Company acquired an additional two operating mines. The additional two operating mines are La Libertad in Nicaragua and San Andres in Honduras. The Company will have five mines in operation with Chapada operations beginning late 2006. Yamana also has four advanced exploration and development stage projects along with an extensive Brazilian and Central American exploration portfolio. Yamana’s objective remains to achieve a sustainable annual gold production rate of at least 750,000 ounces of gold per year beginning in 2008. In addition the Company will have significant copper production by 2007. Subsequent to the year end, the Company also announced the potential acquisition of Desert Sun Mining Corp. which owns the Jacobina gold mine in the Bahia state of Brazil near the Company’s Fazenda Brasileiro mine and its C1 Santa Luz pre-feasibility project.
Yamana is a Canadian gold producer with significant gold production, gold and copper-gold development stage properties, exploration properties and land positions in Brazil and Central America. Yamana expects to produce gold at intermediate company production levels by 2006 in addition to significant copper production by 2007. Company management plans to build on this base through the advancement of its exploration properties and by targeting other gold consolidation opportunities in Brazil and elsewhere in Latin America.
A conference call and audio webcast has been scheduled for March 21, 2006 at 11:00 a.m. E.S.T. to discuss the results.
Conference Call Information: Local and Toll Free (North America): 800-814-4853 International: +1 416-644-3419 Participant Audio Webcast: www.yamana.com Conference Call REPLAY: Replay Call: 416-640-1917 Passcode 21180886# Replay Toll Free Call: 877-289-8525 Passcode 21180886#
The conference call replay will be available from 1:00 p.m. E.S.T. on March 21, 2006 until 11:59 p.m. E.S.T. on March 28, 2006.
For further information on the Conference Call or audio webcast, please contact the Investor Relations Department or visit our website, www.yamana.com.
NON-GAAP MEASURES: Cost per ounce data and adjusted net earnings and adjusted earnings per share are provided to supplement Yamana’s consolidated financial statements. The presentation of adjusted measures are not meant to be a substitute for net earnings (loss) or net earnings (loss) per share presented in accordance with GAAP, but rather should be evaluated in conjunction with such GAAP measures. The terms “adjusted net earnings (loss)” and “adjusted net earnings (loss) per share” do not have a standardized meaning prescribed by Canadian GAAP, and therefore the Company’s definitions are unlikely to be comparable to similar measures presented by other companies. The Company’s management believes that the presentation of adjusted net earnings (loss) and adjusted net earnings (loss) per share provide useful information to investors because they exclude non-cash charges and are a better indication of the Company’s profitability from operations. The items excluded from the computation of adjusted net earnings (loss) and adjusted net earnings (loss) per share, which are otherwise included in the determination of net earnings (loss) and net earnings (loss) per share prepared in accordance with Canadian GAAP, are items that the Company does not consider to be meaningful in evaluating the Company’s past financial performance or the future prospects and may hinder a comparison of its period to period profitability. Cost per ounce data and adjusted net earnings are a non-GAAP (Generally Accepted Accounting Principles) measure and are unaudited. Please see the note on non-GAAP Measures contained at the end of Management’s Discussion and Analysis contained in the December 2005 annual report.
