Agnico Eagle Mines Limited (AEM) Q2 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Agnico Eagle Mines Second Quarter 2013 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, Thursday, July 25, 2013, at 11a.m. Eastern Time. And I would now like to turn the conference over to Mr. Sean Boyd, President and Chief Executive Officer. Please go ahead, sir.

Thank you, operator, and good morning, everyone, and thank you for participating in our second quarter 2013 conference call. I just like to remind everyone that this presentation contains forward-looking statements. So please be forewarned. Just in terms of a summary of the quarter, in terms of highlights, from a production and operating cost standpoint, we were in line with our expectations and as a result of that, we are still on track to achieve our 2013 full year guidance. Our financial results in the quarter were impacted by, as we've described before, our extended maintenance shutdown in the autoclave and Kittila, but also on concentrate settlement adjustments, which were a bit more severe than we normally experience, given the sharp falloff in the gold and silver price early in the quarter, and that's what caused such a change from what we would normally see with those settlement adjustments. The Kittila autoclave is back running at steady-state levels. Our recoveries were back up almost immediately to the 89% level, so performing extremely well. We did also describe in our press release that we've been undertaking a review of our operations to enhance our financial flexibility and as a result of that review, we've announced a significant reduction in our capital and operating cost, both for 2013 and for 2014, and we're able to do it in a way where it doesn't impact our ability to achieve our 20% growth in production through 2015. Just a description and generally of the reductions in capital operating costs, we're looking at about $50 million in 2013. That would be about half expense and half capital. Of that $50 million, about $20 million would be exploration. The rest is capital and some operating cost savings. In 2014, we're looking for about $200 million in capital cost reductions, principally Meliadine, sustaining capital and some capital that we had originally planned to spend at Kittila and at Goldex. We're also looking for reductions next year in exploration expense of about $50 million, which should be roughly around $20 million in capitalized explorations and about $30 million in expense. We're still going through these numbers. As we go through our budgeting process, we'll be looking for additional savings and efficiencies and optimizations as we go through a detailed budget for next year and also a full review of our life of mine plan at all of our mines. As we said, 2013 was always back-ended in terms of second half production. We're expecting about a 15% increase in production in the second half of 2013 as we have a full 6 months out of our Kittila operation and also a full 6 months at our Creston Mascota, which started about a month ahead of schedule, in the first half of 2013. We're expecting better grades at Meadowbank as we encounter some of the high-grade pockets of mineralization, which we experienced in June and August of last year. We're going to see some of that in the second half of this year. The Goldex development has gone well. We expect startup of Goldex within the next few months, and we're expecting continued great improvement at LaRonde. So as we look forward on a quarterly basis, we're anticipating roughly 260,000, 265,000 ounces per quarter in the second half of 2013. That will rise to about 280,000 per quarter on an annualized basis in 2014 and at around 300,000 ounces per quarter in 2013 on average. So you can see, we can still significantly increase our production as we move forward because the expenditures on these projects, which drive that production growth, have largely been made and the reductions that we have made were in projects that are longer-term. As far as the actual operating results, again, production cost, in line with expectations, which essentially put us on track to achieve our production guidance in 2013. The biggest difference year-on-year and period-to-period was obviously the autoclave maintenance at Kittila. We produced about 5,000 ounces in Q2, and that was down from 43,000 ounces in Q1. So Kittila, on a normalized basis, is producing plus 40,000 ounces a quarter, so that was with the maintenance shutdown. That's why we saw a significant decline in production. As far as the actual financial results, as we discussed, they were impacted by lower commodity prices in the Kittila shut down and also the decline in metal prices. So the concentrates do contain gold. And so with the gold price down $300 in mid-April, those settlements were affected by that, not just the decline in the silver price and the zinc price. As far as the financial position, we had over $100 million in cash. Our long-term debt stood at $850 million. Our maturities, the first payment on our private placement long-term debt is not due until 2017, and that's $115 million. So the balance sheet is strong. We have undrawn under our credit facilities, over $1.1 billion as well. And our 2 principal covenants under our debt arrangements, our net debt-to-EBITDA and a tangible net worth covenant were well within our requirements under our debt facilities. As far as production growth, no change there. We're still expecting 20% production growth through 2015 driven by La India, Goldex, increasing grade at LaRonde and expectation of a robust production coming out of Kittila now the autoclave has been fully realigned and the internal components to that autoclave have been upgraded. As far as our capital, we have traditionally talked about our business along the lines of spending about $600 million a year for the next several years, largely split, sort of $200 million, $250 million on sustaining and the rest on growth projects. Next year, we're looking at spending about $450 million or $400 million, roughly $250 million or so on sustaining the rest on growth projects, and