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Is Further Debt Reduction on Investors’ Minds for Yamana’s 3Q16?

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Debt reduction

Yamana Gold (AUY) announced on October 3, 2016, that it had raised a total of $178 million through the completion of its Mercedes mine sale and the monetization of its Sandstorm (SAND) warrant holdings.

The company stated that it would use the proceeds from this transaction to reduce its net debt. It also said, “This is the first of a series of steps this year to decrease our overall debt.” The company announced in early 2016 that it would reduce its net debt by $300 million through 2017.

Yamana is also targeting a net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio of 1.5x–2.0x. The company could provide an update on its progress on these efforts in its earnings release.

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The above chart shows Yamana’s financial leverage compared to those of its peers (RING). Yamana’s peers have been involved in similar portfolio restructuring transactions. AngloGold Ashanti (AU) sold its Cripple Creek & Victor mine to Newmont Mining (NEM), and Barrick Gold (ABX) sold its Nevada assets to Kinross Gold (KGC).

Notably, Yamana has a higher leverage than its peers (GDXJ), including Eldorado Gold (EGO), Agnico Eagle Mines (AEM), and IAMGOLD (IAG).

Foreign exchange rate movements

Yamana Gold’s gold cash costs for 2Q16 were $664 per ounce, compared to $577 per ounce in 2Q15. Along with higher-than-expected costs due to one-off events at Chapada, unfavorable exchange rate shifts were also responsible for Yamana’s higher costs.

Currencies such as the Brazilian real, the Chilean peso, and the Canadian dollar have strengthened compared to the company’s budgeted assumptions. These three currencies rose 11%, 4%, and 7%, respectively, in 2Q16 compared to 1Q16. 

Forecasts for foreign exchange rates for the rest of the year are stronger than Yamana’s budgeted assumptions. To reflect this, the company has revised its 2016 cost guidance. 

Cerro Morro update

Yamana Gold’s Cerro Morro mine development remains on schedule in Argentina. The company’s 2016 exploration is focused on discovering a new high-grade structure and expanding its current resource base. Around 73% of detailed engineering has already been completed, and this number is expected to reach 85% by the end of 2016.

The company is envisioning initial production in 2Q18, and it could provide an update on the progress of this project in its 3Q16 results.

Now let’s look at key updates from Kinross.

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