Agnico Eagle Mines Ltd (AEM) 2006 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Agnico-Eagle Mines Q3 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 October 26th, 2006 at 3:00 p.m. Eastern standard time. I will now turn the conference over to Sean Boyd, Chief Executive Officer. Please go ahead.

Thank you, operator, and good afternoon, everyone. And thank you for joining us for our third quarter conference call. This conference call is coming to you from Finnish Lapland. Agnico-Eagle held its third quarter 2006 Board meeting for the first time outside of Canada in Finnish Lapland. We also had the pleasure and honor of laying a cornerstone on the processing facility for our our Kittila mine. With us here today is our full management team. We have Ebe Scherkus, Dave Garofalo, Don Allan, Alain Blackburn, Greg Laing. We have our host, Ingmar Haga, our Vice President of Europe. We have Mark [LeBeau], John Robitaille, [Danielle Racine], we have Tim Haldane, our Vice President, Mexico, and our newest Vice President, [Patrice Yobair], who recently joined us as our Vice President of Human Resources.

What I would like to do is take you through the presentation. For those of you on the Internet, we have a slide presentation which I can direct and forward the slides here, and we'll open it up for a question-and-answer session at the conclusion of the slide presentation. As you've seen in the press release and by our third quarter results, we continue to make very, very good progress towards our goal of building value through increases in growth in both our production and our reserve base at LaRonde. We have moved forward on our goal to triple our gold production. Just moving through the Safe Harbor statement. As we move forward on our goal to triple our gold production to 750,000 ounces by 2009, we've moved forward our 4 projects which are now under you construction, and as you know, a fifth project, the Pinos Altos project is in feasibility. On the reserve side we have 10 million-ounces -- 10.4 million-ounces. We are moving that over the next 2 years to 14 to 15 million-ounces with the existing projects. The first increment in growth in that reserve base will come in February of 2007, when we begin to convert the resources that are currently at the Pinos Altos, plus additional conversion at other properties.

From an earnings and cash flow point of view, we had record levels this quarter, both in earnings and cash flow. We were net cash flow positive in this quarter. In fact, we increased our cash position to $431 million from $415 million at the end of Q2. As far as Corporate highlights, one of the highlights which is not mentioned on this slide is from a safety perspective. We just completed 20 consecutive months at the LaRonde mine without a lost time underground accident, which is a record for Agnico-Eagle. From a cash cost point of view, again, we're benefiting by extremely high byproduct credits, which has given us a very negative cash cost per ounce. That's driven quarterly earnings of over $40 million, 38% -- $0.38 a share normalized, excluding some one-time net gains, normalized earnings about $0.31 or $36 million.

Cash flow record after working capital changes of over $73 million, again, increasing our cash position. With our cash position, our cash flow, our expanded bank facility, which we'll talk about in a minute, our growth is fully financed. With 4 new mines under construction, we announced 3 new mines under construction in the second quarter of this year, so we've got 4 under construction and the fifth, Pinos Altos, feasibility will be completed in the second quarter of 2007. The shares have extremely good trading liquidity. We're trading approximately about 3 million shares a day, approximate value of about $100 million.

On the operating side again, as we said, another very good operating quarter. From a tonnage perspective, we averaged about 100 tons per day higher in the quarter over the previous quarter in 2005, of almost 7,300 metric tons a day. From a dilution perspective, the overall dilution is essentially on-plan. On the deepest mining horizon, level 224, we're seeing dilution of less than 5%. We had a very good quarter from a recovery perspective. As all the recoveries on all the s were about our plan. And that's simply a result of an optimization strategy that is continuing at the LaRonde processing facility. In terms of cost per ton, our costs per ton were slightly higher in the quarter, at $63 per metric ton, up slightly due to costs associated with accelerated development, and also general costs industries face in the industry. We're still forecasting about $61 a ton for the first -- for the full year, which is about $1 per ton higher than the previous estimate.