that's a reduction of about $200 million. We should point out that the biggest decline was on Meliadine, but the -- I think what's important is, just as important is the decline in how much we're spending there as the fact of where we're spending it. We are going to continue with our ramp at Meliadine, which allows us to keep that project on the projected timeline for late 2018, assuming we get Board approval about a year from now. So that was important for us to keep moving that project forward. We continue to get good grade results there. So it's not just the reduction, but how we've allocated and focused the smaller amount of capital that we have planned to allocate to our business. I'll move through the operations quite quickly. LaRonde is on track to get to its cooling plant infrastructure in place by the end of the year. That will improve our operating flexibility in the mine as we move forward in the next year and beyond and allowing us to open up the lower part of that mine where we're seeing a higher-grade material. About 60% of our ore in the quarter came from the lower mine, and that should increase as we move forward. And as we get into 2016, we should be drilling principally all of our ore from the lower level, allowing us to mine at or above the reserve grade. The biggest reason for the increase in cash cost at LaRonde was really the significant decline in byproduct revenue, both from a pricing standpoint and also from a production standpoint. In the second half, we should see production increase at LaRonde by about 7% to 8%, just driven by the grades. Lapa, another steady quarter. In terms of production and cost, still on track to do its production this year. We've had some interesting drill results, but that mine is still slated to close within about 3 years, but we'll continue to drill it. We've got, I would say, a reasonable drill program there, following up on targets. We've seen some of the best totals we've seen in a while there at that property. So they certainly do warrant follow-up, given the infrastructure that we have in place at Lapa. At Kittila, we talked about that. Essentially we are operational. The plant was operational for 14 days out of the quarter, and that's why production was only 5,000 ounces. And as we've said earlier, throughput and recoveries are back to a steady state, with recoveries at 89% level. Our expansion plans are also on track, where we're looking to increase our throughput by 20% up to 3,750 tonnes per day by the second half of 2015. In Mexico, our unit costs were up a bit, and that was largely the result of a roughly 20% decline in realized silver prices in the quarter. The Pinos Altos mine produces a significant amount of silver, but from an operating standpoint, we're achieving our cost targets. In terms of cost per tonne, we're also achieving our production targets, and we had our Creston Mascota heap leach operations come back on line about a month earlier than schedule. So we expect a stronger second half in Mexico due to the fact that we're anticipating a full 6 months of production coming out of the recently started up Creston Mascota heap leach operation. At Meadowbank, we continue to make good strides in our cost-reduction programs. Our cost per tonne in the quarter was $83. I think you'll recall, those numbers were closer to $100 in the past, so the team has done a really good job of managing its overall cost structure. We have had an ability to increase both the mining rate and the processing rate there. In the quarter, we processed over 11,000 tonnes per day. That resulted in production of over 90,000 ounces. And as we've said, the fact that we've got the plant operating at those levels with the benefit of having higher-grade components of the open pit available to us in the second half, we expect an extremely strong second half coming out of the Meadowbank operation. On our development projects, La India is going extremely well. We are on track for our commissioning in the fourth quarter of this year the project is on budget. We're well advanced on construction. We actually have a site visit there in September. Actually, 2 visits on the front and back end of the Denver Gold show, so we're going to be looking forward to showing off the progress that we've made at one of our new mines in Mexico. At Goldex, also going well. We're expecting commercial production in the fourth quarter of 2013. We continue to work on additional studies. There's a number of satellite zones there. What we were hoping to do well along was get the M and E Zone restarted, establish a production base and then make decision subsequent to that on the satellite zones that surrounds the GE bed deposits. So things have gone well and we look for more upside to that project as we move forward. On Meliadine, we continue to drill. We've continued to encounter good drill results, which is not a surprise to us. It's a prolific deposit. There's lots of gold in the system. But as we look at the volatile nature of the gold market, we felt it was prudent to ensure we have sufficient financial flexibility in our business. And as a result, we decided to reduce our capital spend at Meliadine from around $125 million from the original plan down to $45 million. But I think what's important is, that $45 million is essentially for the ramp, so we're continuing the ramp development to open up the ore body, access the deposit, and that leaves us flexibility in the schedule that if our Board gives approval to the project, about a year from now, we can still meet the start up date of late 2018. So just in summary, one of our objectives in the past quarter was to review our business, look at ways that we can reduce costs, improve financial flexibility, while still being able to deliver on our production growth objectives that we laid out earlier this year through 2015, we'll see a 20% increase in our output. So we've been able to do that from both ends on the cross side and also on the production side as we advance to La India and Goldex. So operator, I'd like to leave it at that, and I'd like to open it up for questions.

