Agnico Eagle Mines Ltd (AEM) 2009 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the Agnico-Eagle Mines year end 2009 results webcast conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session with instructions provided. (Operator Instructions). I would like to remind everyone that this conference is being recorded today, Thursday, February 18, 2010 at 11:00 AM Eastern time and I would now like to turn the conference over to Mr. Sean Boyd, Chief Executive Officer. Please go ahead, sir.

Thank you, operator. Good morning, everyone. And I know it is a busy day for all of you. There are a number of calls and releases coming out. So, we'll move through our slides but what we wanted to try to do is just give you an overview of the quarter and how it positioned us going forward.

As you know, we continue to optimize our newly-built mines. We've seen a significant improvement at many of our operations, which has been reflected in very strong Q4 results. However, we continue to optimize going through 2010 and we're also, as you know, very focused on commissioning the newest mine Meadowbank and that commissioning process is underway. As we optimize the operations, we continue to analyze, we continue to study several internal expansion opportunities. And we'll be talking about those as we move through 2010 and they have the potential to increase our output over the next several years as we move through this five-year phase of continued growth. And what that will do because their internal opportunities that can be funded through internal resources that will allow us to drive our per share metrics production per share and ultimately cash flow per share.

But also another area of focus for us is exploration. There is a 40% increase as you know in our exploration budgets in 2010. We're focused principally on converting more resource into reserve. We saw a big bump in our resource and we're also focused on extending the resource outlines at several of our deposits.

So, from a highlight standpoint, strong earnings, strong cash flow in the quarter driven by record quarterly production. And very good cash costs which came in below $300. Also, we saw the reserve and resource position grow to a combined $30 million. So, we'll move through the slides. And then we'll leave some time to -- for the questions that you may have. In terms of the strategy, we've talked about this many times. There's no need to change it. It works for us. It is still very much a growth story in production and reserves. So, in 2010, we see our production moving to over the million ounce mark. We talked about the expansions through 2014. We think these expansions give us the potential to add another 50% or so to our output. Our reserves, we expect to continue to grow through 2010 as we work on converting the bigger resource which was a result of our drilling in 2009. Our strategy to grow the Company from an acquisition perspective remains the same.

Looking at earlier stage opportunities, it is a good position to be in because we're not feeling compelled to rush and we're not feeling a need to do something because we've got good growth right out through 2015 through the internal project. So anything we would be looking at now, we would be looking at in the context of coming into production 2015 and beyond. Our costs continue to be well below the industry average and as we grow our output, our guidance cash cost guidance is around $400 mark for 2010 so still well below the industry average. And our financial position now given our borrowing capacity under the current facility, our cash position and our cash flow, growing cash flow gives us the internal resources that generate increasing production through the build-out of the internal expansion opportunities.

In terms of the transformation of the Company, as you know, we started a few years back as a single asset regionally focused company with an ambition to grow to a multi mine international company by building five mines at the same time. We're at the end of that phase as we commission our new, big Meadowbank mine. As you know, that is going to significantly increase our output in 2010 and put us in a position to work on optimization and expanding the five new mines that we built over the last few years. Our exploration and budget has increased dramatically over the period. And we expect to see a continued focus on exploration with sizable budgets because our deposits are large, surrounded by large land packages that we own 100% and there's still good potential to grow those deposits.

Operating results in particular stand out record production, the Abitibi mines are performing well. Goldex had a record quarter and has completed construction on its surface crushing infrastructure. So, in a good position to ramp up production again. Lapa had a good quarter, still room for improvement there. So, we can still do better at that operation. Kittila had a record quarter. We're still optimizing that mine from a recovery and throughput perspective. We're looking for better performance there. At Pinos Altos, gradual ramp-up, we have a solution to the issue around the filter presses which is adding capacity. We'll talk a bit about that. And Meadowbank, we're look for contribution, future quarters as we're in the commissioning phase now. We hope to have our first pour before the end of this month.

Moving on to the earnings. A good, solid quarter in terms of earnings above consensus expectations because of the good production and cost performance. Cash flow over $50 million. We're starting to see the benefits of the investments in these new mines in terms of building our cash position which will fund our internal expansions, our balance sheet, despite having made a major investment or series of major investments over the last several years is still strong with over $160 million in cash at the end of the year. $160 million in available credit. And rising cash flow and rising net free cash flow as we move forward. And as Dave Garofalo has talked about, we're looking at terming out some of our debt facility going into the debt market and that will give us further financial flexibility as we move forward.

