Agnico Eagle Mines Limited (AEM) Q2 2016 Earnings Report, Transcript and Summary

Good morning. My name is Kirk and I will your conference operator today. At this time, I would like to welcome everyone to the Agnico Eagle Second Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Sean Boyd. You may begin your conference.

Thank you, operator, and good morning everyone. Welcome to our second quarter 2016 conference call and thank you for joining. We know it’s an extremely busy time over the last 24 and the next 24 hours for everybody. I would like to start and just give you a brief overview of the quarter. We continue to make very good progress on several fronts on operational improvements, on advancing key development projects, on strengthening our financial position and on expanding several of our deposits through exploration success. From an operating perspective it was an important quarter because we set another safety performance record. In the quarter we had the fewest last time accident since we’ve been reporting on that basis from a safety perspective. And that’s important because we’re a bigger company, more employees, lots of activity across the board and we are doing it safer than we’ve ever done it. So that’s great. And I want to thank our employees for that focus on not only their own well being but the well being of the employees they work with. From a production standpoint another really good quarter over 400,000 ounces produced at cash cost little below C$600 an ounce. As a result of that performance getting to the second half of this year we have upgraded our full-year production guidance to between 1.58 and 1.6 million ounces previously at this 1.565 and we’ve slightly lowered our cash cost estimate and our all-in sustaining cost estimate. What that has allowed us to do with the strong start to the year is to continue our quarterly efforts to reduce our net debt position and improve our financial flexibility going forward. So we are able to see a significant reduction net debt down to C$742 million and our investment grade credit status was reconfirmed in the quarter with Dominion Bond Rating Service. Agnico has a long history of paying a dividend. We paid a dividend for 34 consecutive years. We have increased the dividend by 25% this quarter and that’s simply a reflection of the confidence we have and our ability to execute on the growth plan going forward and the good work that we’ve been doing in terms of improving our financial flexibility over the last for the while. And I think more important for us, we were able to improve that financial flexibility and still invest more in exploration, still keep our key projects moving forward and still maintain that strong positioning to deliver a 30% to 40% growth in production we see five years from now. We’ve received the final permit for Meliadine project that’s a fully permitted project, we continue to update the economic analysis, we continue to optimize the construction plan and will have all of this work completed by the year-end and will be going to our Board early in 2017 with recommendations on the entire Nunavut platform including Meliadine and Amaruq the satellite deposit for Meadowbank. Exploration wise we put out a separate release. We’re active on a number of fronts, we continue to get extremely good results across the Board and I will talk about a bit of those results as we go through the presentation. Just on the operating performance by mine, the performance in terms of production our ability to maintain costs and the increasing gold price in the quarter drove an increase in total operating margin up 15% from the first quarter to C$282 million that was at a realized gold price of C$1,230 an ounce. So we would expect further growth in that total operating margin in the second half of 2016 based on current gold prices. From a financial position perspective we are seeing our ability to not only reduce net debt but the debt markets and the low interest rates allowed us to issue C$350 million of long-term debt in the private placement markets that had an average tenure of a little less than 10 years at a weighted average interest rate of 4.77%. So that cleared our total credit facility, we now have C$1.2 billion available under that credit facility plus a C$300 million accordion facility available to us. That puts our net debt as a percentage of market cap at single-digit, so very strong balance sheet net debt-to-EBITDA based on the net debt position and our EBITDA going forward, that’s the one. So a good strong position and a very manageable repayment schedule. From an earnings perspective, we can do better than consensus simply driven by good solid production and good management of our unit costs. Good steady performance and great cash flow per share, which we expect to improve on as we lay out our growth plans for the Company. As far as the specific assets starting with LaRonde another very strong quarter for the second consecutive quarter. LaRonde has had the largest total operating margin of any of our mine. So even after all of these years starting production in 1988 it’s still performing extremely well, it’s still a major contributor to profits and cash flow and it’s only going to get better from here on in as we access better grades from the lower mine. It clearly remains a key building block for us going forward not just from a growth and production perspective, but also from a cash generating perspective. And the LaRonde complex has the potential to produce over 400,000 ounces on an annual basis as we access higher grade ore from the lower mine and as we potentially develop the Bousquet 5 Zone which has been dewatered. We are going underground, opening up that. That study should be done by the end of the year and we will be able to provide more clarity on our plans for Bousquet and how they fit into LaRonde early in 2017. Canadian Malartic, our optimization efforts with Yamana our partner are starting to see very good results. We had record processing rate in the second quarter exceeding 55,000 tonnes per day, so that’s up 10% in terms of throughput going through the plant from a year-ago. We continue to move forward on the permitting for the Barnat extension. We’ve had public hearing, so that process is moving forward as we had expected. And one of the reasons we were interested in this opportunity back in 2014 was the potential of the Odyssey Zone of north and south. We put out some of our early drilling on Odyssey. We expect to have a resource on Odyssey in February 2017, when we put out our year-end reserve update. So we are seeing some good results there. What that resource will allow us to do is start looking based on our experience at Goldex, dealing with large mining, let's put together possible development scenarios on Odyssey and see how it may fit into the overall Canadian Malartic plant. Just in terms of the Zones, we’ve outlined both the north and south zone. And as a result of the good results that we’ve announced yesterday. The partnership is going to allocate more resources to that exploration effort. We feel that it’s an important part of the Canadian Malartic value creating story and we want to know as much