Agnico Eagle Mines Limited (AEM) Q1 2017 Earnings Report, Transcript and Summary

Good morning. My name is Sharon and I will be your conference operator today. At this time, I would like to welcome everyone to the Agnico Eagle First Quarter Results 2017 Conference Call. [Operator Instructions] Thank you. Mr. Sean Boyd, you may begin your conference.

Thank you, operator, and good morning, everyone. And thank you for joining our first quarter 2017 conference call. Before we get into the details of the presentation, just want to point to a couple of forward-looking statements in our slide deck because there will be some projections and forecast in here and please read the detailed language. Just touching on some of the highlights, clearly it was a great start to 2017. Not that surprising to us, given that we actually had a really strong close to 2016, producing about 420,000 ounces or so in the fourth quarter. So the mines continue to perform very well across the board. As we said, production almost 420,000 ounces in the first quarter of 2017, very good total cash cost at $539, all-in sustaining cost at $741. Now part of that all-in sustaining cost number was due to just spending patterns in the year, so we do still expect to spend the entire capital forecast including all of the sustaining, which would see sustaining number move up over the balance of this year. As a result of the strong start from a production standpoint, we have now bumped our guidance to 1.57 million ounces. We expect to exceed that number, it was previously at 1.55 million ounces. We simply just added the additional quarter that we've seen coming out of Lapa. They've been able to extend the life of the mine. It was originally slated to close in October of last year. So the team there continues to do a good job generating additional cash flow. That job is made easier because the Canadian dollar gold price continues to be over $1,700. So they continue to look at ways where they can maximize the asset sort of in closing days and they've done an exceptional job there. At Canadian Malartic, we'll talk a little bit more about that. And we have the full team here that can answer questions. The Quebec government approved the project, the extension into the Barnat area. We expect that to begin in late 2019, or early 2020. Goldex continues to perform very well, not just from a production cost standpoint, but also in terms of developing the lower part of the mine in Deep 1 and we're about a quarter ahead of schedule on that project and we're slightly below budget. And Nunavut, we continue to move those projects forward. Amaruq, we continue to see good drill results. We'll talk a little bit about that. We're identifying the ability to extend Whale Tail to the west. Also have done some infill drilling on V Zone, continue to get good results there. And we've got a lot more drilling to do for the balance of the year. At Meliadine, we've got good performance, underground development and that's a good sign because we switched over from contractors to Agnico personnel last year so that's working the way we had expected it to do to improve the productivity we were seeing in the underground development. Construction activities on service are proceeding well, targets on track. And I think of note is we're restarting regional exploration on Meliadine and we've haven't really done regional exploration there for several years. So we'll have a number of targets that we will be drilling and I think that project given that it's on an 80-kilometer greenstone belt certainly has a lot of potential beyond the 10 million ounces that's currently in reserve and resource and we declared our quarterly dividend of $0.10 a share and this is the 35th consecutive year of paying a dividend out at Agnico Eagle. Just in a little bit more detail on operating results slide. As we said, we had very good performance across the board at all of the mines. Good cost performance, good production. We're tracking extremely well as we said to our guidance of 1.57 million ounces. We're also tracking well in terms of our cost guidance and we feel by the middle of the year, we'll have a better sense of how that will sort of come out for the balance of the year. It's a little bit premature to adjust the cost guidance now, given that the exchange rate has an impact on those unit costs. But based on start of this year, we're essentially tracking below that guidance. I think of note on the cash flow, very strong margins as we said the contribution across the board. The mines generated $307 million, that's at a realized gold price of $1,223 and the realized exchange rate on the bulk of the production of the Canadian operations is CAD 1.32. So we're certainly tracking above that, both in terms of gold price and the exchange rate. So that bodes well for the balance of the year. As a result of that, we have a very strong financial position, a lot of financial flexibility going into this building phase in Nunavut and at the other projects. Cash position at the end of the quarter at $804 million, our net debt at $465 million. So a good position to be spending $850 million essentially in 2017 and about $950 million next year to largely get Nunavut platform up and running. So we can manage that by the cash on hand and the cash that's being generated from our operations. The next slide is just highlights on the cash flow. And significant improvement over the first quarter of last year, almost $1 per share in operating cash flow, so just not a good earnings result, but also a very strong operating cash flow per share result. As far as the mines go, we'll start with LaRonde. LaRonde continues to see increasing grade as we move forward and open up the lower mine. We expect our grades to continue to improve through the balance of the year, so we expect LaRonde to continue to be a strong contributor, not only on the production side, but also on the cost side. We continue to drill the lower part of LaRonde and we continue to focus on the western side and that's to support the studies we're doing at depth to assess the potential to mine below 3.1 kilometers down to a potential depth of 3.7 kilometers. LaRonde Zone V, we're on track, that's the old Bousquet zone. We expect to receive the permits by mid-2018. And