In terms of the reserve growth, we saw sizable jump in the overall reserve and resource envelope. Our reserves are at a record 18.4 million ounces with over 11 million ounces of resource. So, close to 30 million ounces combined. We will see further conversion of that resource in 2010 into reserves and we're sticking with our target of a reserve by the end of 2010 of 20 million to 21 million ounces. In terms of reserves per share, on the next slide, we see some of the best growth in reserves per share in the industry. It just shows you that slide how difficult it is to grow reserves on a per share basis. We've been successful doing that because we bought properties early and they've grown and we've built successful mines from those deposits.

From a production point of view, our production profile remains as guided in December. But as we said many times, we're looking at several expansion opportunities at Kittila, at Pinos Altos and at Meadowbank. We can see being able to do better than our guidance in terms of production out through 2014 with growth in 2012, 2013 and 2014. Per share basis, we move up into a leadership position in terms of growth per share. Based on buying assets early and building production platforms on those assets.

From a cash flow per share perspective and net free cash flow, again, we move into a leadership position as we complete the build-out of these five new lines. Capital expenditures, the large investment to build a five mines is behind us. There is still a bit more work to do in 2010 as we complete construction at Meadowbank and commission that mine and work on expansion scenarios on Creston Mascota in Mexico. But the Cap Ex falls off dramatically in 2011 and beyond. That's where we generate (inaudible).

Moving to the operations, quickly to an update, a status update on the various mines from Q3 to Q4. At LaRonde, tonnage increased dramatically from 6,500 tons a day up to almost 7,000 tons a day. We saw that reflected not only in output but also in cost per ounce. At Goldex, key driver there was the difference in the grade. As we explained, we were in a bit of a low grade cycle in Q3. Back into more of a normal cycle in Q4. And as a result, we had record production.

At Lapa, we see steady improvement in recoveries, a bit better in throughput. That resulted in good production and also an improvement in cost. We can still do better from a recovery standpoint. We can still do better in terms of tonnage through the plant. And that should be reflected in more output in 2010 and a better unit cost on a per ounce basis. We've seen a very good start in 2010 for Lapa right through to January and through to February.

At Kittila, we've seen significant improvements in the throughput from 1,900 tons a day to over 2,700 tons a day. We've seen a significant improvement in recovery. As a result, we had record production. That lowered unit costs dramatically on a per ounce basis. We also had much better cost performance at the mine site with mine site costs at EUR46 per ton down from EUR78 per ton in Q3.

At Pinos Altos, we also saw as we started to commission that mine, which went into production in September, a ramp up in the throughput and better grades going through the plant as a result, we had more production, not quite as much as we had hoped but we have a plan to address the issue that we had at the filter press. We'll talk about that in more detail in a minute.

At LaRonde, steady performance, great cost per ton performance on budget. Fourth quarter, actually $69 per ton which was below budget. Ton process for the year essentially on budget. And so good, steady output, level developments going as planned. We've got the underground program remains on schedule for start-up in late 2011. Our dilution on the lower levels has been in line and has come in as we expected it. So, we've seen no negative surprises there. The reserve and resource grew at LaRonde by 5%. It is now 6.7 million ounces. That continues to be our flagship, still a very big deposit and we'll see increased output as we get the deeper infrastructure in place to access the deeper ORE.

Goldex, we talked about that one. Record tonnage. Record gold production, cost per ton on target at CAD23. Development continues ahead of schedule. The new surface crusher has been operational since January. And based on our advance and development, we're certainly in a position to do well here at Goldex in terms of being able to increase tonnage. So, again, dramatic improvement and a very steady mine which has the potential to do better in terms of its ability to run more tonnage through the plant.

At Lapa, strong Q4, good start to 2010 as we said in terms of ounce output. As the mines running as expected. Mill recoveries in Q4 were at 80%. So, we're nearing the design capacity. Still some potential to do a bit better there. Getting a bit better on dilution. We've seen two stones in December where we had dilution around the 40% area. We're making improvements on the dilution side.

