After five years as an exploration company, Yamana Resources Inc. has decided to develop its first mine next year and hopes to begin producing silver at that Argentinian property by first quarter of 2001.


The shift from mining exploration company to mining production company, though, has resulted in significant changes at Yamanastarting with a change in corporate thinking and resulting in dramatic cuts in employment, says Richard Dick Walters, Yamanas president and chief operating officer.


Before, we always spent money to find something, but now we are going to be spending money to produce somethingand theres a big difference, Walters says. For an exploration company, the focus is on finding that big deposit, he says, while for a production company, the focus is on making a profit.


Yamana, which legally is based in Toronto but operates from its executive headquarters in Spokane, never has made a profit, which Walter says is typical of an exploration company. He adds, though, that the company should begin operating in the black in 2001 when Yamana begins mining silver in Argentina.


In its most recent fiscal year, ended Feb. 28, Yamana reported a net loss of $24 million, compared with a net loss of $5.6 million in the previous fiscal year. The company attributed the bigger, more recent net loss mostly to $20 million in write-offs of mineral properties that Yamana determined were declining in value or for which it believed it wouldnt be able to secure further exploration funding. The company reported a loss of $1.7 million for the first six months of its current fiscal year, ended Aug. 31, compared with a loss of $1.1 million in the year-earlier period.


As a result of its shift in focus, Yamana has had to look for workers with production-oriented skills rather than the exploration-oriented skills needed previously. That has meant pursing workers in Argentina who have experience working in mines and scaling back the number of geologists who have been on staff for exploration.


The Spokane office has reduced its work force to eight employees from more than 30 two years ago, Walters says. In March, the company also closed two of its overseas exploration officesone in Santiago, Chile, and another in Jakarta, Indonesialeaving active exploration offices in Buenos Aires, Argentina, and Asuncion, Paraguay, he says. The office in Paraguay is staffed primarily by employees of Denver-based Newmont Mining Corp., which says it is the largest gold producer in North America. Yamana formed a joint venture with Newmont this past summer to explore properties in Paraguay.


We currently are about 25 percent of the company we were about two years ago, Walters says, referring to staffing. He adds, though, that Yamana now has a core crew in place to do what the company has to do.


Seeking long-term survival


Yamana has decided to transition from strictly exploration to a combination of exploration and production because junior exploration companies, such as Yamana, have begun facing an uncertain financial future, due to increasingly scarce financing opportunities.


Exploration companies typically dont have cash flow and instead rely on investors to finance exploration projects.


During the last five years, Yamana has spent 86 percent of its available financial resources, totaling $52.2 million in equity financing plus contributions of $10.4 million by joint-venture partners, on exploration, and 14 percent on all other company expenditures, Walters says.


Due to a depression in the mining industry, which has been plagued by low metals prices, global economic and currency weaknesses, and the Bre-X scandal, investor confidence has deflated, making financing more difficult to obtain, Walters says.


To generate its own cash flow, Yamana plans to begin mining high-grade ore from one of several properties it has been exploring in the Santa Cruz province in Argentina. The company announced earlier this month that it had obtained a commitment from Northgate Exploration Ltd., an affiliate of Toronto-based Trilon Financial Corp., to provide a loan of up to $4 million (U.S.) for development of the first phase of a multiphase development plan for the property there, called Bacon.


Now we will have an asset and that more or less will guarantee our long-term survival, Walters says.


Development of the Bacon property, which currently has indicated and inferred silver resources of 9.3 million troy ounces, is expected to begin in June 2000, Walters says. He says an underground mine will be developed there, and a ramp to serve the deposit initially will be constructed to a depth of 25 meters below the surface. Eventually, the ramp will be extended to 50 meters and then to 75 meters below the surface.


Yamana has decided to pursue development of the Bacon property because exploration is furthest along at that mine among the companys various potential deposits, he says.


Ore production is expected to begin during the first quarter of 2001 and will proceed in at least four phases. The first phase is expected to yield more than 3 million ounces of silver, Walters says. He says Yamana has proven reserves for the first phase, semi-proven reserves for the second phase, and a good indication of reserves for the third and fourth phases.


Rather than building a processing facility for the mine right away, Yamana expects during the first two phases of mine operation to ship unprocessed ore from the underground mine directly to a smelter in Quebec thats operated by Noranda Inc., of Toronto. Walters says that Yamana wont have to process the mined rock before its smelted because the silver content of the ore will be of such high grade it can be shipped thousands of miles and still be processed economically. Even with transportation costs included, the cash cost for that method of mining and processing still is expected to be less than $2 an ounce, well below prevailing market prices for silver.


During the third and fourth phases of the mines operation, Yamana likely will have to build a mill at the Bacon propertyso that it can process ore before shipping it to a smelter, Walters says. He says the mill will be needed because the ore that will be extracted in those phases of the mines operation is expected to be of a lower grade than the ore removed in the first and second phases.


Martinetas is next


The next property that Yamana hopes to put into production is its Martinetas property, a potentially high-grade gold property located in the same Argentinian province as the Bacon property.


To develop the Martinetas deposit, Yamana likely would partner with another mining company, Walters says. Yamana hopes to secure a partner or some financing within the next six months so that it can begin production at the Martinetas property, which would cost about $3.5 million to develop, he says.


As it plans development of the two Argentinian ore bodies, Yamana isnt deterred by current depressed precious metals prices, because it has found high-grade ore during its exploration of both the Bacon and Martinetas deposits, Walters says.


Were really insulated from price because of the high grade, he says, adding that, High grade forgives a lot of sins.


Walters says that because of the quality of the ore found so far during drilling at the Martinetas property, he estimates that Yamana would be able to produce gold there for about $30 an ouncewhereas most gold mining companies produce gold for about $250 an ounce. He adds that Yamana believes that there are multiple ounces of gold per ton at that deposit, which would be considered almost unheard-of grade.


We believe that the small, high-grade deposits will be very profitable, and they will underwrite our survival, Walters says. Our big challenge, though, is to find a discovery with world-class aspects. In other words, one thats huge.


Discovery of such a world-class deposit is whats needed to boost Yamanas stock price, which has continued to hover around 50 cents (Cdn.) a share, Walters says.


The Bacon property will set the base price (for Yamanas stock). I dont believe that well see it drop any lower, provided the precious metals prices dont fall, Walters says. He adds, though, that for now, he also doesnt expect the companys stock to shoot up either.


Bacon is not the big hit that investors are looking for, Walters says. Investors, he says, are looking for at least a 1 million-ounce depositand neither the Bacon nor the Martinetas is expected to be that large. Still, Walters claims that some of Yamanas other exploratory properties in South America have such big hit potential.


During its latest fiscal year, Yamana discovered in Paraguay the first gold found in hard rock in that countrys history. Yamana plans to continue exploration there with Newmont Mining.


Other properties that the company will continue to explore include the Lejano property, which is a silver deposit, and the Estrella property, which is a gold deposit. Both, like the Bacon and the Martinetas, are located in the Santa Cruz province of Argentina.