[Operator Instructions] Your first question today will come from the line of John Bridges of JPMorgan.

The CapEx cuts that you've made, you mentioned them being longer-term things. What were they related to?

Meliadine was the principal one. The Kittila shaft is a project that we would consider a nice-to-have, but not a necessity. As you know, that's a 40-plus year mine life, so we'll continue to sort of look at that. We continue to drill it and we actually continue to get good drill results as we move to the North at Suuri. So it's a project that has expansion potential, but it's not pressing for us, and we would prefer more financial flexibility rather than commit to the shaft at this time at Kittila.

Okay. I know you're busy with the cooling plants at LaRonde. How are you doing with respect to your tonnage build up there? That's something, I guess, you're watching quite nicely.

Yes, we're on track. Our production in the first half has been where we expected it to be. The key component on tonnage ramp up is the cooling infrastructure, which is slated to be installed before the end of this year, and that's still on track to be in place and that will allow us much more operational flexibility in the deeper part of the mine in terms of controlling the temperature. And we're developing new pyramids, which also give us operational flexibility. So we're on track.

Okay. And finally, do you have a number for the concentrated adjustment in the quarter?

I'll get Dave to give the breakdown of the settlement adjustments and the impacts on concentrate.

Hi, John. The total is about $8.5 million in the quarter.

Your next question will come from the line of Stephen Walker of RBC Capital Markets.

Just a couple of questions. Just to touch again on Kittila. What's the capacity of the ramp vis-à-vis producing ore and waste with the mill expansion to 3,750? What sort of a production can you expect coming up the ramp?

We can do 3,750 from the ramp. The question with the shaft is always once we get below 700 meters, our analysis suggest that it's cheaper to mine below 700 meters with the shaft. If we continue with the ramp below 700 meters, our cost per tonne would go up. And so that's the trade-off. So those are the things that we continue to monitor. The shaft gives us -- ultimately, would give us 2 benefits. One is, ability to mine at the lower cost, but also access to develop and explore the Rimpi area, but can still explore Rimpi and access Rimpi with the ramp access that's not been stopped or slowed down. The shaft would also give us potential to explore at depth. All these deposits are still wide open below 1,100, 1,200 meters. So that's an objective of ours going forward, but we're just trying to balance the financial flexibility needs with a lot of opportunities. Essentially, we have a lot of internal opportunities. We'll see more presented to us as we go into next year from Mexico and Goldex, but we have only so much capital we're willing to commit. So we have to sort of think strategically about where we want to put that capital.

Right. But just as a follow-up, along the timeline if you don't sink the shaft, when do you cross that threshold, where you have the majority of your ore or a significant amount of your ore coming from below 700-meter level?

After 2020. So the shaft would take 3 or 4 years to construct. So we have a window, a couple of years to decide on the shaft. And we have -- the shaft location has been picked. So they're well-advanced and they're thinking, it's just a process of capital allocation right now.

