News Column

Fitch Assigns Initial Long-Term IDR of 'BBB-' to Yamana Gold; Rates Sr Unsecured Notes 'BBB-'

June 25, 2014

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned an Issuer Default Rating (IDR) of 'BBB-' to Yamana Gold Inc. (Yamana; TSE:YRI, NYSE:AUY). In addition, Fitch assigns a 'BBB-' rating to the company's revolving credit facility, existing unsecured debt, and the $500 million 10-year, senior unsecured notes. Net proceeds of the notes are to be used to repay the term loan due 2016. A complete list of ratings follows at the end of this release.

The notes benefit from the same upstream guarantees as the credit facility and rank equally with existing private notes aggregating $1.1 billion. Yamana's proportionate share of Osisko Mining Corporation's (Osisko) long-term debt at March 31, 2014 is $138 million and is non-recourse to Yamana. Osisko debt has a priority claim on Osisko's cash flows.

The Rating Outlook is Stable.

KEY RATING DRIVERS

Yamana's ratings reflect its sizeable reserves, very low cash cost position, average geopolitical risk, and limited capital spending compared to the potential for substantial future growth combined with Yamana's commitment to maintain a conservative capital structure given its exposure to gold prices. In weak gold markets, the company has the ability to defer development and exploration and focus on preservation of its capital structure.

Yamana is very low on the cost curve compared to peers. It is solidly in the lowest quartile, benefitting on a by-product basis from a comparatively large percentage of sales coming from silver and copper. In 2013, the company had production of 1.2 million gold-equivalent ounces (GEO) at an all-in sustaining cost of $814 per GEO on a copper by-product basis and $947 per GEO on a co-product basis.

The company has a high degree of operating mines, low capital requirements, and pro forma for the Osisko transaction, high mid-tier production. For its size, production by mine is fairly diversified, with no foreseeable large risks from new mine construction cost overruns or delays, as a majority of projects are at least in the commissioning phase, with the exception of Cerro Moro.

Yamana operates in Chile, Brazil, Argentina, Mexico, and Canada. At Dec. 31, 2013, proven and probable gold reserves were 16.3 million oz. which compares at 15.8x 2013 gold production of 1 million ounces. Pro forma for the Osisko acquisition, Yaman's share of proven and probable gold reserves was 21 million oz.

Expectations

Latest 12 months (LTM) ended March 31, 2014 operating EBITDA was $663 million reflecting a decrease in realized metals prices and a slight decrease in production, part of which was planned and part based on a heavy rainy season in the first quarter of 2014 in some regions. The company stated pro forma 2013 EBITDA was $817 million. Fitch expects annual EBITDA to average at least $850 million through 2016 assuming, among other things, gold prices of $1,200/oz. Free cash flow is expected to be negative in 2014, but is expected to be neutral to slightly positive as soon as 2015 depending on commodity prices and the timing of capital spending.

Sufficient Liquidity

Liquidity pro forma for the Osisko transaction is moderate, with $260 million in cash on hand and approximately $750 million available, after approximately $250 million in borrowings, on the company's revolver due March 2019. The revolver has a maximum total net leverage covenant of 3.5x and a maximum total net debt-to-net worth covenant of 0.75x. Total debt to latest LTM operating EBITDA was 2.0x and net debt-to-LTM operating EBITDA was 1.7x. Liquidity should remain adequate to support Yamana's capital spends, which are expected to be $600 million in 2014. The company does not expect major capital spending on large projects in the near future, with expansionary spending at Pilar, C1 Santa Luz, and Ernesto/Pau-a-Pique mostly completed.

Fitch expects Yamana to remain in compliance with its covenants and have sufficient liquidity to support its operations.

Fitch estimates schedule maturities of debt, pro forma for the new notes and Osisko debt, as of March 31, 2014, of $31 million in 2014, $24 million in 2015, $589 million in 2016, $43 million in 2017, $110 million in 2018, and $1.6 billion thereafter.

Capital Structure

At March 31, 2014, total debt was $1.3 billion and compared at 2.0x operating EBITDA of $663 million. With the $500 million term loan and $500 million notes issuance, total debt will be approximately $2.3 billion, but this should normalize at $1.8 billion after the expected repayment of the term loan with proceeds from the issuance of the notes. Fitch expects leverage to peak in 2014 at 2.5x, declining thereafter and normalizing under 2.0x as production increases and earnings from Osisko are fully realized.

The Stable Outlook reflects Fitch's expectation that total debt/EBITDA will not exceed 3.0x on a sustained basis, and will generally trend to below 2.0x. Should internal cash generation fall behind expectations, Fitch expects expansion expenditures to be cut or to be supported by new equity issuances or non-core asset sales.

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

--Gold prices and internally generated cash flow deteriorate without an equal management response in the form of reduced spending, asset sales or the raising of equity;

--Expectations that total debt/operating EBITDA will be greater than 3.0x on a sustained basis.

Positive: Not anticipated given size and sensitivity to metals prices but future developments that may lead to a positive rating action include:

--Significant reduction in borrowing and positive free cash flow on a sustained basis.

Fitch rates Yamana Gold Corporation as follows:

--IDR 'BBB-';

--Revolving Credit Facility 'BBB-';

--Senior Unsecured Term Loan due 2016 'BBB-';

--$35 million 3.64% Senior unsecured notes due 2018 'BBB-';

--$265 million 4.78% Senior unsecured notes due 2023 'BBB-';

--$75 million 3.89% Senior unsecured notes due 2018 'BBB-';

--$85 million 4.36% Senior unsecured notes due 2020 'BBB-';

--$200 million 4.76% Senior unsecured notes due 2022 'BBB-';

--$140 million 4.91% Senior unsecured notes due 2024 'BBB-';

--$15 million 5.53% Senior unsecured notes due 2014 'BBB-';

--$74 million 6.45% Senior unsecured notes due 2016 'BBB-';

--$182 million 6.97% Senior unsecured notes due 2019 'BBB-';

--$500 million Senior unsecured notes due 2024 'BBB-'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria & Related Research:

--'Corporate Rating Methodology' (May 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=836535

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Gregory M. Fodell, +1 312-368-3117

Associate Director

Fitch Ratings, Inc.

70 W. Madison

Chicago, IL 60602

or

Secondary Analyst

Monica M. Bonar, +1 212-908-0579

Senior Director

or

Committee Chairperson

Michael Weaver, +1 312-368-3156

Managing Director

or

Media Relations:

Brian Bertsch, +1 212-908-0549

brian.bertsch@fitchratings.com

Source: Fitch Ratings


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