Agnico Eagle Mines Ltd (AEM) 2006 Q2 法說會逐字稿

Welcome to the Agnico-Eagle Mines second-quarter 2006 financial results conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. (OPERATOR INSTRUCTIONS) I would like to remind everyone that this conference call is being recorded on Thursday, July 27, 2006 at 11:00 AM Eastern time. I will now turn the conference over to Mr. Sean Boyd, Chief Executive Officer. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and thank you for joining our second-quarter conference call. With us here in Toronto is our full senior management team, who will be available to answer your questions at the end of the formal part of the presentation. For those of you who are not logged in on our website, we are conducting the call using a series of slides which you can access on Agnico-Eagle.com.

As you know after reading the press release and seeing the results, Agnico-Eagle continues its steady progress toward a multi-mine gold production base which is backed up by continued record operating and financial performance. In fact, the second quarter was our strongest operating quarter in the history of the Company from the perspective of our ability to generate cash.

Just moving forward on the Safe Harbor statements, I understand there is two of them there. As we move through those, we will deal with the corporate strategy. Our strategy has been very consistent. We certainly recognized a couple of years ago that we needed to branch out from LaRonde and become a multi-mine company. We have had a definite strategy to do that and we continue on track to reach our objectives of tripling our gold production by 2009 to 750,000 ounces.

We will continue to grow our reserves. As you know, we already have a strong base of 10.4 million ounces with an additional 5 million ounces in gold resource, which is subject to some aggressive drilling programs particularly in Mexico and in Finland and we will talk about those as we continue to explore those properties and look to add to our already strong reserve position.

Our balance sheet was strengthened in the quarter with our equity issue, but also we were net cash flow positive. Even after our construction and expansion expenditures, we are sitting with a cash position of $415 million with no long-term debt. When you add that to our bank facility and our cash flow, our growth is fully financed.

A big part of our strategy is also having a low political risk profile, so as we've conducted our acquisition part of our strategy we have focused on those areas that you can get permits, you can move projects forward. We will also continue to pay a dividend as part of our strategy. We've paid one for 26 years, so that also remained a strong component of our strategy. Also a non-precious metal forward sale approach which is consistent with the long history of the company remains a core part of our strategy.

The second quarter in terms of highlights, again another record performance from the Company. Record low cash costs of approaching -$1000 an ounce, certainly benefiting from the byproduct revenues and from settlement gains that we achieved based on settling the concentrate shipments.

Our earnings of $37 million or $0.32 a share continue to be very strong. Offsetting that was a $0.06 foreign exchange loss and a $0.04 loss on zinc forward sales. Those zinc forward sales expire in five months, so over the second half of the year we expected based on current zinc prices for those hedges to have a very marginal impact on earnings going forward.

From a cash flow perspective before working capital changes we generated about $70 million, another record. As we said at the start of the call, that put us in a position where we were generating net free cash flow even after construction and expansion expenditures at our various projects. Cash position, we talked about that; over 400 million with the growth fully financed.

We announced three construction decisions on LaRonde II, Lapa and Kittila. We will provide an update on those. We were added to the S&P TSX 60 index based on the size of the Company and the trading liquidity. What we were trading over the last three months about 3 million shares or about U.S. $100 million a day in trading value.

On the earnings and operating results, as we said off the top, record low total cash costs, but from a production perspective the Q2 was expected to be gold production side a little bit lower than the rest of the quarters due to extracting lower grade blocks in the mining plan. However, for the first half of 2006, our gold output is slightly above budget. We have had higher metal recoveries than planned for all the metals, so that has certainly helped on the gold production side. We are forecasting -- continue to forecast 250,000 ounces of gold production for the full year, which is consistent with our budget that we put out late last year.

Silver production expected to be a little below bit lower at about 5 million ounces, copper in little bit lower at about 7500 tons, but zinc production expected to be 6% higher up to 77,000 tons. Our outlook for zinc, certainly listening to Teck's conference call this way, Teck put out some slides on its own and certainly using some slides with the International Lead Zinc Study Group, and those slides indicate continued large supply deficit going forward into 2007. When this is combined with very low inventory levels for zinc, I think that bodes well for zinc prices going forward, which also bodes well for our ability to continue to generate very, very strong cash flows out through 2007.