Right. Just a question on La India. There's been some comments made about access to water, and you've given us a good update on the timeline and the development. I guess, 2 parts to that -- to my question in La India. When do you expect to have ore under Leach or material under leach? And then secondly, access to water and ultimate water budget over the next 5 to 10 years? Is it sufficient within that catch basin?

Yes. Tim will look after that one.

The first question was, when do we expect to be -- have more under leach, and that's going to be sometime in Q4, so commercial production, first quarter next year. Second question about water. We're very comfortable with our water supply now, startup water supply and we're comfortable with the water rights that we've acquired, and the Plan A and Plan B for our water sources are in very good shape.

Your next question will come from the line of Patrick Chidley of HSBC.

Just a question on Goldex. In terms of -- looking at the current metals prices and returns on investments like that, is there a sort of point at gold price maybe where that project -- you've got the chance to shut it down before you really get going on it? I mean, is that one of the projects that might be a little bit at risk at the current gold price level?

No, not at the current gold price level. That project will actually generate some good cash flow. I think the key for us there was to reestablish a production based on the satellite zones because as we were contemplating and studying and analyzing that opportunity, we basically selected a base case, which was simply developing M and E zones. We had probably a half a dozen additional cases, which contemplated different satellite zones being brought into a mine plant. So we actually think the value is in some of those additional satellite zones and we're analyzing that now. Now the question will be, you actually directed us to the real point here, which is we have a lot of opportunities to make decisions on where we should allocate capital. And clearly, the higher-cost ones, we'll have to compete very hard for capital and so it's up to the Goldex team to demonstrate that. They have an opportunity to create value going forward relative to some of our other internal or external opportunities. So that's being monitored now, and that's a big part of the process that we'll be going through during this next budget phase in the life of mine planning phases. All of the operations are providing various scenarios on how they can optimize and add value, and providing investment opportunities to do that. And then here, we have to make decisions where we want to allocate that capital strategically. So far, so good on Goldex. The all-in cost is $1,100, $1,200. We own it and they don't -- the carrying value is minimal and so it actually works quite well.

Okay. Thanks. Just a quick follow-up then. You mentioned maybe the external opportunities. We've seen you do a number of sort of junior investments in the last sort of couple of quarters. Is there anything bigger that you guys might consider? Or you think this is a market where there are opportunities to acquire producing assets? Or do you think that's really -- you would've considered those already and things haven't really improved that much?

No. I think what we've done in our approach in the -- through the beginning of this year was to look at our strategic investment portfolio. We've reallocated some money out of the Queenston transaction to a select number of strategic investments. We've added a little bit more to that portfolio with the 5 strategic investments. One of the things we haven't reduced is resources that we're directing to our project evaluation group because there's still a lot of opportunities out there to evaluate. But again, we've got 20% production growth over the next 2, 2.5 years. So we're not feeling pressured, but we do think it's important from a strategic standpoint to keep that review process going. And that's the type of strategy that's worked for us well over the years where we've taken these total opportunities in early-stage projects that we like. So we continue to look, but we're not feeling pressured or compelled to do something.

Right. And finally, financing. You've get into your credit facility, $50 million. Do you expect to be using a lot more of that through the year to get the capital projects down this year and next year, I guess?

We'll be using some this year. But what our expenditure reductions do next year is put us in a position where we won't have to use that. So we'll be using that to finish Goldex, to finish La India during this difficult price environment, but that still leaves us comfortably in a position where we are well within our debt covenants et cetera. But that is the plan.

Your next question will come from the line of Don MacLean of Paradigm Capital.

Just following up on Patrick's question about the credit line. Is that fully available or would be drawn down within the covenants of this kind of gold price, Sean and Dave?

Yes, its.

Okay, fully accessible. And maybe I missed it early on. You're making a significant capital for Meliadine. Can you give a little bit more breakdown as to what those cuts are?

Well, it's largely drilling. Most of the expense next year, of the $45 million, will be on the ramp. So there are camp costs that we can reduce, drilling costs, those types of things, but the $45 million roughly is to keep the ramp going.