In Kittila, as we said, record gold production plus 35 ounces in the quarter. Recoveries have improved. The mill availability, more importantly, also improved to 84%. We're still optimizing room for improvement on that. We've got 263,000 tons of ORE stockpiled. In a good position to achieve our guidance of close to 150,000 ounces in 2010. Our reserves and resources are flat at six million ounces. However, the reserve position grew by 25% to four million ounces. We were focused on conversion on the reserves and as we move through 2010 with a $16 million budget, we hope to convert additional resource to reserve and, pand the overall reserve outline. Good exploration outside of Kittila. In terms of expansion potential, we're studying production rate increases. We're still forecasting in a position to make a decision on the production rate increases in early 2011.

Quickly to Pinos Altos. Pinos Altos, we do have a plan to improve our throughput. We had good performance here in February where we're running 3,000 tons a day or better. That is simply focused on mechanical availability, better operation within the existing filter tailing system. But the permanent solution is to install additional filter capacity. We've ordered two additional filters that will bring our total when those are installed in the third quarter to five filters. That will provide us with what we think is additional capacity. We think that will be potential to increase throughput at Pinos Altos. So, that would be -- steady improvement in Q4. We've seen further improvement in Q1. And we expect to continue to see improvement up through the third quarter until we get the additional filter capacity in place and we're also working, as you know, on further expansion opportunities there on satellite deposits as well as looking at increasing the capacity of the plant beyond the 4,000 ton per day rate of capacity. In terms of reserves and resources, the total is 4. 6 million ounces, it grew about 8%. We do have an active exploration program. We have been successful in making new discoveries there. So, there is -- from our perspective, good upside at Pinos Altos.

At Meadowbank, as we've said, we're in the commissioning phase now in the plant. Based on where we are in that commissioning phase, we anticipate first gold pour before the end of the month. We anticipate commercial production in April. So, in Q2 and so far, so good there. We've encountered as we move through the commissioning process, we've encountered no major issues to date. We saw significant increase in the reserve and resource here to over 7.7 million ounces, up 38%. So, still good potential to increase the reserve base through conversion of reserves and we're also, as you know, looking at expansion scenarios here. Likely, we'll be settling on probably 10,000 tons a day from 8,500 tons a day. We're still doing some work on that. We'll have more news on that as we move toward the middle of this year. I'll leave it at that, operator. We would be happy to take questions.

Ladies and gentlemen, we will now conduct the question-and-answer session. (Operator Instructions). Your first question comes from Tony Lesiak from Genuity Capital Markets. Please go ahead.

Good morning, Sean, Dave, Ebe, everyone. First question is on Pinos Altos. And on the reserve and resource statement. Can you give me a sense of how much resource was associated with the new targets, [Cubiros], Sinter, and San [Alesejo].?

Marc?

Essentially, that's where we found the emphasis in 2009 and where we're going to be exploring in 2010.

In fact, we find a half million ounces of cubic oil a Sinter and Cubiros is completely open.

Ok. Was there any change in the Creston resource? or reserve?

No.

Nothing. Ok. On heap recoveries, it looks like they declined in the quarter. Can you comment on that and whether or not you're looking at any changes to the mine plant?

Tim?

It is pretty early days. Lease cycle for this ORE is over a year. So, to get anywhere close to steady stage. (Inaudible).

Tim, can you get closer to the microphone? You're breaking up.

Ok. The lead cycle for the Pinos Altos heap leech ore is more than a year. So, it will take us a year to get stable with our recovery and there's not a decline in recovery. There's a -- just a change in the throughput. We had some throughput issues with wet ORE and we had less tons going on the pad, less pressure being - - .

We're losing you again. Perhaps you could move closer to the microphone?

I'm going to try a different microphone. Is that ok?

Perfect.

Ok. Just very fast, lead cycle for Pinos Altos heap leech is a year. A little more than a year. So, it will take a year to get the recovery stabilized and normalized. We didn't see a drop in recovery. We saw a drop in tons going to the pad and fresh ORE being leeched. And we have a little bit bigger inventory on the pad right now. We're not concerned with.

your next question comes from John Bridges of JPMorgan. Please go ahead.

Good morning, Sean, everybody.. Congratulations on the results. I was just nitpicking really on Lapa. You're talking about dilution but increased grind costs. That's an interesting mix. Just wondering if perhaps Ebe had some explanation as to what's actually going on. I'm just intrigued.

You're the grinding expert.

The grind cost is really the throughput currently. We are in the last quarter, we're enough at 1,500 tons per day. We are currently at 1500 tons per day (inaudible). Typically presently, the plant is in good mode of optimization and the cost will decrease presently.

It is related to the narrow vein isn't it, more than anything else?