There is no change in our full year production estimates. We're still looking for about 250,000 ounces of gold, 5 million-ounces of silver, 77,000 tons of zinc, and 7,500 tons of copper. In terms of the tons per day, you can see we've had steady performance going back to the beginning of 2004, once we completed the construction at the end of 2003. We're getting those tonnages simply because we now have the flexibility from multiple mining levels at LaRonde, and that's allowed us to maintain a daily tonnage rate of about 7,300 tons a day. So despite the increase in the Q3 cost per ton, as we said, we're still looking for about $61 per ton for the year, which is only about a 15% increase since the beginning of 2004. So still a very good performance from a cost perspective.

On the financial results side, the earnings are self-evident. Just to add some additional numbers which aren't on this slide, to give you a sense of how the mine performed. From a mine gross profit perspective in the third quarter of 2006, the LaRonde mine generated a profit of $72 million, US, that's versus a Q3 '05 profit of $26 million US. For the full -- or for the first 9 months of 2006, we generated a mine profit at LaRonde of $221 million US, versus $76 million for the first 9 months of 2005. From a cash flow perspective, we gave you the numbers after working capital changes. Before working capital changes for 9 months, which is really an operating cash flow numbers that some of you will use in your analysis, we generated operating cash flow of $182 million for the first 9 months of 2006, which is more than triple what we generated for the first 9 months of 2005. So the mine is working extremely well, producing significant quantities of metals and those metals we're certainly taking advantage of the current high commodity prices in all of those metals.

From a financial position perspective, again, the strongest financial position we've ever been in as a Company. We added to our cash position at $431 million. We have working capital now, slightly over $500 million. There's no long-term debt, as you know. Our shares outstanding, 120 million. Fully diluted, it would be about 130 million, assuming the exercise of the warrants and the options that are outstanding. In the press release, we noted that we have doubled our bank lines. We now have undrawn credit lines of $300 million US. And the term of those has been extended to 5 years. So with the large cash balance, with the strong cash flows, with the expanded bank facility, our production and the reserve growth based on the projects we now have, is fully financed.

On the reserve side, we've shown steady growth as we gained access certainly, to drill LaRonde over the years. And with the production decisions and feasibility studies on our other projects, we've continued to move that number forward. We're targeting, as we said, additional reserve conversion at both Pinos Altos and Kittila, to move us to the 14 to 15 million-ounce mark with the existing projects. Just to give you some sense of how we've been able to grow the reserve base on a per share basis, back in 1998 we had about 60 million shares outstanding. We had a reserve position of 1.3 million-ounces. We're currently sitting with 120 million shares outstanding roughly. So roughly a doubling of our shares outstanding. And we've increased our reserve position about 8 times over that period. So over the years, we've certainly added to the per share reserve position of this Company.

Getting into the projects, looking at the sort of global picture, obviously, execution is key. We've made some very good progress, adding management both at the corporate level and at the project level, including hiring both Finnish and Mexican nationals at the projects. There's still a few positions that obviously, we'll be looking to fill. And one of the reasons for hiring Patrice Yobair as our new VP Human Resources is to continue the process of making sure we have a well-rounded team to complement the technical team and the strength that we have in the Province of Quebec.

Just moving quickly to exploration, we have the largest budget, as you know, in the history of the Company at $35 million. We'll be providing a full exploration update likely in the third week of November. And what we can say at this point is we've had some encouraging results that we continue to see in Finland, Mexico and even in Quebec as we drill our properties. From a production growth standpoint, nothing has changed there. Still targeting in excess of 700,000 ounces a year in 2009, continuing to grow in 2010 and 2011, as we ramp up production at all of the projects. From a capital expenditure point of view, no significant change in the forecast there. We're still looking for the key years being 2007, 2008. Combined capital in those years of slightly over $500 million. With $431 million in cash and good strong cash flow, these cash flows -- these capital expenditures are very easily managed given the financial capacity of the Company.