FORWARD-LOOKING STATEMENTS: This news release contains “forward-looking statements”, within the meaning of the United States Private Securities Litigation Reform Act of 1995 and similar Canadian legislation, concerning the business, operations and financial performance and condition of Yamana Gold Inc. Forward-looking statements include, but are not limited to, statements with respect to estimated production, synergies and financial impact of the proposed transaction; the benefits of the proposed transaction and the development potential of Yamana’s properties; the future price of gold and copper; the estimation of mineral reserves and resources; the realization of mineral reserve estimates; the timing and amount of estimated future production; costs of production; capital expenditures; success of exploration activities; permitting time lines and permitting, mining or processing issues; currency exchange rate fluctuations; government regulation of mining operations; environmental risks; unanticipated reclamation expenses; title disputes or claims; and limitations on insurance coverage. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “plans”, “expects” or “does not expect”, “is expected”, “budget”, “scheduled”, “estimates”, “forecasts”, “intends”, “anticipates” or “does not anticipate”, or “believes”, or variations of such words and phrases or state that certain actions, events or results “may”, “could”, “would”, “might” or “will be taken”, “occur” or “be achieved”. Forward-looking statements are based on the opinions and estimates of management as of the date such statements are made, and they are subject to known and unknown risks, uncertainties and other factors that may cause the actual results, level of activity, performance or achievements of Yamana to be materially different from those expressed or implied by such forward-looking statements, including but not limited to risks related to: unexpected events during construction, expansion and start-up; variations in ore grade, tonnes mined, crushed or milled; variations in relative amounts of refractory, non-refractory and transition ores; delay or failure to receive board or government approvals; timing and availability of external financing on acceptable terms; the business of Yamana not being integrated successfully or such integration proving more difficult, time consuming or costly than expected; not realizing on the anticipated benefits from acquisition transactions or not realizing on such anticipated benefits within the expected time frame; risks related to international operations; actual results of current exploration activities; actual results of current reclamation activities; conclusions of economic evaluations; changes in project parameters as plans continue to be refined; future prices of gold and copper; possible variations in ore reserves, grade or recovery rates; failure of plant, equipment or processes to operate as anticipated; accidents, labour disputes and other risks of the mining industry; delays in the completion of development or construction activities, as well as those factors discussed in or referred to in the current annual Management’s Discussion and Analysis and current Annual Information Form of Yamana filed with the securities regulatory authorities in Canada and available at www.sedar.com, and Yamana’s Annual Report on Form 40-F, filed with the United States Securities and Exchange Commission. Although management of Yamana has attempted to identify important factors that could cause actual results to differ materially from those contained in forward-looking statements, there may be other factors that cause results not to be as anticipated, estimated or intended. There can be no assurance that such statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements. Yamana does not undertake to update any forward-looking statements that are incorporated by reference herein, except in accordance with applicable securities laws.
Mineral resources which are not mineral reserves do not have demonstrated economic viability. Readers should refer to the respective Annual Information Forms of Yamana for the year ended December 31, 2005, and other continuous disclosure documents filed by the Company available at www.sedar.com, for further information relating to the mineral resources and mineral reserves.
Cautionary Note to United States Investors Concerning Estimates of Measured, Indicated and Inferred Resources: This news release uses the terms “Measured”, “Indicated” and “Inferred” Resources. United States investors are advised that while such terms are recognized and required by Canadian regulations, the United States Securities and Exchange Commission does not recognize them. “Inferred Mineral Resources” have a great amount of uncertainty as to their existence, and as to their economic and legal feasibility. It cannot be assumed that all or any part of an Inferred Mineral Resource will ever be upgraded to a higher category. Under Canadian rules, estimates of Inferred Mineral Resources may not form the basis of feasibility or other economic studies. United States investors are cautioned not to assume that all or any part of Measured or Indicated Mineral Resources will ever be converted into Mineral Reserves. United States investors are also cautioned not to assume that all or any part of an Inferred Mineral Resource exists, or is economically or legally mineable.
