To qualify as generational, a mine must be able to stand the test of time
As an industry, we have accepted a tenet that in my view is overdue for challenge: production level, and production level alone, is what defines the quality of a mine. Production levels are important, but they seem to have become all the rage. We have even begun to define mines based on tiers with one ranked higher than another based on level of production. Perhaps, for some companies this remains important because their aggregate production requires more production by mine. But to distinguish an operation as having higher quality than another based on production alone is fundamentally flawed and wrong.
As a company with a significant but more manageable production platform, Yamana can afford to be more nimble and, as such, we have the luxury of not having to limit ourselves to the relentless pursuit of only mines with top tier production levels. We focus on quality of production for certain and, in that, it matters less if the production level is 150,000 ounces per year or 500,000 ounces per year. One is as much a blessing as the other so long as we can manage the mine in our existing management construct and it generates robust cash flows.
Where I can agree with the notion of tiers for assets and mines is not so much in respect of the size of production as in the longevity of production. Most gold mines have shorter lives than other metals mines. Typically, a gold mine has an initial mine life of eight to ten years, although often far less than that. Gold miners, to be sure, explore diligently to replenish their mineral reserve inventories, sometimes with great success, but this is no easy thing. While mine life extensions do occur, it is very infrequently that the mine life for a precious metals mine extends for several decades.
In the last short while, I have been using the term “generational assets” which I have been applying to mines whose longevity is several decades, hence the reference to generation and generational. A mine that produces at a certain level or possibly increases production for several decades is what I have taken to calling a generational mine.
These are rare and even more rare is when one company has several of these assets in its portfolio. I took to calling us nimble above and also smaller than many of our peers. However, we have proportionally more generational mines than many of our peers and the number of generational mines in our portfolio is disproportionate to our size. In my view, this is a distinction one should not overlook.
Operating for an extended period allows companies to build a regional presence and become part of the fabric of the communities in which they operate. It creates local employment in good paying, high skill jobs for an extended period and a procurement ecosystem that supports local businesses and economies. I take great pleasure when I hear stories of second-generation employees who work at our mines, as I often do. We want to have the kind of regional significance that can only come from a long-term presence, be in a position to make a positive difference and create long-term value for our stakeholders.
Several assets in our portfolio fit this criteria. One of the more obvious generational mines is the Canadian Malartic mine in Quebec. Yamana holds a 50% stake in this open pit operation, which entered production in 2011. With production of more than 650,000 ounces per year, Canadian Malartic fits the more classic definition of a tier one mine because of its significant production platform, but as importantly it is a significant cash flow generator, the largest private employer in Quebec’s Abitibi District, with more than 2,250 employees including full-time workers and contractors, and it will remain in production until at least 2040 based on the underground mine now in development, making it a generational mine. This mine will produce gold at a level of at least 500,000 ounces per year for more than three decades! And that longevity will likely increase with upgrade of resources not currently in the mine plan and newer discoveries which are already in progress.
Over the next seven years, Canadian Malartic will transition from Canada’s largest open pit gold mine into the country’s largest underground gold mine and remain in production through at least 2040. Indeed, the underground project at Canadian Malartic, known as the Odyssey mine, has excellent potential to extend mine life well beyond that, as only half of the project’s 14.4 million ounces of mineral resources are currently included in the underground mine plan. As exploration continues, we believe many of these ounces will ultimately be integrated into the plan, further extending mine life.
While the production level at our Jacobina mine in Brazil is less than Canadian Malartic, it is an excellent cash flow generator and another generational mine in our portfolio. The operation has more than doubled annual production since 2014 from 75,000 ounces to nearly 180,000 ounces of gold. And production is only going to increase as we advance the second phase of a phased expansion that will raise annual production to 230,000 ounces. A third phase that would increase production to 270,000 ounces per year is currently under evaluation.
Jacobina, which employs 2,500 people including full-time workers and contractors, currently has a reserve life index of 15 years plus a pipeline of resources and exploration targets that we believe will further extend mine life. This latter point, the ability to convert mineral resources into mineral reserves, is an important one. It is key to extending mine life which, as I stated earlier, is not easy to do; yet it is something that Yamana does exceptionally well, which is why three of our five operating mines fall into the generational asset category. It is well understood in our company that we will be mining at Jacobina for several decades to come.
The third of these generational operations is the El Peñón mine in Chile. El Peñón’s reserve life index has never been higher than eight years, yet it is in its 22nd year of operation. We have consistently been able to replenish reserves at El Peñón—a feat that we accomplished yet again in 2020—while generating new discoveries.
El Peñón has at least 10 years of mine life in front of it, but we are confident we will be able to find more ounces, extend mine life, and continue generating significant free cash flows from this operation. El Peñón is a prime example of why investors should be sensitive to a mine’s mineral resource base and a company’s track record of converting those resources into reserves. It is a measuring stick of future mine life and how generational assets like El Peñón are created.
We have one additional asset in our portfolio that merits mention. While is it not a precious metals mine, there is a significant precious metals component to its very dominant inventory of copper. I am referring to the MARA project in Argentina’s Catamarca Province. Yamana holds a majority 56.25% stake in the project, which, with 11.8 billion pounds of proven and probable copper reserves (100% basis), is one of the largest undeveloped copper deposits in the world. It also holds 7.4 million ounces of proven and probable gold reserves (100% basis) and has an estimated mine life of at least 28 years. MARA is comprised of the Agua Rica deposit, which is where the minerals are located, and the plant and infrastructure of the nearby Alumbrera mine. Alumbrera is a former operating mine that has a fully functioning processing plant, a permitted tailings storage facility, ancillary infrastructure, and a pipeline to transport copper concentrate to port facilities. By integrating Agua Rica and Alumbrera we effectively turned what had been a greenfield project into a low-cost brownfield project and one of the least capital intensive copper-gold projects in the world.
MARA, in short, is a future generational mine that is advancing towards development at an opportune time, as copper is a green metal in high demand yet short supply. It is a key raw material in electric vehicles and renewable energy infrastructure that will drive the green transition.
There are other assets in our portfolio with the potential to become generational assets such as our Minera Florida mine in Chile and our recently acquired Wasamac project in Quebec. Wasamac is a Feasibility Study level project with 1.8 million ounces of proven and probable gold reserves. Its current estimated mine life is 12 years, but the project is located on a large land package and the ore body has not been explored at depth. We plan to allocate a fulsome exploration budget to Wasamac and expect that, in time, it will approach our criteria for a generational mine.
We are also investing in exploration at our Cerro Moro mine in Argentina. This is our newest mine and it is still too soon to say if it is generational, but Cerro Moro is located on a large 300,000 hectare land package and we believe there are opportunities to significantly increase mine life.
So, while we have four generational assets in our portfolio, that number may increase and, in the meantime, we are certainly well positioned to punch above our weight class with the number of generational mines as compared to our size.