On LaRonde II, no real change there, except we've moved forward on underground development of the excavation for several things, including the [shiv] area. We've acquired the hoists. They're currently being refurbished now, so we've been able to get them in place early. We've ordered other key equipment, so that's moving along extremely well. One other point to add on LaRonde II is we continue to drill to the west of the deeper zones on the Bousquet property, and we had some interesting results there that we can report on, with the full exploration update in November.

At Goldex, it continues to go very, very well in terms of construction and underground development performance, all continue to be very good. We're actually stockpiling development ore. We've got about 78,000 tons on development ore on surface. The project is on time and on budget in Canadian dollar terms. On Lapa, also going very well from a mine development point of view. Shaft sinking is going extremely well. We've spent about $10 million of the $90 million, making a production decision there in last quarter. We continue to drill that project. We'll also update that project. We've had several drill holes with encouraging results with good grades and thicknesses outside of the known resource outline. So that will be part of the update in November.

On the Kittila mine where we are today, again, very good construction progress since we visited here in June with investors and analysts. We continue, as we said, we laid the cornerstone of the processing facility today. We are now starting the underground program with the underground ramp. The drill is in place there. We saw the activity. It's going extremely well. On the drilling side, 4 to 6 drills going. About a third of the drill footage is on infill, about 40% of the drill footage is drilling along trend. And again, drilling continues to confirm the potential of the entire Suurikuusikko trend. We'll be able to provide an update on that in November.

On Pinos Altos, as you know, a very large land position. We've got 4 drills operating now. 2 more drills -- or 5 drills operating. 1 additional drill being mobilized now. We've also recently added to our property position in the region, so we continue to look for opportunities there. We are also drilling outside of the main resource area, drilling the San Eligio region on the slides. You can see it just above the rectangle where the resource area. Again, getting interesting results there. So in all of our projects, our drilling has proven very successful, and that's really part of our program to add value. Not only to build the mines and grow the production base, but also to expand the overall reserve and resource on this project through an aggressive drill program with experienced finders of gold.

Looking closely at the Pinos Altos structure, we continue to drill that, looking for extensions of that structure. We're also drilling in the pit area, part of the feasibility now is pit optimization. So we'll be updating some of the drilling results in and around the pit area, and outlining the implications of that on the ultimate design of the pit. Still looking in the scoping study about $150 million in CapEx. And as you know, that project is near infrastructure, as are all of our projects, which helps keeping the overall capital costs down.

Our time line of upcoming events, exploration update, prior to the analysts tour, we've got an analyst tour in Quebec on November 28th and 29th. If there is interest there, please let David Smith in Toronto know, or Hazel Winchester, that you have an interest. The interest so far has been very, very good. There is limited space. We can only accommodate so many people on this trip. So please, if you'd like to go, please express your interest to our people in Toronto. In middle of December, we'll put out our '07 production mining cost forecast. And again, Pinos Altos feasibility, we're looking for Q2 of '07.

Just to summarize, we continue to generate extremely strong earnings and cash flow at record levels in the third quarter of 2006. Growth projects on track to triple our production. Also on track to add to our reserve base and get to it the 14 to 15 million-ounce range with the existing projects. And we can do that by focusing on exploration. We basically plan to spend about double what we spent in our previously highest year of exploration spending, which was last year. Operator, that's the conclusion of our presentation. And now we'd like to open the lines up for questions.

[OPERATOR INSTRUCTIONS] Victor Flores, HSBC.

Couple questions for you about the exploration work at Pinos Altos. First of all, could you just clarify, of that indicated resource that you're talking about, what zones does that encompass?

It encompasses Oberon de Weber, but principally, Santo Nino. That's where we have the bulk of our resource.

Sorry, does that include the inferred, as well?

No, it doesn't.

And is the inferred in some of these other zones that -- ?