Yamana Gold Inc Key Statistics (Based on Canadian GAAP and expressed in U.S. dollars, unless otherwise noted) (Unaudited) (Audited) For the three months ended For the fiscal year ended Dec. 31, 2005 Dec. 31, 2004 Dec. 31, 2005 Dec. 31, 2004 (10 months) ——————————————————— Gold production (ounces): Pre-commercial Fazenda Nova – 2,745 7,379 2,849 Sao Francisco pilot plant 1,212 846 4,843 3,214 ——————————————————— 1,212 3,591 12,222 6,063 Commercial Fazenda Brasileiro 17,810 20,854 74,570 78,168 Fazenda Nova 12,740 – 28,780 – ——————————————————— 30,550 20,854 103,350 78,168 ——————————————————— 31,762 24,445 115,572 84,231 ——————————————————— Commercial gold sales (ounces): Fazenda Brasileiro 19,257 23,982 72,074 79,882 Fazenda Nova 15,463 – 31,698 – ——————————————————— 34,720 23,982 103,772 79,822 ——————————————————— Fazenda Brasileiro per ounce data: Average realized gold price $ 485 $ 434 $ 448 $ 409 Cash costs per ounce produced Fazenda Brasileiro $ 357 $ 224 $ 320 $ 205 Fazenda Nova $ 177 $ – $ 208 $ – ——————————————————— $ 282 $ 224 $ 289 $ 205 Average ore grade (g/t) Fazenda Brasileiro 2.31 2.82 2.44 3.13 Fazenda Nova 0.87 – 0.87 – Average recovery rate (%) Fazenda Brasileiro 88.3 92.5 89.3 91.9 Fazenda Nova 90.0 – 81.0 – Financial Results (thousands) Gold sales $ 16,655 $ 10,305 $ 46,038 $ 32,298 Mine operating earnings $ 4,807 $ 2,923 $ 8,569 $ 10,377 Adjusted net earnings $ 3,311 $ (1,263) $ 1,991 $ 2,696 Net earnings (loss) $ (73) $ 804 $ (4,111) $ 2,783 Per share data: Adjusted net earnings per share $ 0.02 $ (0.01) $ 0.01 $ 0.03 Basic (loss) earnings per share $ (0.00) $ 0.01 $ (0.03) $ 0.03 Diluted (loss) earnings per share $ (0.00) $ 0.01 $ (0.03) $ 0.02 Weighted average number of common shares (thousands) 190,197 111,737 144,888 100,036 Financial Position (thousands) Dec. 31, 2005 Dec. 31, 2004 ————————————- Cash and cash equivalents $ 151,633 $ 87,054 Working capital $ 157,951 $ 88,936 Shareholders’ equity $ 314,974 $ 160,309 ——————————————————————— Reserves and Resources December 31, 2005 Mineral Reserves (Proven and Probable) Proven Reserves Probable Reserves ——————————————————————— Contained Contained Tonnes Grade Oz. Tonnes Grade Oz. (000) (g/t) (000′s) (000) (g/t) (000′s) ——————————————————————— Gold ——————————————————————— Fazenda Brasileiro – U/G 1,100 3.100 109.9 969 2.490 77.5 ——————————————————————— Fazenda Brasileiro – O/P 249 2.420 19.3 – – – ——————————————————————— Total Fazenda Brasileiro 1,349 2.979 129.2 969 2.487 77.5 ——————————————————————— C1-Santa Luz – – – 9,200 1.880 556.0 ——————————————————————— Fazenda Nova – – – 3,330 0.862 92.3 ——————————————————————— Sao Francisco – Main Ore 7,830 1.21 303.6 19,661 1.23 775.6 ——————————————————————— Sao Francisco – ROM Ore 12,291 0.23 92.5 24,224 0.25 190.8 ——————————————————————— Total Sao Francisco 20,121 0.61 396.1 43,885 0.68 966.4 ——————————————————————— Sao Vicente – Main Ore 6,101 1.23 241.8 3,356 1.11 119.5 ——————————————————————— Sao Vicente – ROM Ore 9,106 0.23 68.3 5,322 0.24 40.3 ——————————————————————— Total Sao Vicente 15,207 0.63 310.2 8,678 0.57 159.8 ——————————————————————— Chapada 18,379 0.33 194.4 292,135 0.25 2,353.1 ——————————————————————— Total Gold Reserves 55,056 0.58 1,029.8 358,197 0.37 4,205.1 ——————————————————————— Contained Contained Tonnes Grade Lbs Tonnes Grade Lbs (000) (%) (mm) (000) (%) (mm) ——————————————————————— Copper ——————————————————————— Chapada 18,379 0.42% 169.6 292,135 0.34% 2,180.1 ——————————————————————— ——————————————————————— Total – Proven and Probable ——————————————————————— Contained Tonnes Grade Oz. (000) (g/t) (000′s) ——————————————————————— Gold ——————————————————————— Fazenda Brasileiro – U/G 2,069 2.817 187.4 ——————————————————————— Fazenda Brasileiro – O/P 249 2.412 19.3 ——————————————————————— Total Fazenda Brasileiro 2,318 2.773 206.7 ——————————————————————— C1-Santa Luz 9,200 1.880 556.0 ——————————————————————— Fazenda Nova 3,330 0.862 92.3 ——————————————————————— Sao Francisco – Main Ore 27,491 1.22 1,079.2 ——————————————————————— Sao Francisco – ROM Ore 36,515 0.24 283.2 ——————————————————————— Total Sao Francisco 64,006 0.66 1,362.4 ——————————————————————— Sao Vicente – Main Ore 9,457 1.19 361.3 ——————————————————————— Sao Vicente – ROM Ore 14,428 0.23 108.7 ——————————————————————— Total Sao Vicente 23,885 0.61 470.0 ——————————————————————— Chapada 310,514 0.26 2,547.5 ——————————————————————— Total Gold Reserves 413,253 0.39 5,234.9 ——————————————————————— Contained Tonnes Grade Lbs (000) (%) (mm) ——————————————————————— Copper ——————————————————————— Chapada 310,514 0.34% 2,349.7 ——————————————————————— ——————————————————————— Mineral Resources (Measured, Indicated and Inferred) (Measured and Indicated include Reserves as outlined above) Measured Resources Indicated Resources ——————————————————————— Contained Contained Tonnes Grade Oz. Tonnes Grade Oz. (000) (g/t) (000′s) (000) (g/t) (000′s) ——————————————————————— Gold ——————————————————————— Fazenda Brasileiro – U/G 1,158 3.14 116.9 2,722 2.99 261.2 ——————————————————————— Fazenda Brasileiro – O/P 249 2.42 19.3 937 1.55 46.8 ——————————————————————— Total Fazenda Brasileiro 1,407 3.01 136.2 3,658 2.62 308.0 ——————————————————————— C1-Santa Luz – – – 18,400 1.66 982.4 ——————————————————————— Fazenda Nova – – – 4,226 0.84 114.2 ——————————————————————— Sao Francisco – Main Ore 9,142 1.22 358.2 23,360 1.24 929.1 ——————————————————————— Sao Francisco – ROM Ore 15,255 0.23 113.0 32,213 0.24 250.2 ——————————————————————— Total Sao Francisco 24,398 0.60 471.2 55,574 0.66 1,179.3 ——————————————————————— Sao Vicente – Main Ore 7,669 1.19 292.2 5,424 1.12 194.5 ——————————————————————— Sao Vicente – ROM Ore 13,117 0.23 95.4 10,804 0.23 78.4 ——————————————————————— Total Sao Vicente 20,786 0.58 387.6 16,228 0.52 272.9 ——————————————————————— Ernesto 160 5.26 27.1 682 5.23 114.7 ——————————————————————— Chapada 25,200 0.30 243.1 396,200 0.22 2,802.4 ——————————————————————— Total Gold Resources 71,951 0.55 1,265.2 494,969 0.36 5,773.8 ——————————————————————— Contained Contained Tonnes Grade Lbs Tonnes Grade Lbs (000) (%) (mm) (000) (%) (mm) ——————————————————————— Copper ——————————————————————— Chapada 25,200 0.34% 188.9 396,200 0.30% 2,620.4 ——————————————————————— Total – Measured and Indicated Inferred Resources ——————————————————————— Contained Contained Tonnes Grade Oz. Tonnes Grade Oz. (000) (g/t) (000′s) (000) (g/t) (000′s) ——————————————————————— Gold ——————————————————————— Fazenda Brasileiro – U/G 3,880 3.03 378.1 780 4.28 107.4 ——————————————————————— Fazenda Brasileiro – O/P 1,185 1.73 66.1 – – – ——————————————————————— Total Fazenda Brasileiro 5,065 2.73 444.2 780 4.28 107.4 ——————————————————————— C1-Santa Luz 18,400 1.66 982.4 2,013 3.09 199.7 ——————————————————————— Fazenda Nova 4,226 0.84 114.2 95 0.50 1.5 ——————————————————————— Sao Francisco – Main Ore 32,503 1.23 1,288.3 11,891 1.43 546.7 ——————————————————————— Sao Francisco – ROM Ore 47,469 0.24 363.2 48,604 0.21 332.4 ——————————————————————— Total Sao Francisco 79,971 0.64 1,651.5 60,495 0.45 879.1 ——————————————————————— Sao Vicente – Main Ore 13,093 1.16 486.6 1,887 1.40 84.9 ——————————————————————— Sao Vicente – ROM Ore 23,921 0.23 173.9 3,771 0.22 26.1 ——————————————————————— Total Sao Vicente 37,015 0.56 660.5 5,658 0.61 111.0 ——————————————————————— Ernesto 842 5.24 141.8 483 4.60 71.4 ——————————————————————— Chapada 421,400 0.22 3,045.5 250,870 0.15 1,226.0 ——————————————————————— Total Gold Resources 566,920 0.39 7,040.0 320,395 0.25 2,596.1 ——————————————————————— Contained Contained Tonnes Grade Lbs Tonnes Grade Lbs (000) (%) (mm) (000) (%) (mm) ——————————————————————— Copper ——————————————————————— Chapada 421,400 0.30% 2,809.3 250,870 0.25% 1,393.7 ———————————————————————