we expect to be mining in that area shortly thereafter. At Canadian Malartic, a strong quarter, averaged about 54,000 tons per day. So good cost performance, good production performance, here's an operation as well that we would expect to see improving grades through the balance of the year as we move into the higher grade areas in the north part of the pit. The important news was the government approval as we mentioned at the start to proceed with the extension of Barnett so that's an important development for us and allows us to move that project forward and extend the mine life of that project. We continue to see a lot of exploration upside here, getting good results at Odyssey. Also focused on interpreting old drill holes in East Malartic below the pit and our guys are feeling pretty good about the potential to add additional ounces in an underground context at that operation. At Goldex, as we said, a strong production quarter from the mine and production 33,000 ounces, cash cost as $532. I think, for us, it's about opening up at deeper part of the mine at the Deep 1 Zone. And as we said, we're ahead of schedule and slightly below budget on that. So that bodes well for Goldex over the next several years. We're also drilling the South Zone and also focused on studies on the Deep 2 Zone. So again, just going back to the decision a few years ago to restart the Goldex mine, clearly the right decision. We resurfaced a lot of value there. The team has done an exceptional job of carefully putting that mine back together and operating at below their feasibility targets, both from a production standpoint and also from a unit cost standpoint. So good performance there. And we continue to move forward on the process to get the Akasaba opportunity permitted and we would expect to see first production in 2019 from Akasaba. Lapa, we referred to it, they continue to squeeze out additional cash flow, our expectations, we work on it sort of quarter-by-quarter and we assess it as we move along and take certainly the gold price into consideration. So the current plan is end of June. It wouldn't surprise us if we got a couple of more months out of it, but we will see how that goes as we move through the balance of the quarter. At Meadowbank, again another strong result in the quarter. A little bit less tonnage than we had budgeted. Had a little bit more over challenging winter from sort of blizzard conditions there. But we continue to see good grade there. As a result, a strong production, good cost performance. Our permitting remains on schedule for Amaruq. We expect to receive the permits in the third quarter of 2018. We made very good progress in the quarter on the road. We're currently about 40 kilometers or so along of the planned 64-kilometer road. Drilling, we touched on that a bit. We see good drilling to the west of Whale Tail. We believe we can extend that pit further to the west. We're spending about $22 million on exploration this year. We're also doing infill drilling on the V Zone. We've traced Whale Tail now. It's been defined over a strike length of 2.2 kilometers. We've traced it down to about 700 meters below service. So lots more work to do there, but we do expect that deposit to continue to grow and we'll also be drilling targets in the vicinity of both the V Zone and the Whale Tail zone as part of the drill program this year. On Meliadine, on schedule, on budget for production startup in the third quarter of 2019, as we've been saying, the project is well positioned because we are able to get a good jump on it in the second half of last year from a planning perspective and adding some key people and ordering some critical items to get on this year's barge season. So we're well positioned for a strong season of construction and development this year. No change in the CapEx estimates or the amount that we expect to spend in 2017, which is about $360 million. So again, also wanted to emphasize that we are drilling our regional targets on that property. And we'll update the market as we move through the year. At Kittila, we had another good start of 52,000 ounces, good cost performance. The focus there now is really on the Sisar Zone. We've got a drill program of $7.9 million and the focus there is to define the Sisar Zone a bit better, incorporate the results of that into a study to increase the mining rate and to increase the production rate there. We would expect the results of that study before the end of this year and the team is suggesting that there is potential to see the output at Kittila grow by 40% or so. So they are working through those numbers and that's largely because the Sisar Zone presents a third source of ore from underground. So that will give them the flexibility to increase the mining rate. Moving on to the Southern Business. Again, all three operations performed extremely well, not just from a production standpoint, but also from a cost standpoint. Pinos Altos at 45,000 ounces, cash cost at $358. So we continue to do some construction work on Phase III heap leach pad so that's normal capital expenditures to extend that mine life and we're nearing completion of the silver flotation circuit, which will allow us to recover a lot more silver, which will certainly help the economics and the return of that project. Creston Mascota, we're looking to extend the mine life there. We've good drill results in Bravo Zone, which is right next to the Creston Mascota pit. We also have in the vicinity the [indiscernible] claim, which also has had some good results. So there's certainly a lot of potential there to keep producing gold at the Creston Mascota area for a number of years. And La India, also very good production and cost performance and also really good opportunity. As you recall, we extended and added to the reserve base at the end of the year. There's still a lot of targets in the vicinity of the mine that will be the focus of some drilling work. And that's a mine that we would also expect to extend and add mine life based on the drilling activity. So that's a quick rundown of the quarter. We've got a much bigger than normal team here in our board room due to our annual meeting. So there's lots of expertise around the table. So operator, we'd be happy to answer some questions.