Your next question will come from the line of the Farooq Hamed of Barclays.

My question really is related to this commentary you have in your release regarding your plan to review your metal price assumptions for your mine plants. I just want to get some understanding of your thinking around that. Like, will you base your assumption, your metal price assumptions on the all-in cost for your different mines, or would it be based on something like the 3-year trailing average? So do you start with cost or do you start with prevailing gold prices in doing that planning?

Well, as you saw last year, we based it on cost because we used 2 different prices depending on the quality of the assets. So for our long-term assets, we used a lower gold price, for our short-term assets, we used the higher gold price. So we do look at the assets. We don't necessarily have to take the trailing 3-year average. In fact, last year some of our mines, we use less than the trailing 3-year average. So that's part of our review. Our process now is, what is the most appropriate price for each mine based on the life of mine plan to essentially maximize the ore body and improve the quality. So short mine life have different considerations versus the long-life assets. So we're still going through that process of what is the most appropriate price and we saw when we did that exercise last year, when we were selective on which gold price we use for which mines, we saw in a couple of cases that the grade of the reserve went up, so it improved the quality. So those are the types of things we're looking at right now as we begin the budgeting life of mine planning process.

And maybe to just expand on that then, Sean. Do you think that there's, for Agnico and for the industry as well, do you think that there's a need to maybe kind of sharpen the pencils more in terms of starting at a cost base and then doing mine plans at below all-in cost base, so kind of building in a return on your mine plant kind of the below your current cost base is rather than just closer to the cost base?

Yes, I think that can happen. I think what industry is doing and we're seeing it where they're looking at carrying values and reserves and the quality of reserves, is the industry is going through a transition here and transitioning out of a significant growth phase into a phase, which is more focused on returns and manageability of the businesses. So reserve pricing is certainly something that companies will be using to stress test the businesses and look at ways that they can improve the quality, and the ability to execute and deliver with some of the projects. So that's part of the process here. You're right there.

Okay. And then maybe just one last question. Just switching gears on the CapEx. So there's the CapEx cut in 2014 to $400 million and most of that is coming at Meliadine and then at Kittila. And I think previous to that, that your guidance was kind of looking out beyond even 2014. It was going to be CapEx all in -- all CapEx sustaining plus development in that $500 million to $600 million range for the foreseeable future. I guess, that's now dependent on these decisions that you're going to make in terms of going forward at Meliadine and the Kittila shaft. So $400 million could be the new run rate or maybe even lower?

Well, we're still looking at the ultimate number as we go through the budget process. So $400 million is our starting point on the existing assets. But as you say, we have an ongoing review. We'll have updated studies next year on a number of opportunities, including Meliadine. Kittila will continue to update their studies and present them to us on a quarterly basis. So this will be sort of a constant process where we refine opportunities, continue to evaluate those opportunities and look at how we can create the right balance between our need for financial flexibility in a volatile market, but also the need to reinvest in our projects because it is a long-term business, and that's the way we've looked at it and that's the way we've sort of applied ourselves over the last several decades because we've been around a long time is just to take that measured approach. And that's the way we're looking at this right now.

Your next question will come from the line of David Haughton of BMO Capital.

First question is just focusing in a little bit the difference that you're getting between the average price for the quarter and the realized price. Just -- I've seen the experiences in the previous quarter, but nothing of the magnitude that we've had in the quarter, just gone. I wonder if you could talk us through about what's been happening in that.

Yes. Dave's got some numbers there for you. Dave?

Dave, as I mentioned earlier, we were about $8.5 million down just from the mark-to-market and settlement losses. But we did a little bit of math this morning, just to see what we lost. Basically, by unfortunate timing, if we could have sold all of our gold at the quarterly average, we would have realized about $12 million more. So I think in this extremely volatile pricing environment that we had, I'm just going to put it down to bad luck this quarter that we got hit with better and extra $12 million. We often do much better than the average during rising gold price environment. And this time, we did worse.

Do you utilize any interim period hedging to be able to smooth out some of the volatility?

Haven't used any, no.