Mineral Reserves and Resources
Chapada’s inferred resources were taken from a Micon International Limited NI 43-101 compliant technical report dated July 2003. Independent Mining Consultants estimated Chapada’s inferred resources in their report dated February 2004 at 68 million tonnes grading 0.14 g/t gold and 0.2% copper. Mineral reserve and resource estimates presented were prepared by or under the supervision of external consultants as indicated in the table below in accordance with NI 43-101. In estimating the mineral reserves and mineral resources, such persons made assumptions, and used parameters and methods appropriate for each property, and verified the data disclosed, including sampling, analytical and test data underlying such estimates. These external reserve reports have been reviewed by Evandro Cintra, Vice-President Exploration as “qualified person”, as that term is defined in NI 43-101.
These figures are estimates, however, and no assurance can be given that the indicated amounts of quantities of gold will be produced. Gold price fluctuations may render mineral reserves containing relatively lower grades of gold mineralization uneconomic. Moreover, short-term operating factors relating to the mineral reserves could affect the Company’s profitability in any particular accounting period. The corporation is not aware of any environmental, permitting, legal, title, taxation, socio-political, marketing or other relevant issues which may materially affect the Corporation’s mineral reserve and resource estimates, other than factors discussed above and in “Risks and Uncertainties” in the Management Discussion and Analysis section of the annual report.
Mineral Mineral Reserves Resources Date Report ——————————————————————— Fazenda Geoexplore Geoexplore Jan-06 Mineral Brasileiro Consultoria Consultoria Update Reserves e Servicos Ltd. e Servicos Ltd. and Resource C1-Santa Luz NCL Chile, NCL Moreno & Nov-05 Preliminary Brasil Ltda., Associates Assessment Study Rezende Engenharia Feb-06 Resource Estimate Update Chapada Independent Independent Feb-06 Chapada Mining Mining Reserve Consultants Inc. Consultants Update Feb-04 Feasibility Study (mineral resource) Sao Francisco NCL Brasil Ltda. Geosystems Feb-06 Mineral International Reserve Update and Resource Model Update Sao Vicente NCL Brasil Ltda. Geosystems Feb-06 Mineral International Reserve Update and Resource Model Update Ernesto —————– NCL Brasil Ltda.Feb-06 Mineral Resource Estimate Fazenda Nova NCL Brasil Ltda. Moreno & Feb-06 Reserve Associates Estimate Update Mine Mineral Gold Copper Mineral Grade Reserve Cut-off Price Price Resources Cut-off (g/t gold; (g/t gold; % copper) % copper) ——————————————————————— Fazenda Brasileiro 1.5 US$425 n/a 1.5 C1- Santa Luz 0.5 US$425 n/a 0.5 and 1.5 (1) Chapada $2.20 (2) US$425 US$1.00 0.15% (3) Sao Francisco 0.40 and 0.13 US$425 n/a 0.40 and 0.13 Sao Vicente 0.44 and 0.11 US$425 n/a 0.44 and 0.11 Ernesto ————– US$425 n/a 1.5 Fazenda Nova 0.24 US$500 n/a 0.24 (1) 0.5 g/t cut-off for indicated resource and 1.5 g/t cut-off for inferred resource (underground mine potential) (2) Internal Net Smelter Return (NSR) cut-off versus grade cut-off used
A cautionary note regarding forward-looking statements and non-GAAP measures follows this Management’s Discussion and Analysis of Operations and Financial Condition.