LaRonde's performance continued to be very steady and the quarter. On the cost side we saw a slight bump for the first half to about $60 a tonne. Part of that is due to being ahead on our development, up to about 700 meters ahead of development. In the quarter we are forecasting $60 a tonne for the full year, which is $2 above the upper end of our range that we put out earlier this year. From a tonnage perspective, our tonnage hoisted for the six months is right on budget.

Our dilution in the quarter was 12% versus a plan of 11%. The dilution in the deeper parts of the mine where we are extracting lower-level blocks has actually been better than planned. Given that we been able to maintain and contain our costs in a way that is better than industry average combined with the ability to move and process tonnage at the planned rate, this mine is generating extremely high gross profits.

In the first half of 2005 we generated 50 million at LaRonde. In the first half of 2006 we generated 149 million, certainly benefiting from higher metal prices but also based on the consistent cost and tonnage performance at LaRonde. So that bodes will going forward in terms of generating cash to continue to fund the expansion.

In terms of the revenue, we've more than doubled the revenue on a first full half and on a second quarter basis we have essentially tripled our earnings, first-half earnings of $74 million versus $23 million in the first half of '05, $0.67 a share versus $0.27 a share. So from an earnings perspective, doing very well relative to our midtier competitors.

Financial position strongest it has ever been in the history of the company. Over the last six months we not only eliminated our long-term debt but we also raised equity that puts our cash position at over $400 million, working capital over $500 million. We have available bank lines of $150 million. So when we say the projects are fully financed, you can see that from the balance sheet, very strong position going forward. Would you add that to our ability to generate very, very strong cash flows.

On the reserve side, the focus will be to continue to prove up the 5 million-ounce resource position and add it to reserve over the next two years. The focus there will largely be in Mexico, where we have a resource on Pinos Altos of 2.1 million ounces. We have an additional resource at Kittila. In addition to the reserve of 2.4 we have a resource of 1.17, so that will certainly be the focus of our drilling campaigns to increase our already strong reserve position.

Just moving into the projects, I think you know the pattern and the history. We like projects near infrastructure. We feel that the projects we have acquired in the last year are a good match with our technical skills. They have camp potential, a lot of geological upside on them.

We have large property positions in the database to assist in the ability to move and grow those deposits. Added to that, we have the largest exploration budget in the history of the Company at $35 million. The biggest programs are focused on Finland and in Mexico, and we will talk a bit about the targets and where we are spending our money and what we can see over the next couple of quarters.

On the production growth side, this slide does not include anything that we would anticipate coming from Pinos Altos upon completion of the feasibility early next year, but you can see a steady growth in production without Pinos Altos out to about 800,000 ounces in 2011. Pinos Altos has the potential to add about 150,000 ounces to that, so you can see in 2009 with Pinos Altos we would be around the 750,000 ounce mark. In 2013 when LaRonde II kicks into production and hits full stride, the production profile will approach 1 million ounces.

On the capital expenditure side, in 2006 looking at about $163 million, we spent about $54 million to date. The remaining expenditures of $110 million will be focused on Goldex, about $60 million. LaRonde including the LaRonde II would be about $25 million. Kittila would be about $20 million in Finland.

When we look at 2007 and 2008 combined about $550 million in combined CapEx if we add Pinos Altos there, which would be about $150 million, were estimating based on our scoping study. So we even went in with adding Pinos Altos at about $500 million to $550 million combined CapEx for those two years. You can see that we are well to the based on our cash position, our ability to generate cash and a bank facility if we need it.

On LaRonde II, construction is just getting underway. LaRonde II 3.6 million ounces in reserves. We are looking at about a 10-year mine life with average production about 320,000 ounces at a cost of about $230 an ounce. Higher production in years 2013, 2014, when we get up to full production. We expect initial production to start up in 2011.