It is, and predominantly at depth, where we haven't got [inaudible] drill density.

Thanks. And could you give us a sense of the widths that you're getting, and whether you're seeing any zonation in the gold, silver ratio as you move along strike or at depth?

We don't really. The only silver zonation that we do see is in Oberon de Weber where there is a definite silver bias with respect to gold. With respect to depth, really it's pretty consistent, so we haven't noted any changes. With respect to thicknesses, we are getting thicknesses in areas of up to 25 to 30 meters, and in certain areas it pinches and swells down to 5 to 10 meters in thickness.

And roughly, what do you think the average will be?

We're working on that right now. We're getting quite a -- we've got an active drill program. We're getting, I guess, since we had difficulties in the first 2 months of the program with the drill contractor, we've since replaced the contractor. And we are getting in excess of 1,000 meters a month. So to calculate an average when so much new drill information is coming in is difficult. But I would say we'll probably be looking at average thicknesses that we know right now, of anywhere between 10 to 20 meters.

And then just finally, of that 3,000 tons a day, do you have a sense as to what the split would be between open pit and underground, and would that change?

Well, the original -- the current scoping study contemplates 100% open pittable material during the first 5 years of mine life, and then be phased in with underground.

Thank you very much.

Michael Fowler, Desjardins Securities.

2 questions. One is just on the -- on how you're actually building all these mines. I wonder if you can go into a little bit of detail as to if you're using some contractors or your own people? I mean, in Quebec, I presume that you're using some of the people from LaRonde to help you construct Lapa and Goldex. But what about Finland and potentially, Mexico?

Well, I can give you a brief just overview. With respect to LaRonde II, Michael, all of the current development that is being done is being done by LaRonde development crews. Similarly at Goldex, where we do use contractors with respect to raise boring at Goldex and also at LaRonde. And we are also using shaft sinking contractors at Goldex and Lapa. In Finland, we have an open pit contractor, and we also have an underground development contractor. Today on the site, we were witnessing the fourth round being drilled in the underground access ramp. But our intention is to phase out both the underground contractor in Finland, and also in Mexico, and proceed with self-mining while we acquire the necessary mining equipment. Some of the mining equipment for Mexico will be acquired or transferred from LaRonde and refurbished. So that's sort of the mix of contractors versus employers. But I would say on the whole, a lot of this work will be done by Agnico development crews.

Okay, Ebe. What about your capital expenditures going forward? Are you happy with they will stay at stated? Or given the era that we're in with inflation, is there going to be going up?

Well, I think with respect to the project in Quebec, we've got pretty firm contracts with the shaft sinking contractors. Also with respect to development, our development unit costs and of course, with Goldex, Lapa and LaRonde, they're very intensive with respect to development costs, unit costs. So, so far our unit costs have been right on the money. So we don't foresee any significant problems there. Similarly in Finland, the unit costs by the contractor is a bit higher than what we had expected. However, with self-mining or self-development, that should be in-line. So as far as cost is concerned, even with Goldex, we've got about almost 40% of the project complete. And as Sean mentioned during his presentation, it is on-schedule and on-budget. So we really haven't seen any significant creep in any of the projects.

LaRonde II, the hoist -- well, one was the original Penna Shaft hoist when we first had the 5,000-ton per day operation. The other one we were able to acquire from Mattagami Lake operations, and then the third from Kidd Creek. So they are used, and they're being refurbished. With respect to mining equipment at LaRonde, LaRonde II, there will be a transition. So a lot of that equipment is already in place. It is LaRonde I mining equipment that will be phased into LaRonde II operations. So when you look at equipment deliveries sort of not being an issue, and you look at a lot of the unit costs not being an issue, so we feel quite confident. With respect to the mill at Goldex and here at Kittila, a lot of the major components, especially the mills -- the SAG mills, we are very close to finalizing those orders. And with respect to those key components, some of the prices are under what we had in our feasibility studies.