[Operator Instructions] Your first question comes from David Haughton from CIBC. Your line is open.

Just got a few questions. Looking at Amaruq, you've given a little bit more detail about the timing of the various pits, Whale Tail and into the V Zone. Is that it kind of a slight revision to your thinking about the sequencing of the mining there?

Yvon, will take that.

Hi, David. No the sequences are basically dictated by the permitting and the EIA process and the schedule has yet to change. As we advance the exploration program in the E Zone, we'll - we are also in parallel doing the first EIA on Whale Tail putting in the Phase II of Whale Tail pit and then the V Zone EIA. So it's just a sequencing issue, but no change in schedule at this stage.

Okay. And the permit to do the exploration ramp, I take it that's going to be of a production quality, so it gives you flexibility to move to underground mining scenario. We've currently been assuming potential for underground mining in 2021, is there potential for that timing just sort of change?

I wouldn't say that at this stage. And it's - you're correct on the ramping not just an exploration, but with the mining of production going forward. But at this stage, as we get underground and we start drilling, we will better define the exact timing of the underground opportunity. But the rough timing is probably plus or minus, plus a year from maybe what you're saying at this stage.

Okay. Over to Malartic, it's good that you've got the permit now for the highway diversion, is that going to be a spend in 2017 or is it more 2018? And if it is '17, is that captured in your guidance for CapEx?

Yes, we have several actually. From Malartic, for sure there's a part of it that is included in our current forecast. But as you know, we've got the decree, but trigger the authorization of CLA. So no construction should start before end of summer. So we will start with the deforestation so it's not a big spending. But the road construction is a two-year project. So it will be spread over the next two years.

Okay. Are there any additional permits to access that Barnat ore body, once the diversion has taken place?

No. We have received a decree. So the first one was mainly to - for the road deviation. And the second one is modification of the operation decree that will include all of the expansion including those Barnat section. So then after, we have to go to CA, when we're going to have all the CA, so 23 of them, so we will have all of our permit in hand for the operation.

Okay. And switching to another asset, to Kittila, the Sisar zone looks like it is shaping up rather nicely. Can you give us a bit of pictures to what it looks like. Is it similar kind of grade to the reserves that we see at Kittila, would we expect any additional enhancements to the mill to be able to handle 2 million tons per annum and what sort of timing might be in your mind here?

It's Alain. David, when looking Sisar Zone, Sisar has a [indiscernible] feature that the main feature is Suuri and what they did in the first quarter, the infill deposit and to be more confident about the quality of the resources. But when looking the grade, it is looking little bit higher that the guide mine right now.

And the mill can handle that kind of throughput?

No, at this stage, we'll have to do slight modifications to the plant, and we're in basic engineering at this stage. And I think on the concept around this 2 million tons per year concept. We'll be mining roughly 500,000 tons from the - or a little more from the Rimpi area, about 1 million tons from Suuri, Roura and roughly 500,000 tons from the Sisar area that come up with the 2 million tons per year.

And if everything works for this concept study, what sort of timing could we be thinking about that?

Ramping up to 2 million tons past probably '19 to 2020.

Okay, lots of things happening between now and 2020 for you guys.

Right, yes.

And last question, if you don't mind. Pinos Altos, looking at the silver float. What sort of cost is expected in that and what kind of recoveries would you expect from the better capture of the silver?

David, I can't - I don't have that information on hand right now to be able to answer that.

No problem.

We can get it to you. But right now, we just see that it will be enhanced, we'll see how it goes.

I think the expectations is about 0.5 a million ounces more of silver a year, and it's not a lot of capital.

It's not really a big project, I appreciate that. It's at the margin.

Your next question comes from Steven Butler from GMP Securities.