The focus of development currently is underground. We are developing on levels 2003 -- 203, 206 and 215, where we are doing rock work there, ramping, etc. All the waste we generate right now is being used as backfill, which helps keep the cost down. In the quarter we acquired a service hoist and in fact the production hoist we will use for the wins on LaRonde II is in fact the initial place to that was used at the Penna Shaft. So we are again continuing to recycle our inventory and infrastructure -- or inventory of infrastructure that we have in northwestern Quebec, again to keep the overall capital cost down.

At Goldex, construction is well advanced. We have been under construction for a year. We made a production decision last July in the midst of extensive construction both surface and underground. We are getting extremely good performance in our underground development. We continue to stockpile ore on surface. Goldex a 1.69 million ounce reserve, another 200,000 ounce in resource.

We are looking at average production of about 170,000 ounces starting in the second half of 2008, a capital cost of U.S. $135 million. We have spent about $35 million to date. After the first year the project is on time. It's on budget in terms of the Canadian dollar budget amount. There will be some upward bias on the U.S. dollar CapEx based on where the exchange rate has gone on the U.S./Canadian dollar side.

Moving forward on Lapa, we are getting extremely good shaft sinking performance. We've averaged about 3 meters a day when we are not excavated stations, 1.1 million ounce high-grade reserve of over 10 grams per tonne.

We are anticipating production in Q4 of 2008 at 125,000 ounces a year for about seven years at $200 -- $210 cash cost, $90 million in CapEx. Shaft sinking, as we said, is going extremely well. The shaft is currently at 820 meters, said there's 540 meters to go. At the rate of this performance, we will be in a position in the fourth quarter to begin drilling the deeper zones of depth. With that deeper access, we will begin to follow up the down-dip potential of the Lapa deposit.

Moving on to Kittila, it is 2.4 million ounce reserve currently with an additional 1.1 million in resource. The deposit remains wide open at depth and there's several other targets that need to be followed up along the entire 15 to 20 kilometer strike length. We are looking for production by mid-2008 averaging about 150,000 ounces per year at a cash cost of $250. Over a 13 year mine life, capital cost to build Kittila is $135 million.

In the quarter, we have completed road access to the site, the power lines in place. We are currently pouring foundations for several of the service installation and clearing the overburden from the main pit area. The drilling focus in 2006 will certainly be on the main zone below 500 meters, where it is wide open. We are also drilling to the north along this trend, where there is a potential new zone shaping up. We are also beginning the step-out program along the entire 15 to 20 kilometer structure. So we hope to have more results on that exploration as we move through the second half of 2006.

On Pinos Altos, it's a 2.1 million ounce resource currently of gold, over 50 million ounce resource of silver. It's an extremely large property position which we have given you a diagram of on the slide, about 11,000 hectares. We have up to now been really focusing the drilling on the small sort of southeastern section of the property. There is a lot of structures that need to be followed up with drilling work as we move to the north and as we moved to the northwest.

There's very good targets up in the north and northwest and we announced in June a $23 million exploration program. Part of the focus will be going out over that large property position with a large-scale drill program and following up on the very prospective targets that are contained on that large property position. The feasibility study is anticipated to be completed in the second quarter of 2007. Work is ongoing on that feasibility study from a metallurgical standpoint, environmental standpoint.

Mine planning work is also underway. We are contemplating in the scoping study 3000 tonne a day operation, both open pit and underground. We been successful in attracting some experienced mine builders that have had experienced building minds in Québec that are leading that effort. We are estimating to capital cost to be about $150 million in the original scoping study.

There's four rigs on-site to drill. We are looking for two to three more rigs. We are expecting to start ramp excavation in October to begin a new ramp. That ramp is important because it will allow us to drill for depth extensions of the zones, and these zones are wide open. As far as our current drilling, we've listed it on that slide. We have had some good grade holes as we move a little bit deeper. There are several essays pending and we feel over the next two quarters will have more news based on that $23 million drill program out of Pinos Altos.

As we summarized, we are in the early stages of our growth story to become a multi-mine international gold producer. That growth story is backed up by record earnings and cash flows coming out of LaRonde in the first half of 2006. We are anticipating strong earnings and cash flow as we go forward. We have projects in hand that have the potential to triple our gold production by 2009 and increase it further still as we complete the full expansion of LaRonde II.

