OREANDA-NEWS. Fitch Ratings has affirmed Yamana Gold Inc.'s (Yamana; TSE:YRI, NYSE:AUY) Long-Term Issuer Default Rating (IDR) and senior unsecured debt at 'BBB-'. Roughly $2.6 billion in principal amount of debt and commitments is affected by this action. A complete list of ratings follows at the end of this release.

The Rating Outlook is Stable.

Yamana's ratings reflect its sizeable reserves, low cash-cost position, low geopolitical risk, longer average mine life, and potential for solid future growth combined with Yamana's commitment to maintain a conservative capital structure given its exposure to gold prices. Offsetting factors include high but declining financial leverage compared to peers in a period with elevated capex, and execution risk associated with development-stage mines at Cerro Moro and improvement efforts at other sites. In weak gold markets, the company has the ability to defer some development and exploration to focus on preservation of its capital structure.

The Stable Outlook reflects Fitch's expectation that total debt/EBITDA will not exceed 3.0x on a sustained basis, and will generally trend at around 2.0x. Should internal cash generation fall behind expectations, we expect the company to preserve and generate liquidity via credit-neutral actions, including cost management, capital expenditure deferrals, non-core asset sales and potentially new equity issuances.

Yamana operates in Brazil (31% of 2016E production), Chile (27%), Canada (22%), Argentina (13%), and Mexico (7%).

KEY RATING DRIVERS

FAVORABLE PRODUCTION PROFILE

The company has a high percentage of production from core, low-cost operating mines, low capital requirements, and solid long-term growth prospects. Fitch calculates Yamana has a weighted average mine life based on estimated 2016 production of over 11 years, on the higher end of peers based on currently producing assets. For its size, production by mine is fairly diversified, with the Cerro Moro project as the only foreseeable large risk from new mine construction cost overruns or delays, while Brio Gold assets have shown recent improvements. First production at Cerro Moro is expected in early 2018 and it is expected to add additional low-cost production of gold and silver over its initial six-year mine life. Assuming current estimates are accurate, we view the construction of the mine as a positive, as it contains high-grade gold and silver deposits, with cash costs that are expected to be very low, at under $400 per ounce of gold. Recent political and business improvements in Argentina such as reduced import restrictions, exchange controls and taxes have been positive to mining in the region as well.

In the first quarter of 2016 (1Q16), Yamana's calculated by-product cash cost of gold was $590/oz., compared to a peer range of approximately $600-$700/oz. Incorporating the impact of all by-products, Fitch estimates Yamana's cash cost to produce gold for the latest 12 months (LTM) period ended March 31, 2016, was $449 per gold ounce of production. All-in sustaining costs (AISC) were $842/oz. in 2015, and are estimated to be in the lowest quartile of peers at $805/oz. for gold in 2016. The high concentration of by-products also increases Yamana's revenue diversification relative to peers, with roughly 80% of estimated revenues attributable to gold sales, allowing the company to benefit from strengthening global copper demand, but also leaving it more sensitive to large declines in by-product prices.

COMMODITY PRICE EXPOSURE

Yamana's earnings are sensitive to gold prices. Fitch expects Yamana to be free cash flow (FCF) positive in a scenario where realized prices are greater than approximately $1,100, and should still be able to generate positive FCF in a $1,100-$1,000/oz. gold price environment, depending on capital expenditure timing from 2016-2018, due to Yamana's lower overall cost structure and low development spending requirements.

BRIO RESTRUCTURING

After falling short of expectations on expansion projects at some producing non-core mines in 2015, the company placed certain development-stage assets and non-core mines (Fazenda Brasiliero, Pilar, and C1 Santa Luz) into wholly-owned subsidiary, Brio Gold, Inc. Despite signs of improvement and a new dedicated management team, the company was unable to find a suitable avenue for monetization that management felt reflected the fair valuation of the Brio division. At the end of 2015, the company suspended efforts to divest, which is expected to add to cash flow in 2016 assuming cost reduction efforts continue, but a monetization of the previously higher-cost Brio assets and subsequent debt repayment with proceeds would have likely been positive for the credit at the time.

With the strategy shifted, Yamana continues work to improve the Brio assets as a part of the Yamana portfolio. Though C1 Santa Luz was put on care and maintenance, cash costs have declined from $778/oz in 2014 to $708/oz. in 2015 for Pilar, and from $804/oz. to $702/oz. for Fazenda Brasileiro. Management has guided to further reductions in cash costs at both assets, to $560/oz. of gold for Pilar and $610/oz. for Fazenda Brasileiro, with 1Q16 performance in line with those estimates. Also on 1Q16, Yamana, through Brio, acquired Carpathian Gold's Riacho dos Machados (RDM) mine for $55 million. Fitch expects RDM's forecasted 100,000 ounces of annual gold production at an average AISC of under $800/oz. over seven years to be a positive addition to the Brio platform given the mine's potential production profile compared to the minimal capital outlay.

KEY ASSUMPTIONS

--Production at management guidance of ~1.3 million oz. in 2016;

--Long-term gold price of $1,100 per oz.;

--No material debt-funded acquisitions;

--Capital expenditures within guidance range;

--Cerro Moro project constructed and starts production on schedule;

--Brio Gold not monetized in current forecast;

--$300 million of net debt reduction in 2016 and 2017 combined.

RATING SENSITIVITIES

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

-- Deterioration in gold prices and internally generated cash flow without an equal management response in the form of lowered costs, reduced spending, dividend cut, assets sales or the raising of equity;

--Expectations that total debt/operating EBITDA will be greater than approximately 2.8-3.0x on a sustained basis;

--Failure to reduce debt within management's guidance of at least $300 million by 2018;

--Debt-funded shareholder-friendly activity;

--Material disruptions or delays at major mine sites;

--Expected period of sustained negative free cash flow after dividends.

Positive: Not anticipated given the company's exposure to volatile precious metal, commodity and foreign exchange prices and size of operations, but future developments that may, individually or collectively, lead to positive rating action include:

--Material debt reduction leading to total debt/EBITDA sustained below roughly 1.0x-1.3x;

--Expectations of sustained positive free cash flow generation over $500 million annually.

LIQUIDITY

SUFFICIENT LIQUIDITY, DEBT REDUCTION

The company has approximately $125 million in cash on the balance sheet and a $1 billion committed revolving credit facility, of which about $760 million is available as of March 31, 2016. The revolver has a maximum net leverage covenant of 3.5x. Fitch expects the company to continue to generate FCF on average in the base case, depending on the timing of growth capex. Fitch expects cash on hand plus cash flow generation to remain adequate to support Yamana's capital spending through the forecast period and fund its target of at least $300 million of net debt reduction between 2016 and 2017. In the base case, Fitch projects total debt/EBITDA of approximately 2.5x-2.8x through 2016, decreasing to 2.0x-2.5 by the end of 2017.

Scheduled maturities of Yamana debt, including debt assumed from the 50% interest in Canadian Malartic, as of March 31, 2016 are $97 million in 2016, $17 million in 2017, $111 million in 2018, $183 million in 2019, and $1.4 billion thereafter.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the ratings for Yamana as follows:

--LT IDR at 'BBB-';

--Revolving credit facility at 'BBB-';

--Senior unsecured notes at 'BBB-'.

The Outlook is Stable.