Okay. Thanks, Ebe, for that. Just moving on to zinc, I guess. David, I see that you're forward selling your zinc. Are you taking a view on the zinc price? Or what is your view on the zinc price, anyway?

Right now, that forward position is a bit of a legacy position from a couple of years ago. And it's actually going to be exhausted by the end of the year. It's less than 15% of our production in Q4, it's the remaining 3,000 tons. As far as our view on zinc price, in terms of our hedging view, we're not anticipating putting any other hedges in place. The [inaudible] are very high. They are at record levels. So hedging is rather expensive right now. The curve is severely backward. So it's not very attractive to put any hedge structures in place. They're rather expensive. We're quite confident that given inventories are at record lows, and they're continuing to decline, there may be a small surplus next year, but it's, on an absolute number basis, it's still a very low number. It's not going to add significantly in inventories. We're confident we can let this -- let our exposure ride in this market.

Thank you very much.

Steve Butler, Canaccord Adams.

I assume you won't be doing any golfing this evening.

It's snowing.

Okay. Just could you -- couple things. I suppose, Ebe, if you could just comment on Q4. What I imply from your guidance, is you'll be doing about 69,000-ounces of gold, or so, in the fourth quarter. So I just wanted to be clear on that number. Is there some processing of Bousquet in the fourth quarter?

There will be about 20,000 tons of Bousquet II ore.

Okay, So, is that driving some of the performance on the gold grade in the fourth quarter, Ebe?

Some of that. But also we will be in a higher grade cycle or higher grade blocks at LaRonde.

Right. And zinc will be the other way, of course, about 38 million pounds, or so. Is that, again, just zoning?

That would be zoning, and then we probably have a bit of contingency in our back pocket.

Okay. The -- could you just elaborate on the -- what you talked about the metallurgy initiatives at LaRonde, Ebe, what you're finding there in some of the initiatives?

I think some of the major initiative with respect to cost control, has been a reduction in cyanide consumption. We're currently upgrading the flotation capacity of both of our zinc and copper circuits. Unfortunately, that is one area where we are faced with some equipment delays in the order of a couple of months. So before some of those initiatives, which would result in superior recoveries in copper and zinc and higher concentrate qualities, that would be delayed by about 2 months. So these are some of the main initiatives that we've undertaken. As we mentioned this morning at our Board meeting, one of the main reasons why we have been able to improve recoveries as well, is that the LaRonde mine itself has been able to provide consistent mill feed. And that has given the mill operators and metallurgists an opportunity to tweak and fine tune the circuit.

Okay.

In comparison to historical performance.

Right. So your zinc recovery was down in the second quarter, but up to 87.7% in the third quarter. So is that a number that's pretty good for the near term?

I would say that's pretty good. We might be able to tweak it a bit more. But that's quite accurate.

Okay. And just last question, I guess, for Dave. Just to clarify your Stornoway shares, are they, Dave, categorized under other assets?

Yes, they would be in the long-term category of assets, because they're a strategic investment.

Okay. Thanks very much, guys.

David Christie, TD Newcrest.

Snowing already, eh? That's pretty depressing. Just quickly on the Lapa, when you say you intersected some new zones of encouraging thickness outside the current resource, can you give me a little more color on those?

Well, let's just say some of the intercepts are above reserve grade. And they were basically -- we were testing the Contact Zone and some of these values are in the contact south zone. So we were encouraged by that. So some of those values that we will update you on after November 15th, are basically in the Contact South Zone.

What's the gap between the Contact and Contact South Zone?

It would be about 100 meters, or so.

Okay. And where do you guys see TCRCs going? Are they going further up here, as zinc prices continue to escalate?

We'll have Jean Robitaille respond to that.

The market is pretty -- I would say that we don't see very big increase next year. Some new player will come in the market, but we have very good terms presently. So I will use the same terms than year.