Management’s Discussion and Analysis of Operations and Financial Condition
(US dollars, in accordance with Canadian GAAP)
1. Core Business
Yamana Gold Inc. is engaged in the acquisition, exploration and development, and operation of mineral properties. Revenue and cash flow from operations is currently generated from the sale of gold bullion. Future revenues and cash flows will include the sale of copper concentrate from its Chapada copper-gold mine which is currently under construction. To date, the Company’s activities have been concentrated in Latin America.
2. Change in Year End
In May 2004, the year end of the Company was changed from February 28/29 to December 31. As such, the current fiscal year is for the twelve month period ended December 31, 2005 with comparative figures for the ten month period ended December 31, 2004.
3. Highlights
Significant achievements during the year include:
– Cash balance of $151.6 million as at December 31, 2005
– Cash flow from operations of $6.4 million before changes in non-cash working capital items and cash flow from operations of $3.4 million after a reduction in non-cash working capital items of $3 million
– Achieved average cash costs of $289 per ounce from its Fazenda Nova and Fazenda Brasileiro mines.
– Commenced commercial production at its Fazenda Nova Mine.
– Commenced the start-up of mine operations at its Sao Francisco Mine.
– Ahead of schedule with the construction of its Chapada copper-gold project.
– Raised gross proceeds of $49.6 million from the early exercise of its publicly traded warrants that otherwise would not have been available to the Company until July 2008.
– Raised $105.3 million in net proceeds from the public issue of 26 million common shares.
– Drew down on debt financing in the amount of $100 million for the construction of the Chapada copper-gold project.
– Entered into smelter off-take agreements for 150,000 tonnes of copper concentrate from its Chapada copper-gold project currently under construction.
– Initiated a copper hedging program that is intended to help secure a less than two year payback at its Chapada copper-gold project.
– Pursued the purchase of RNC Gold Inc. whereby the Company acquired two additional mines: San Andres and La Libertad bringing total forecast gold production up to more than 500,000 ounces by 2007. The transaction was approved by RNC Gold Inc. shareholders on February 17, 2006, received court approval on February 22, 2006 and closed February 28, 2006.
– Advanced three projects through exploration to the point where they now each have the potential to become our next new mine.
– Increased proven and probable reserves by 1.2 million ounces.
– Continued drilling and the development E-Deep at the Fazenda Brasiliero Mine to further define and expand the size of the ore body.
4. Subsequent events – Acquisitions
RNC Gold Inc.
On December 4, 2005, the Company announced transactions which provided for the acquisition of RNC Gold Inc. (“RNC”) and 100% of the San Andres gold mine in Honduras. The total purchase price for these transactions was approximately $ 52 million, comprised of approximately 5.7 million Yamana common shares (0.12 of a common share for each RNC share) and other transaction costs and adjustments. Additionally, the Company paid $ 18.9 million in cash for the purchase of the San Andres Mine.
The addition of San Andres in Honduras and La Libertad in Nicaragua to the Company’s existing operations will increase gold production by 120,000 per year bringing total forecast gold production to approximately 500,000 to 550,000 ounces by 2007 and up to 650,000 ounces by 2008. The Company also acquired development stage properties including Cerro Quema in Panama. The Company recorded the RNC transaction in accordance with the purchase method of accounting for acquisitions under Canadian generally accepted accounting principles. As such, assets acquired and liabilities assumed under the transaction will be recorded by the Company at their fair market values as of the date of acquisition, February 28, 2006.