Okay. And had you been trying to time your sales? Had you been holding back if the gold prices are going down, thinking that might recover, or do you have just a systematic result every -- certain period?

We do not hold it back and try and time the market. We do not have complete control of when we sell our product. In terms of -- we do have a fair amount of gold and concentrate. So when that gets processed, we realized those prices at that time. So we don't try and manipulate the price.

Okay. Because that number is coming through on gold was particularly more than what we've seen in previous periods, I guess. You guys tend to the bad luck of timing.

Also, David, Dmitri has done some work looking at our previous 29 quarters with all these movements, and this was a real aberration from the average of the previous 29 quarters due to the sharpness of the drop in April. But also just bad timing on some of the sales, so it lowered our realized price.

Okay. Now just switching back to Kittila, if I may. When you're talking about the shaft some time out in the future, would you also be thinking about a plant expansion that would go with that? Would you looking at higher throughput and consequently, potential additional autoclave?

Yes. There's a number of scenarios that the Kittila team has been working on. Anything above 3,700 and 50,000 tonnes a day would require an expansion to the plant capacity. So that's certainly also part of the study. The other part of the study would be a second autoclave. We had considered the second autoclave anyways without expansion, just as a risk mitigator, but our sense now is based on the experience we had with the realigning and how quickly we got it back up and running that we don't think it makes sense to spend $80 million to $100 million on a second autoclave just to have some insurance or confident with the one autoclave and its robustness given the fact that it's relying, and we upgraded the internal components there, including the walls between the compartments.

And with that extended downtime that you experienced during the quarter, does that pushed out the requirement for the next scheduled downtime? Or does it influence the availability going forward?

Yes. Well, that's -- the operators can give you some insight there.

We'll continue to have regular maintenance and maintenance to maintain scaling issues with any autoclave and within the process. But we believe that the modifications that have been done will provide for more robustness and the length of the shutdowns would be shorter with that.

Your next question will come from the line of Anita Soni of Credit Suisse.

Just a follow-up on the concentrate pricing, but we should take this offline. I just want to know what the actual realized prices were for each of the metals this quarter?

It's -- I heard that. It came a bit muffled. You're looking -- you need the average realized prices for the main metals?

Yes, for the main metals in the concentrates at LaRonde.

We're just getting a sheet here.

Anita, that's in the press release, I believe, the realized prices, but...

I'm drilling out sort of specifically at LaRonde. If I can -- I just want to separate out the sort of the concentrates, quarter-end, quarter-end pricing that I know impacts you and just sort of the rest of the operations, but you can send that another time. And then, just also on Kittila, a follow-up question in terms of the maintenance for next year. Is that a 44-day shutdown? And is it back to its regular sort of Q1, Q3 pattern of split or has is it shifted a little at this point?

We'll continue with roughly 5- to 8-day shutdown per quarter over the next few years, I think.

5 to 8 days, and that evenly spreads each quarter?

That's about right, yes. It will vary as per the sequence, but that's about the average rate that we'll be looking going forward.

[Operator Instructions] Your next question will come from the line of Carey MacRury of TD Securities.

I had a question on Meliadine. Given the pullback in metal prices, I'm just wondering what your current thinking there is in terms of what development options you guys are considering?

Well, the current thinking there is to continue working on the -- updating the feasibility, which will be finished in the first half of next year. That processes is ongoing. We're continuing to drill it now. So we'll be updating our reserve and resource. And as we indicated, we've had to continue to get good drill results. As far as our scenarios, what we've been discussing with our team there is to present us with options and review options of different throughput rates and different throughput rates from underground versus open pit. So that's what we continue to do there, is look at the options and the drilling is dictating where some of the emphasis is. So we're looking at different options, which would give us different capital results, and that will help us because we're looking at maintaining our financial flexibility. But the objective, the way I look at that one is that we're less concerned about the exact start date of that project and trying to get the right mix and blend at the start and try to make it scalable as we can because it's a large structure, we still only drilled about 10% of that project area on the 100%. So we're taking a long-term view of that asset.

Your next question will come from the line of Tanya Jakusconek of Scotia Bank.