about it as quickly as we can to work on various scenarios to integrate Odyssey into the overall Canadian Malartic plan. At Goldex, it continues to perform at levels much better than the feasibility study. In a number of areas mining rate, development rate, cost per tonne had a very strong production quarter of over 30,000 ounces. Cash costs approaching C$500 an ounce all-in sustaining costs a little lower than C$650. So very good cash flow generator, hoisting performance about 13% above budget, very good development performance. The development of the Deep 1 Zone remains on time and on budget for start early in 2018. And that's an important part of our ability to extend the mine life and grow production. And we are also engaged in the permitting process of Akasaba, which can also add good quality ore from a satellite deposit in the vicinity of the Goldex processing facility. At Lapa, it is winding down, but we see some potential to potentially keep it going a little bit longer than the original plan. So the team is continued to work on ideas to maximize that assets, but I think more importantly the efforts of the team there were recognized in Quebec with the awarding of the F.J. O'Connell trophy which is a prestigious award for safety in the province. So despite the fact that I’d say very short mine life the team continues to strive for excellence not just in production, but also in terms of safety. At Meadowbank, good cost performance, despite the lower production volumes. In the second quarter, we produced about 72,000 ounces of cash cost a little under C$800 ounce as we mine largely in the Vault pit we are seeing slightly less grade. Studies are underway to possibly extend. Production at Meadowbank beyond the third quarter of 2018 and that would be nice. Our Board of Directors was at the site this week for two days at Meadowbank, at Amaruq and at Meliadine and we have got a chance to talk to the team at Meadowbank and discuss some of these ideas that could add two or three months to production and just trying to maximize that asset. We continue to work on the access road to Amaruq has proceeded about 13 kilometers. We expect that road to be done by the end of 2017. We have applied for the permit for construction of Whale Tail and that will go before the Nunavut Investment Review Board. We would expect to receive the permit in about two years time, which would allow us to start production at Amaruq and start shipping to Meadowbank in 2019. We have seen some important drove results at Amaruq which we put out in the press release. The interesting thing about Amaruq is part of the process. Our objective for 2016 was to find a potential second source of open pit ore to maximize the processing capacity that exists at Meadowbank. The mineralization at Amaruq continues to grow. The drilling has focused not just on delineation of Whale Tail, but also in the V Zones which is just a little bit Northeast of Whale Tail and the V Zones mineralization extends the surface. We are getting high grade mineralization in that V Zones area is continuing to grow. We have a slide in the deck on the expansion of the V Zones and what we are seeing there is an ability to not only add a second source of pit ore, but also have high grade. And the way we are thinking about that possibly sloughing in is in the early years of production at Whale Tail. We are hopeful that as we get more information on Amaruq that we could use this as a potential source of higher grade ore at the Whale Tail deposit and move that ore down to the Meadowbank plant. We will have an updated resource on Amaruq in the third quarter and then a further update of the resource in February of 2017. The update that we got so far only includes a few holes. We've done an internal update, so there's many more holes that are still to come here and we would expect the V Zones to continue to grow. At Meliadine, as we said it's fully permitted. We continue to work on the studies and we continue to look at Meliadine in the context of the overall entire Nunavut strategy, so the focus remains on looking at ways that we can optimize construction capital as well as work some of the large resource into the mine plant. So those efforts continue and we will have an update on that early in 2017. At Kittila, continue to get good performance in the underground; we are working on studies that should be completed by the end of this year on mining and processing. Our rate increases anywhere from 1.6 million tonnes to 2 million tonnes a year. And that's largely driven by the fact that we view the Sisar Zone as a potential third source of underground ore, so that would give us the flexibility underground to increase the mining rates and then increase the processing rates. I should mention as we are talking about Finland that we did have some very good results at Barsele in Sweden. So we would look at that as a potential opportunity for us to expand our operations in Europe. Although, it's early, we have extended the mineralization along strikes. It looks similar to Goldex in terms of thicknesses, slightly better grade, so we do have the in-house experience to mine a deposit of that type. Moving to the Southern Business with Mexico. The combined business generated in the Southern Business with the three mines in Mexico C$83 million in operating margin in the quarter. So continued low cost production, Pinos Altos cash costs C$348 an ounce so very good cash flow generation at the Pinos Altos mine. At Creston Mascota we had good performance but we also picked up an additional piece of ground in between Pinos Altos and Creston Mascota called Madrono. We've been after that piece of ground for many, many years we were able to work a deal with the same family that own Pinos Altos. So that's something that we feel could come into our production pipeline as we get more information mineralization on surface. We started the drilling on that project and its proximity to the Creston Mascota and Pinos Altos operations would keep the overall cost down that's essentially right in the middle of both operations. At La India very good cost performance under C$400 cash cost per ounce, so solid 27,000 ounces of production coming out of the quarter. And just an update on El Barqueno continue to drill a number of structures. We’ve announced the Olmeca structure which has been traced over 700 meters very good grades. We've been able to acquire some surface rights in that area. As a result we were actually drilling that for a few quarters. Got a good feel for that and that could become more important as we continue to drill that part of the El Barqueno property. So just in general we've had a good quarter from an operating standpoint. We continue to be focused on growing output over time but doing it in a very steady and measured and focused fashion. We have been positioning our balance sheet very carefully from the perspective of reducing debt in terming out the debt and that will position us internally to be able to fund our growth plan. So all-in-all a good solid steady quarter. I want to thank our employees for that the great effort and the excellent results. And operator, please open the line for questions.