Sean, Amaruq was an indicated resource into open pit and underground at around 3.3 million ounces. Do you guys plan to initially declare a reserve at the end of this year, or you're going to wait to 2018 to declare a reserve - initial reserve?

Yes, we're planning to declare reserve at the end of this year. As you can see in the first quarter, we infilled the V Zone to bring in to indicate that the program is completed now. And we did the same thing for Whale Tail, we infill to infer resource. And we will extend a little bit the deposit to the west of Whale Tail, but the plan is to bring to the reserve at the end of this year.

Your next question comes from Mike Parkin from Desjardins.

On Meadowbank, can you just give a bit of a color on grade being higher, was that expected? What was the planned grade and positive grade reconciliation?

Well, I think, there is a combination of factors. We did some mining back into the Portage E pit, which has generally been known for higher grades, little more tonnage or high grade from the - from the pit A in Portage as well. We've had positive grade reconciliation in some of these 2 pits. And we've also been mining higher grade than reserve grade at Vault in the quarter. So it's just a basically a mining sequence for the quarter.

And is that - for the remaining reserves, are you going to be in the zones where you could have that potentials still going forward?

Well, we will be - we're expecting to make guidance at Meadowbank for the rest of the year. So we're not, whatever we put out there and then we've got on paper for now we've got 6 months of production - 9 months production next year for depletion of the pit. So we're just going to be essentially mining published reserve grade at this stage going forward.

Okay. On Canadian Malartic on the Barnat Zone what's your thoughts towards how you approach that - would you be looking to blend it, and if a recall correctly, it's got slightly better grade than the pit you're in right now and the ore is softer. Do you feel there's potential that you could push the mill above 55,000 tons per day once you access that zone?

At this stage, we don't feel that there's going to be very big difference in hardness profile with 2 zones. We will be progressively be blending Barnet with the added depletion at Canadian Malartic. But at this stage, we're not expecting to surpass the targets.

Okay. And then with Lapa, Sean mentioned that it's somewhat Canadian gold price dependent how long it goes. Do you see the potential that if the Canadian gold price remained high, you could push it further? And would it justify putting a hedge on to insure that, or is it marginal kind of ounces and you're not interested in doing that?

That at this stage, we're mining all in at $850. So it is pretty good number. We're seeing a potentially production into Q3, but after that, we're not expecting any production out of Lapa officially for this year. We may be - as we continue to complete the closure of the underground operation, we may be stockpiling in parallel some ore for next year but that will be probably be the end of Lapa production, potentially at the end of Q2, or maybe sometimes into Q3.

Your next question comes Anita Soni from Crédit Suisse.

Just a couple of quick questions on depreciation and capital. So depreciation, it seems like you guys were running a little bit below the quarterly average run rate, I guess, at $580 to $610 for the entire year, right? And I think you did $130, will that pick up over the course of the year?

Hi Anita, it is likely that we're going to look at that rate as we go through the rest of the year, it's definitely well below the run rate. We're just not comfortable as of this moment changing this guidance. But we have more tons at La India and Pinos Altos and as we refine those mining plans over the next couple of quarters, we will come back to you on that. But I agree, so far, it looks like we've been a little conservative on that guidance.

Okay. And then capital, as we think about capital, everyone, sort of understands that Q1 is a low run rate for everyone. For you guys, is it more bulked up towards Q2 and Q3 with the shipping seasons it - up into Nunavut?

You are correct. I think historically, both on the sustaining and growth side. We tend to be lower in Q1 and as the bulk of the growth spending this year will be towards Meliadine, so a lot of - the increase will occur in Q2, Q3.

And probably more related towards Q3, when does it thaw out there? Like when can you start shipping?

Well, the first boats are scheduled in July at this stage.

Okay. And then last question, with regards to Kittila. From the tour I recall there is a shutdown this year, it's in Q2, and what's the duration of that?

We had a shutdown that was on the border of Q1 and Q2, which impacted some production on the quarter because we advanced it 1 week. And there's a second shutdown scheduled for October and it's going to be a 10 day planned shutdown at this stage. This is basically the schedule going forward 2 10-day shutdowns in spring and fall.

Okay. So 2 10-day shutdowns, part of that was already in Q1 and some impact into Q2 and then a 10-day shutdown in Q3. Okay.

At this time, I will turn the call back over to Sean Boyd.

Thank you, Operator, and thank you everyone. And you're all welcome to join us this morning at 11 o'clock for Annual General Meeting at the Sheraton Center in Toronto. Thanks again for participating and look forward to seeing you soon. Bye now.