Our existing projects with the resource base of 5 million ounces on top of the reserve position of 10.4 million ounces give us the potential to increase our gold reserves to the 14, 15 million ounce range. We will move to that number based on an aggressive drill program trade. We have got $35 million planned in 2006, a lot of it focused in Mexico on that large property package as well as Finland, where we have got a number of drills going on that large position as well. So we are looking for continued resource-to-reserve conversion from those projects and hopefully expansions of the overall resource envelope as we continue to drill that large property position.

Operator, that concludes the formal part of our presentation. We would be happy to take questions.

(OPERATOR INSTRUCTIONS) John Bridges, JPMorgan.

I will take the honor. Congratulations on the numbers. I struggle a little bit to actually get to what was perhaps a clean number there. There is so much going on in there. I see you have got some pretty fancy reported realized price, things like that. I wonder if you could sort of just walk us through some of the unusual elements of the quarter.

John, it's Dave. There are a couple of things that I would consider non-recurring, one of which was the foreign currency translation losses which arises from the consolidation of our subsidiaries -- I should say our entities in Canada and in Europe, where we have a large deferred tax liabilities. They have to be translated at the current rate every quarter, so you are going to have movements in that every quarter. That is what caused that. The other non-recurring item is the zinc derivative loss.

The other items -- and I appreciate you say that they are large; I don't think they are non-recurring, though. The settlement gains and mark-to-market gains on our inventories, those does will be recurring and they had been recurring since really we have been producing concentrates at LaRonde.

That arises because we have to invoice at whatever the current price is and then at the end of a quarter we have to mark-to-market the inventories using the thirty-day average at the end of the quarter. Plus we have settlement gains versus what the inventories were previously recorded at when we have final settlement. So that sort of thing I would consider part of the business and not non-recurring. I don't consider them unusual items at all.

Right, right. Have you got a number for that? I try to calculate it, but --?

Yes, I would say it is about, between mark-to-market and final settlement gains, probably about $20 million in the quarter.

Okay. Anyway, congratulations again. It was very strong.

Michael Fowler, Desjardins Securities.

Good morning. Just can you -- I think Ebe is there, I guess. Can you sort of comment on the rock mechanics of all of the various projects there, Ebe, and what you have been finding recently?

Well, I think I will start with LaRonde II, which is probably the biggest project. I would think from a rock mechanical point of view we really have not had any significant issues. What excites me is -- or what sort of helps me be positive about LaRonde II is I look at some of our deepest mining levels down to level 224, below the bottom of the Penna Shaft, and our budget for the year to-date was 7% dilution. We are currently averaging around 5%. So we are really not having any ground issues.

Also with respect to development, the large part of the development is in the lower parts of the mine. As we have mentioned, we are about 700 meters ahead of schedule and a lot of that development is in the deeper horizons of the mine. So I think from a geomechanical point of view, the fact that our dilution has declined, that our development has accelerated, it bodes very well for LaRonde II.

In terms of Lapa, with our underground development that we did whereby we exposed the ore, where we drilled it off we were pleased to find that there were no major faults or discontinuities that would break or disjoint the vein structure. It was very continuous, very vertical. It is in the sheer zone, so we got the answers that we wanted from Lapa.

Goldex, we did some recent stress measurements just to be able to confirm our geomechanical phase of this large envelope that we hope to extract. The figures came back better than what we had anticipated. So that should be a plus with respect to dilution going forward at Goldex, or it should be better than what we incorporated in our financial model based on hard data obtained from the mining horizon at Goldex.

Suurikuusikko, the more we have drilled it off, or Kittila rather, the more we drilled it off, we had originally -- we were a bit concerned about some of the disjointed nature or the on-echelon structure of the mineralized zones within the larger sheer zone. But the more we drilled it off, the more we been able to interpret that the zones are in fact a lot more continuous than we had originally anticipated two, three years ago. So from a mining point of view, the orebody looks a lot more continuous and the hanging wall and foot wall, the rocks that we have seen from core so far. It bodes well for mining conditions from Kittila as well.

