This isn't exactly surprising. Baneulos has been on the shelf with a sore elbow since the middle of May, and he wasn't exactly setting the world on fire before going down, posting a 4.50 ERA in 24 innings for Triple-A Scranton, with a 22/10 K/BB and 29 hits allowed. Rest and rehab didn't do the trick, so under the knife he goes.
There's been some grumbling that the Yankees waited too long and that maybe he could have had the surgery sooner. I don't like second-guessing medical decisions, so I won't grumble along with that. In any event, Banuelos will miss most or all of 2013 and we shouldn't expect to see him in line for the majors until some time in '14. He's still quite young, only 21 years old, so even in 2014 he'll still be just 23.
Scouts have generally praised Banuelos for his smooth, easy, and consistent mechanics, but have wondered if his small physical stature would harm his durability. Personally, I don't think that really factors in that much: plenty of big, strong, physical pitchers (including some with "clean" mechanics) blow their elbows.