[Operator Instructions] Your first question comes from the line of Andrew Quail from Goldman Sachs. Your line is open.

Good morning, Sean. Thanks very much for the update and congratulations on a very, very strong quarter. Again, first question is on Malartic obviously you guys have been trying to get up to that that [indiscernible] capacity for a while. What was it that got you that 55,000 tonnes today that you guys have been trying. Was it the growing size or what was it?

Well, I think it’s a combination of factors Andrew. The team over there has been working a lot on the side goal and on the crushing configuration. I think one of the bigger impact is also on the maintenance side they worked a lot on the maintenance availability of the plant. Configuration is secondary, crushers where we've been able to push better quality product from the machines back to the side bill. So its several factors it's a combination of between this improvements initiatives that are part of the exercise. Some of it also is cyclical and dependent on some ore hardness profile as we mined various zones in the pit, very happy with the performance in the quarter.

Yes. It’s great. Do you think that sort of bankable or sort of you know able to be achieved in the next few quarters and into perpetuity?

The budget is at 53,000 for the rest of the year and I think 53,000 is pretty sustainable. But keep in mind that the ongoing target at 55 depends on key permits that will be delivered in next year and to be put us in a position to improve our pre-crushing capacity over there.

Just moving on to Amaruq obviously looking forward to the update this quarter on the exploration, but Sean with the construction of that the excess rate, how much is it going to cost you over the next couple of years. Is it minimal or what’s…?

That’s about C$70 million or C$80 million in that range and that gets expense – make us expense side.

And that will be done by the end of next year?

Yes.

Great. That’s it. Thanks.

Thanks Andrew.

Your next question comes from the line of Stephen Walker from RBC Capital Markets. Your line is open.

Great. Thank you. Just a couple questions starting with Amaruq, the V Zones coming together very nicely and looks like it's got some continuity comes to surface? Is that going to be permitted in conjunction with the current Whale Tail permitting, so you'll be able to begin mining that in conjunction with Whale Tail? And as a follow-up to that, almost given – you don't have to drain any major lakes or water bodies north of – in the V Zones area. Could that potentially be mined in 2018?