Okay. So bottom-line good news?

I would say so.

Sean or David, just in terms of -- just to confirm, I guess at the end of this year you will not forward-sell any of your zinc going forward. Is that correct?

Yes. That position expires at the end of December of this year. We are currently not looking at any derivative mechanisms. We had looked at them prior to deciding on doing an equity issue. We were looking at put structures, which were prohibitively expensive.

Okay, thanks very much.

Mark Smith, Dundee Securities.

Two quick questions and I guess they are both for David. The $35 million in expiration expenditures for 2006, what portion of that is expensed versus capitalized?

That is all expensed and the reason it has gone up so much is because we have added the Pinos Altos program, which is $23 million. That has to be expensed until we deliver a bankable feasibility study.

Okay, got you. Next question and perhaps I don't know if you can answer this or not, what portion of Q2 sales are pending Q3 settlement?

If you look at the metals awaiting settlement balance on the balance sheet, it is just under $100 million. So essentially about 1/4 of our year's sales at any one time are outstanding and awaiting final settlement.

Okay. So it's something around 15 -- 12 to 15% of Q2?

I would say in fact virtually 100% of Q2 is outstanding, because concentrates typically take three to four months for final settlement. So virtually everything you produce in the current quarter settles in a future quarter.

So the best way to deal with this for trying to get the numbers is to use the Q2 production numbers and then to allocate Q3 prices and add the difference to Q2? (multiple speakers)

Yes, whatever your assumptions are. I guess that would be a quick and dirty way to do it.

Okay. Thanks a lot, David.

Chantal Gosselin with Genuity Capital.

Good morning. My first question is relating to LaRonde II. Ebe, you mentioned that you started development for the wins and that very little waste had to be hoisted to surface. I know you only have a couple months now started, but do you see that continuing in the second half of 2006? What would you expect for 2007 in terms of tonnage if you anticipate any lower impact from that development on your production?

Well, the benefit with LaRonde II of the current development that we have ongoing is on level 206 and 215. It's so a lot of this we are mining below those horizons, Chantal, from level 224 up. So a lot of that gets recycled into that, into those scopes. Also going forward we do have a midshaft dump in the Penna Shaft, so we do not have to -- even if we do have to hoist it, we do not have to hoist it to surface. It gets dumped into the whole backfill system.

In terms of the actual quantities of waste expected, we are going to do most of the rock work for the hoist rooms and ramps, etc. and have that completed probably by the middle of next year. So I don't have the exact figure. Daniel, do have the figure of total waste?

No.

What I think in terms of what we are generating it isn't an issue. I know the issue you are thinking about is being bottlenecked at the bottom of the shaft, but that is why we had two levels, 206, 215, and why we installed the midshaft dump, because we expected this might be an issue. So that is how we have dealt with it.

So you don't anticipate any negative impact on your --?

No, we don't. That is the last thing we would want and that is how we have accommodated the situation.

Okay. My second question is more general, maybe for Sean. You have grown the Company from one mine to five mines I guess in a very little period of time. What is your vision going forward? Do you want to have a certain target size for the Company or do you want to focus on capitalizing on your current assets and try to consolidate in the same districts?

We don't have a magic ounce target for the Company. I think our focus is more on maximizing our asset bases in the districts we are currently operating in. So we would you our areas of operation being obviously North America including Mexico and Europe. So we would certainly be trying to maximize that.

We are in a position it now where we know the industry is consolidating. We feel no pressure to have to do something. We are currently not actively working on anything, but we continue to look as part of our normal corporate development activities. So we will take a very disciplined approach to growth like we have over the last couple of years. So even when we were feeling somewhat pressured to expand beyond LaRonde I think we still maintained a very disciplined approach to what we do. We will just continue to take that approach going forward.

Thank you.

Chris Potter, Northern Border Investments.

If you look at the forward gold price, say, out to December of 2009, it's currently about $750, which is about the time you think you are going to be producing about three times as much gold as you currently are. Have you guys looked at what your cash flow per share might be at $750 and, say, on a run rate of 750,000 or 800,000 ounces a year?