Okay. I have 1 more question on exploration spending in 2007. Do you see it to be similar to what it is in 2006 or -- ?

No, it should actually decline. The reason we have such a significant expense item this year, is because we have to expense our exploration at Pinos Altos. Assuming a positive decision on Pinos sometime in the second quarter of next year, then we can start actually capitalizing our expenditures there. So overall our expenseable exploration should decline in 2007.

Just on a strategy side, though, the strategy will be to -- those large property positions here in Finland and in Mexico. So as we move the projects forward, we'll certainly be focused on looking at a lot of targets on those large property positions. And in fact, we started to increase our land package in Mexico.

Good. Thanks, guys.

[Jonathan Rossen], [New Glory].

I was wondering for the shareholders, is there going to be any change in like, dividends, because the costs have been so down, and the profits have been up? Or any like, special dividends that might you be giving out at this point of time? Or is there no projection of that at all?

Well, we can't really get into any details, but I think you know we love to pay dividends. We've paid a dividend for 26 straight years, which is a pretty enviable record in this business. So we'll be reviewing that as part of our budget review that we undertake later in November and through December. And we'll be updating the market on our view on dividends. You should know though, that we are investing back into the Company, back into the projects. So although we're generating very good cash flows, we're using those cash flows to move those assets along, to prove up more reserves, to increase our production base. But I think it's safe to say we'll pay a dividend. At this point, we'll just have to review what that dividend will be.

Thank you.

Mark Smith, Dundee Securities.

Yes, just a very, very quick question. Just on the guidance in the attached sheets for taxes for 2006 of 40%, are you expecting some taxes to come up in the fourth quarter that we haven't seen thus far this year?

Yes, I mean, what happened in the third quarter, is we actually were able to book a tax recovery on the sale of Contact Diamond. We weren't anticipating actually booking a gain on that. And because we had a very high tax basis, we actually generated a capital loss, which we were able to use against other capital gains we generated earlier in the year. So the tax rate in the third quarter is unusually low. And we expect much closer to the statutory rate in the balance of the year. In fact, probably higher than the statutory rate in Q4, as much of our exploration expenditures are going to be in Mexico, which we cannot tax effect.

Let me clarify the question. Your effective rate for going through the first 9 months was 27%? Are we going to see like, 48 or 49?

I would say we're definitely going to see something at least in the mid 40s. Because again, much of our exploration expenditure cannot be tax effected, because it is outside of Canada. And we can't book a tax asset on expenditures in countries where we don't have income.

Okay. Got you. Thanks a lot, Dave.

[John Graham], Orion Securities.

Quick question on your unit costs. They came in this quarter at about $63 a ton. I was wondering if you could do a little bit of a breakdown there as to how much was in [inaudible] costs and how much was in the accelerated development plan?

I'll just give you a quick breakdown. This is the David [inaudible] question, or [hysterical] [inaudible] question, but the breakdown for the first 9 months, which is probably what we're going to have in the fourth quarter, definition drilling $0.18; development, $5.84; mining, $11.22; underground services, $19.23; underground services, $16.87; laboratory environment, $0.25; surface services, $1.92; admin, $4.72; stockpile adjustments, $0.95. So that would bring it just over $61 per metric ton.

Okay. That's great. Thank you very much.

[OPERATOR INSTRUCTIONS] Mr. Boyd, there are no further questions at this time. Please continue.

Thank you, operator. Let's wrap it up here. It's late into the evening on this side. We've had a long day. But we certainly appreciate your attention. And again, just to remind you, if you would like to attend our mine trip in the Abitibi, that trip will include an underground tour of LaRonde, also an underground tour of Goldex, and a visit to Lapa. And it will be sort of a day and a half on November 28th, 29th. So please express your interest to either Dave Smith or Hazel Winchester in our office in Toronto. Again, thank you very much. And we look forward to keeping you updated on the progress we're making on our projects, and on our exploration programs. Thanks, again.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your line.