I have a question just on the cost cutting, and I don't know if Sean or Dave is going to take this question. Just on looking at your cost structure, some companies have been saying that they are starting to see some release either in their labor cost consumables, other and also, I wanted to talk a little bit about the sustaining capital in terms of what could be cut from the $200 million to $250 million. So maybe just on those major items. What are you seeing in your cost structure?

Well, we're certainly seeing less input price pressure, but it's dependent on location of the operation and the type of operation. So I think that's consistent. We're seeing good cost per tonne performance across the mines, which is also a good sign. Labor is selective. It's still very competitive in certain parts of where we're doing business, so we continue to look at that.

But Sean, are you still seeing that sort of 3% to 5% wage inflation for your labor?

Where we saw it last year and where we get to this year, I think we're seeing some moderation in some of our areas of operation in terms of bonus structures and performance incentives. And I think that's positive because it's certainly down from where it was a year or so ago, when it was a very competitive and there were incentives being paid to induce workers to leave. So we don't see a lot of that anymore in the main area of operation.

And then maybe just in your consumables. Maybe in your cyanides or your tires or some of the other key items, are you seeing some of these there?

Well, were seeing some small declines in certain areas. We're certainly seeing an opportunity there to reopen some of the contracts, which we're actually engaging at, at this stage of safety [ph]. The context is making it favorable to renegotiate certain contract barriers, and we're looking into that at this stage.

And what about your maintenance?

What specifically on the maintenance side are you referring to?

Some of the companies use contractors. Would you be doing all of your maintenance in-house?

Our maintenance is done in-house. We're also looking at parts availability from major suppliers that are also going down. So it's all part of our contracting approach.

Okay. And then what about just the sustaining capital, which, I know, Sean, you mentioned was $200 million to $250 million a year. Is there much to be able to cut from that?

Well, that's an exercise where we're going through during the budget in life of mine planning process. That type of stuff is largely deferrals, and the mines will make a case that they need a replacement component or truck or et cetera. And so that's an analysis where we look at what could you do without that for 2 years to work it out. So it's more of that exercise, and we have to do that in more detail as we go through the normal budgeting process.

Okay. And all of these new budgets that you're talking about, would they be available to us probably when you report your year-end number. So that would be February of next year?

It's normally what we do. The process is underway now.

Your next question will come from the line of Steve Parsons of National Bank Financial.

A couple of questions, Sean. First off, on Kittila [ph]. Just to dig into some of the details and the cost increases there. It looks like cost increased by about $200 an ounce from last quarter. I believe some of that, obviously from the lower silver price. Is there anything else happening there that would explain the higher cost and if so, is that going to get pushed to subsequent quarters?

Well, the direct operating costs are basically flat quarter-over-quarter, half-over-half. They're not going up. Our costs are always dependent on the proportion of how many times they're coming from an underground mine or an open-pit mine and how many are being milled and how many are being heap leached. So on the cost-per-tonne factor, there's lots of inputs into that. I'd like to look at the direct operating expense, but -- which is relatively flat. But for Q2 specifically, silver price for sure and then there was some stockpile adjustment as well. So both of those worked against the cash cost per ounce number.

Right. Okay. And then, on LaRonde there was a big drop in zinc production there in Q2 and obviously, with lower zinc prices and provisional prices as well, you got hit. But how does that couple of quarters look? As you're sort of the moving towards higher gold grades, are you really going to see a drop-off in the zinc grades as well somewhere to Q2 and consequently, you could see elevated cash costs for a couple of quarters?

As we continue to move into the deep portion of the mine or the zinc grades will go down and the gold grades will go up. The cash cost that were shown in our guidance are essentially going to be met going forward. Assuming that metal prices start -- there's no more fluctuations in metal prices.

This does conclude the question and answer session. Mr. Boyd, I'll turn it back to yourself.

Thanks, operator, and thanks, everyone, for participating in our Q2 2013 conference call. And as we mentioned, I'm not sure if there's much room left, but if anybody has an interest to go to La India in September, you can contact our Investor Relations group. Thanks again.

And thank you. Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and you may now disconnect your lines.