No, we haven't forecast that. You can plug in your sort of own assumptions based on our -- we have provided a fair amount of information on our production profile. We have provided a fair amount of information and detail on the expected cash costs associated with each project. But you would also have to make some assumptions on byproduct pricing as it relates to LaRonde, because that also has an impact on cash flow.

The data is there, and we are not going to get into projecting sort of cash flows at $750 gold. Obviously with that type of growth, with that growth bias toward gold at a $750 gold price given our anticipated cost structure on a per ounce basis, we should be generating very, very meaningful cash flows. That is certainly a big part of our strategy to be in a position to do that.

Thanks, guys.

Steve Butler, Canaccord Adams.

Just a quick question on Lapa. In June when you updated the Lapa reserve, you actually increased the grade but the ounces fell just slightly from I think 1.17 down to 1.1 million ounces. Can you just elaborate? I do know the grade went up, but obviously the tonnes fell. Perhaps where did you lose some tonnage there?

Will there be some emphasis on underground exploration drilling at Lapa this year or do you really wait for later when things are more fully built there? Thanks.

Okay, Steve. That is a very simple answer. In the original interpretation on the western end of the deposit, we had originally thought that we would be able to mine transverse. There were two parallel vein structures and we thought we could lump the two together and mine transverse. So as a result of that, in the mining plan there was internal dilution. That had the impact of reducing the grade.

So when we drifted along the vein structure and we intersected both of them, we came to the conclusion that it would be too dilutive. So as a result, in the new reserve estimate we took out that internal dilution and we would mine both of these zones using longitudinal methods. So it had the impact of reducing tonnage and then of course some of the ounces associated with it. So by being more selected the grade went up to over 10 grams.

Okay. Is there also an impact there, Ebe, in terms of the sampling that you did on the 28 -- or 2500 tons through the sample tower, etc.? Any positive reconciliation factor or are we still to see perhaps some in the future?

Basically what the sampling tower did was confirm the higher grade, which we then used to calculate the new ore reserve and the new mining plan. So it did come in higher. What we did, we compared it to drilling results. We compared it to muck sampling results that we had. Basically we found out that the -- with the exception of chip sampling, which was very biased, but the tower sampling came back positive. There was a significant increase in grade.

Okay.

I don't think going forward we have incorporated some of that in the present mining plan and reserve estimates, so I don't think you'd be able to anticipate an additional, say, 15 to 30%.

Okay. And will you have any focus on drilling there in the near-term or is it all focused on the development?

Well, I think we -- as Sean mentioned earlier, in the fourth quarter we are looking at drilling at the bottom of the shaft. That is where we currently have some of our resource. Based on current shaft performance, we expect to get pretty close to the target area of where we will be able to drill from a station and do a lot more drilling to be able to update or refine that resource and see what we actually have.

Some of those drillholes, original drillholes from surface were over 5000 feet long. So we will be in a better position this fall and that certainly is our intent and objective.

Okay, thanks very much.

(OPERATOR INSTRUCTIONS) Mike Curran, Royal Bank.

Good afternoon, gentlemen. I think this is probably a question for Dave. I think he did breech it earlier. It was regarding the taxes in Q2 being significantly higher, but obviously a lot of that was mostly deferred. I didn't really catch going forward did you say that was a one-time or should we be looking for much stronger, higher tax rates but a lot of that deferred going forward?

We are projecting a tax provision of around 40% of earnings before tax going forward. We will become mining duty assessable, provincial mining duty assessable this year. That is about 12% of that 40%. That being said, though, we are spinning quite a bit of capital in Quebec, which will help defray some of that cash cost, but we do expect to pay some money duties in Quebec this year. In fact, in the second quarter $7 million out of that $26 million provision was current. It was accrued and it may go up and down over the course of the year as we spend more capital.

Great. Thanks a lot.

Mr. Boyd, there are no further questions at this time. Please continue.

Thank you, operator. I just want to thank everybody for attending our Q2 conference call. We look forward to keeping you up-to-date on the progress we will be making on our projects and certainly on the exploration, given our $35 million budget. Thank you very much.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. You may now disconnect your lines.