No. It has to be an amendment to the original permit which has been submitted for the Whale Tail construction. And at this point, we still don't have a published resource on it. We will have a published resource, the initial resource in the third quarter. We will have an updated resource in February. It continues to grow. There are several lenses. Our expectation is that it could potentially start two years after Whale Tail, all driven off of permitting, but what we're seeing now is it’s got that potential to be able to deliver higher grade to that plant. And there are still a number of areas on that. Alain is raising his hand here, so he has got some color and update on Amaruq.

Hi, Steven. The lake is very – too small lake when we compare with the bigger lake that we can get a little bit. And we are not looking the location of V Zones to looking for a second source of material for the project; I will say probably it’s the best place to find something close to [Vault], close to the ramp and close to the camp that we are designing right now. I think we're a little bit sluggy and what mentioned from that doesn’t can be increase to the east. And the last well that we drill is at 400-meter below surface and we hit again V is [military lenses], and I can tell you two that we intercept is better or higher grade [indiscernible].

That’s very helpful. Thank you for that. Any chance of a bulk sample?

The [indiscernible] six rig, two are in the regional program and three are concentrating to increase the footprint and what we try to do is with the next result calculation to help the studies.

Okay. Thank you for that Alain. Just on Meliadine, on some of the long sections there's a portal number two that’s been illustrated. When do you expect to begin coloring that in development of number two portal?

Development strategy for next year, we will likely start the development of that second ramp access.

Okay. That’s 2017 for that capital, okay. And just finally with the exploration success at Barsele, north and south Odyssey and those grades that are associated with some of those deposits and the similarity with Goldex. Can you talk a little bit about the cost savings, the Rail-Veyor system is going to result in at Goldex Deep 1? Just want to get a sense of the benefit of the Rail-Veyor system that you're currently installing and the work that you've done on cost savings that it could bring. I don’t know Yvon if you can speak to that.

Yes. I guess it's difficult to comment on that at this stage. The main reason for installing the Rail-Veyor is mainly to reduce our CapEx involved and get an access to the ore zone quicker. So I think that's the biggest benefit, we've been able to – without keeping the shaft and incurring production disturbance, we've been able to advance the development of that zone by year by installing the Rail-Veyor concept. So time will tell what’s the operating costs, what we're seeing now is that the – they will be putting us in a position to maintain our current OpEx numbers at close to 1.2 kilometers in depth, but we need to validate that as we operate.

Okay, great. That's very helpful. Thank you for that.

The next question is from David Haughton with CIBC. Your line is open.

Good morning, Sean and team.

Good morning.

Thank you for the update. I guess my question is a sort of exploration related. Looking at Page 15 of the presentation just thinking about V Zone, it seems to be filling out very nicely. The mineralization that you are seeing in the V Zone, is it similar to what you are encountering at Whale Tail?

Not really. Exactly speaking. In Whale Tail we are more talking about something that is all said in our information whereas in the V Zones it’s clearly a set of [vein – course vein with lot of free gold in it], so in that sense it's different.

Okay. And just looking at this diagram again is it still open to the Northeast and Southwest?

Yes, it is. We are currently continue to investigate the Eastern portion because we can expect that it would be multiple [indiscernible] that vein that we see in the V Zones system and as Alain mentioned previously still open – we’ve got hole in it that 400 meter below surface.

And on a similar thought here Whale Tail, is that also open to the Northeast?

Yes, it is still open to the Northeast and at that point in time, we saw more benefits of drilling near surface to identify the second source of open pit ore as opposed to continue to drill at Whale Tail, but we are still in the zone, it’s 600 meter below surface in the Whale Tail deposits.

Okay. Just switching over to Odyssey if I may, if refer to going to its being amenable to Goldex style mining. I know it’s still early days, but would you be thinking if this as a supplementary feed to Malartic or could you see it as possibly justifying an expansion at Malartic to accommodate the ore?

Well, I think at this stage it's really early to comment, but I think the idea is to get some decent tonnage and perhaps double the grade first then we're getting from the pits and sort of slowdown in the stripping in the – both the main Malartic pit in the Barnat pit to just improve the overall economics of the site. So that's the focus at this stage and we've created a dedicated team to sort of focus on these studies going forward and also looking at satellite, underground satellite length is around the current Malartic pit as well.

Okay. A little bit earlier you had mentioned that you are seeking permits to have sustained throughput at Malartic of 55,000 tonnes a day, would that permit accommodate for even greater throughput than the 55,000 or you only going for that level?

No, we're targeting the 55,000 for now.

Okay. Thank you very much. It’s helpful.