Subsequent to the year end, on February 17, 2006 the shareholders of RNC Gold Inc. approved the transaction and all necessary regulatory and court approvals were obtained. The transaction closed on February 28, 2006.
Desert Sun Mining
On February 22, 2006, the Company entered into an arrangement agreement with Desert Sun Mining Corp. which owns the Jacobina gold mine in the Bahia state of Brazil near the Company’s Fazenda Brasileiro mine and its C1 Santa Luz pre-feasibility project.
The acquisition will be completed by way of a court approved Plan of Arrangement whereby each Desert Sun Mining common share will be exchanged for 0.6 of a Yamana common share. All Desert Sun Mining options and warrants will become exercisable for common shares of the Company based on the exchange ratio. As a result of the proposed transaction, the combined company would be held approximately 76% by existing Yamana shareholders and 24% by existing Desert Sun Mining shareholders. The total number of Yamana common shares outstanding would be approximately 262.1 million, calculated on a pro forma basis after giving effect to the Company’s acquisition of RNC Gold Inc.
Cash costs of the combined company are projected at $270 per ounce of gold in 2006, with $125 and $115 per ounce of gold projected for 2007 and 2008, respectively. Projected cash costs assume copper will be treated as a by-product credit.
The Company’s total measured and indicated resources based on information known at the time of announcement would comprise approximately 11.6 million ounces of measured and indicated resources including 7.6 million of proven and probable reserve gold ounces. Proven and probable copper reserves would be approximately 2.3 billion pounds. Inferred gold resources would total 6.1 million ounces.
Taking into consideration the Company’s updated reserves and resources as at December 31, 2005, following the Desert Sun acquisition, the Company would have measured and indicated resources of approximately 12.1 million ounces of which 8.1 million ounces would be proven and probable. Inferred resources would total 6.4 ounces and copper reserves would be 2.35 billion pounds.
In addition to the upside in the production profile of the Company, the transaction would facilitate operational and administrative synergies, and broaden shareholder base and increases to share liquidity.
The transaction is subject to all requisite regulatory and court approvals, Desert Sun shareholder approval, third party consents and other conditions customary in transactions of this nature. The combination must be approved by at least two-thirds of the votes cast by shareholders of Desert Sun. The transaction is expected to close during the second quarter of 2006. If the combination does not occur under certain circumstances, Desert Sun has agreed to pay the Company a break-fee of C$21.5 million.
5. Overview of Financial Results
The table below presents selected financial data for the Company’s three most recently completed fiscal years:
——————————————————————— Dec 31, Dec 31, Feb 29, 2005 2004 2004 (ten months) ———————————- Financial results (in thousands of dollars) Revenues(1) $46,038 $32,298 $19,811 Mine operating earnings(4) $8,569 $10,377 $6,754 Net earnings (loss)(2) $(4,111) $2,783 $1,008 Adjusted net earnings(3) $1,991 $2,696 $1,788 Cash flow from operations $3,410 $8,536 $5,491 (after changes in non-cash working capital items) Cash flow from operations $6,445 $9,293 $4,953 (before changes in non-cash working capital items)(3) Per share financial results Basic (loss) earnings per share(2) (0.03) 0.03 0.02 Diluted (loss) earnings per share(2) (0.03) 0.02 0.02 Adjusted earnings per share(3) 0.01 0.03 0.04 Financial position (in thousands of dollars) Total assets $465,697 $177,106 $93,948 Total long-term liabilities $119,281 $9,572 $7,657 Gold Production (ounces): Pre-Commercial Fazenda Nova 7,379 2,849 – Sao Francisco pilot plant 4,843 3,214 283 ———————————- 12,222 6,063 283 Commercial Fazenda Brasileiro 74,570 78,168 56,794 Fazenda Nova 28,780 – – ———————————- 103,350 78,168 56,794 ———————————- 115,572 84,231 57,077 ———————————- ———————————- Gold Sales (ounces) Pre-Commercial Fazenda