[Operator Instructions] And the next question is from [indiscernible]. Your line is open.

Thank you, Sean for the update. And congrats on the good quarter again.

Thank you.

Quick question on Amaruq. Have you guys given much thought to the type of trucking operation you're going to be doing for once Whale Tail is up and running in 2018?

In terms of transport to Meadowbank?

That's correct, yes. I was looking at cycle times and just figure that you might need an increase from your existing fleet at Meadowbank. And I just want to know if you thought of a plants around that?

Well, at this stage what we see from the Whale Tail pit studies is that the production from that area will essentially meet the current equipment fleet that's present at Meadowbank without needing to expand it. Having said that the 60 kilometers distance between the two sites will require dedicated transport fleet for ore only and that's part of our ongoing study and evaluation, but we would have a dedicated team just to truck the ore.

We bought four new trucks at Meadowbank last year, haul trucks for the open pit and that was partly done knowing that we would be developing the satellite pit at Whale Tail.

Perfect. And then just a follow-up, would that be the 100 tonne or 150 tonne?

Well, the haul trucks on the road we were looking at now some white train type combination in trucks anywhere around 100 tonne capacity.

Perfect, great. That’s it for me. Thank you very much.

The next question is from Anita Soni with Credit Suisse. Your line is open.

Good morning, guys and congratulations on a good result.

Thank you.

Thanks. I just want to ask a question with regards to Amaruq and I'm just wondering what are you envisioning right now for sequencing of these two pits at this point?

Well, the Whale Tail comes first, that's the subject of the permit that was submitted a few weeks ago and we expect that to be in production in 2019. As we continue to drill V which is looking like it's becoming more important. We still need to put our resource on it and put a mine plan around it before we file amendment. So our best guess is that V would start a couple years after the Whale Tail starts so sometime in 2021-ish or so but again that's subject to the permitting process, but we're working hard from an exploration point of view to get as much information as we can on V to calculate that resource and to put a pit outline around it and then file for the permit amendment.

And my second question is with regards to the Malartic exploration at Odyssey some good drill results there. How do you see that sort of sitting into the whole Barnat Malartic mine plan at this point? In terms of sequencing?

Well I think it's all part of the ongoing life of mine improvement overall at Malartic. We’re looking at the full potential of the property. At this stage we've gone through the permitting varies with Barnat and things are moving as per the schedule and we're continuing to optimize the pit sequencing at both Malartic and Barnat to improve the studies. But at this stage there hasn't been a major change to the mining sequence and as we move studies further in 2017 we’re most likely going to be in a better position to answer that question more specifically.

All right. And then last question on another developed project or exploration project that you have. Meliadine you received the last permit there so what's the next phase in sort of when do we expect another catalyst out of that or is that sort of in a optimization and sort of holding pattern mode at this point?

While it's in an optimization mode in terms of moving some of the resource into a mine plan and also from the perspective of fine tuning the construction plan and program. And we expect that to improve the project. And one of the reasons to bring the Board up this week, so they can get an update on some of our thoughts there and where the emphasis is on what we're sort of focused on over the next six months. So that study and all that work should be completed by the end of this year.

All right. My apologies if you've covered [indiscernible], I jump on this call late.

No problem.

Thank you.

Showing no further questions at this time. I'll turn the call back over to the presenters. My apologies, we do have one from Steve Butler with GMP. Your line is open.

Steve, welcome back.

Thank you very much Sean. It's great to get back as I said on the [Nigel] call especially after five guys reporting last night, a lot of fun.

We did it on purpose.

Exactly. Thank you.

We were in a hurry.

Anyway speed reading is required. On the V Zone, do you guys remind me again is our resource on the V Zones at Amaruq and what is it?

Well, there was a small resources that year-end last year of about 200,000 ounces at about six gram, but when looking back at it then having a better understanding of the shape of the Zone, we managed to track the [indiscernible] extension of the original structure and find some more parallel zone which and then significantly the whole concept of that area. So that’s a lot it for now and we'll have a better update – we have an update in the third quarter as mentioned by Sean previously. So we're working hard that I think as much to whole weekend. It’s been our primary focus of building this year and we expect this year good outcome of that area with a number you’ve seen in the press release.

Okay. Guys. That’s it. Thanks. End of Q&A

And no further questions at this time. I’ll turn the call back to the presenters.

Thank you, operator and thanks everyone for your time and attention this morning. Take care.