Nova 4,694 1,704 – Sao Francisco pilot plant 4,050 2,883 – ———————————- 8,744 4,587 – Commercial Fazenda Brasileiro 72,074 79,822 49,989 Fazenda Nova 31,698 – – ———————————- 103,772 79,822 49,989 ———————————- 112,516 84,409 49,989 ———————————- ———————————- Non-GAAP Measures(3) Per ounce data: Cash costs per ounce produced(4) Fazenda Brasileiro $320 $205 $208 Fazenda Nova $208 – – ———————————- $289 $205 $208 Average gold price realized (1) $448 $409 $396 Average gold spot price $445 $409 $372 Operating statistics Gold ore grade (g/t) Fazenda Brasileiro 2.44 3.13 3.42 Fazenda Nova 0.87 – – Gold recovery rate (%) Fazenda Brasileiro 89.3 91.9 95.5 Fazenda Nova 81.0 – – ——————————————————————— (1) Revenues consist of sales net of sales taxes. Revenue per ounce data is calculated based on gross sales. (2) Net (loss) earnings, basic (loss) earnings per share and diluted earnings per share for the year ended December 31, 2005 include an unrealized non-cash loss on commodity contracts of $8.6 million. (3) Non GAAP measure – see reconciliation table below. A cautionary note of non-GAAP measures follows this Management’s Discussion and Analysis of Operations and Financial Condition. (4) Certain mine general and administrative expenses have been reclassified from cost of sales to general and administrative expenses to conform with current year’s presentation.
Net loss for the year included non-cash charges in respect of stock option expense, foreign exchange losses, unrealized losses on commodity contracts and a future income tax recovery. Net earnings for the year, adjusted for these non-cash items (a non-GAAP measure), was $2 million compared to $2.6 million for the comparative ten month period ended December 31, 2004. The following chart summarizes net earnings adjusted for these non-cash items:
——————————————————————— A non-GAAP Measure Dec. 31, Dec. 31, Feb. 29, 2005 2004 2004 (ten months) ——————————————————————— Net earnings (loss) per consolidated financial statements $ (4,111) $ 2,783 $ 1,008 Adjustments: Stock-based compensation 2,303 2,191 612 Foreign exchange gain (369) (1,848) (157) Unrealized losses on commodity contracts 8,615 – – Future income tax (recovery) expense (4,447) (430) 324 ——————————————————————— Adjusted net earnings $ 1,991 $ 2,696 $ 1,787 ———————————— Adjusted earnings per share $ 0.01 $ 0.03 $ 0.04 ———————————— ———————————————————————
An unrealized non-cash loss of $8.6 million was recognized on the mark-to-market of copper hedging instruments entered into during the year. The Company has effectively sold forward 50 million pounds of 2007 copper production at a net price of $1.27 per pound. This represents approximately 50% of the Company’s projected copper production for 2007. The financial instruments entered into were structured to hedge against the risk of declining copper prices on future copper concentrate sales, while permitting the Company to participate in market price increases at prices exceeding the $1.67 strike price of the call options involved in the transactions, thereby maximizing the total exposure at $15 million. By putting this copper hedge in place, the Company is helping to ensure a less than two year pay back for its Chapada copper-gold project. The original pay back outlined in the Chapada feasibility study based on a copper price of $1.00 per pound was approximately two years.
The formal requirements under generally accepted accounting standards permit this arrangement as a hedge so long as cash flows from sales come from copper solely. Since Chapada produces a concentrate of copper and gold which is sold in concentrate form, under accounting rules, hedge accounting is disallowed. Accordingly, changes in the fair value of the financial instruments will be reflected in current earnings from period to period. This will result in fluctuations in net earnings from period to period until which time the contracts are closed in 2007. The unrealized mark-to-market loss represents the value on cancellation of these contracts based on market values as at December 31, 2005 and does not represent an economic obligation for the Company nor does it represent an estimate of future gains or losses.