I would say it is more related to optimizing the overall circuit over the quarter, we averaged just under 1,200 tons per day. We're currently averaging over 1,600 tons per day so the cost on the unit base will decline so it is a bit of an aberration.

Ok. Ok. I would just like to say thanks for the breakdown of the cost by different categories as well. That's helpful. Anyway, well-done, guys.

Your next question comes from John Flanagan of Fundamental Equity. Please go ahead.

Sean, in view of the entire capital cost of building Meadowbrook, does the return on investment still seem attractive at these gold prices and what is the total investment now?

Well, the total investment in terms of construction Cap Ex is about $700 million. We made the decision to build it and buy it when gold prices were $525 an ounce. So, the rate of return is higher now than it was when we made the decision to go ahead with that project. Also, as we've seen in the recent reserve and resource update, we've seen a significant increase of over 30% in the overall mineralized envelope up to now exceeding 7.7 million ounces. When we made a decision to buy it and build it, it was around three million ounces.

So, the ROI meets your standards?

That's correct, yes.

Thank you.

Your next question comes from Ray Fass, a private investor. Please go ahead.

Thank you. And congratulations. I simply wanted to confirm that your resource increases are coming from internal exploration as opposed to acquisition of exploration companies, correct?

That's correct. We spent about $60 million in exploration in 2009, a good portion of that was on the existing property portfolio and that's where we saw the increase in the resource and the conversion of resource to reserve.

Thank you.

Your next question is a follow-up from Tony Lesiak. Please go ahead.

Good morning. Another follow-up on the Pinos Altos. The 5,000 ton a day mill capacity that you're talking about, would that be available from 2011 on?

Yes.

So, obviously, there could be some changes in the guidance that you put out in December.

Well, we will be in a bit of a transition from the open pit into the underground so that will be part of our expansion study. So, I think it is a bit too early to say that but definitely having the extra capacity available sooner rather than later is a plus.

Ok. And Ebe, while I've got you, the wrap-up at Meadowbank, out of the 300,000 ounces, maybe 100,000 comes in the first half, 200,000 in the second?

I would say that would be reasonable.

Ok. And final question for David, there was an inventory adjustment of about $16 million on each of the mines to calculate cash costs. Can you elaborate on that?

Yes, there were three metals where we produced more than we sold. Gold, zinc and silver. And essentially, those are the inventory adjustments associated with the stockpiling or build-up of inventory in those three metals.

Ok, so there was nothing else in there?

No, not really.

Great.

Just as a follow-up, Tony, on your question in terms of December update. What we hope to have, based on working and analyzing several internal expansion opportunities is to have a lot of that work done as we move into the fourth quarter so that we can incorporate it in that update. Those would be things like Pinos Altos moving above their current rate of capacity of 4,000 tons a day. A potential new satellite zone that will go into construction in 2011 and production likely in 2012. We need to work out the details. It looks like it is likely Sinter. We'll have a good sense then of Meadowbank and its ability to go to 10,000 tons a day. And we'll also have a good sense of where we're headed in terms of Kittila. We may not have all of the final numbers but what we're trying to do is work through a time line this year where if we need to make modest investments of $5 million to preorder equipment ahead of announcing some updated production profile, we can do that and get that in the pipeline sooner rather than later.

Thanks, Sean.

Your next question comes from Steven Butler of Canaccord Adams. Please go ahead.

Good afternoon. Almost, guys. Question for you on Kittila. A nice reserve increase. As you booked. And were sort of expected to book. In terms of that reserve increase, is it justified or supported by an incremental capital cost for either shaft or just simply ramping down further, deeper? Thanks. And how much?

It is justified by ramping down. This is part of our trade-off study over the long-term whether we can justify a shaft. So, these reserves are just based on operating cost and extending the existing mine.

So, normal course maintenance capital levels -- nothing tremendous?

That's what this is involved. At the current tonnage rate. But we are evaluating significantly higher tonnage rates and if we do that, then there will be accelerated development and sustaining capital will increase.

Right. Ok. Thanks very much.

Your next question comes from Barry Cooper of CIBC. Please go ahead.

Yes, good day, everyone. Question for Ebe or Tim if he's still on the line there. Just looking at Pinos Altos, I know the silver recoveries have been an issue there and knowing right from the get go, I think you're anticipating 48%, 50% recovery. But your coverage seems to have come up nicely. Silver recoveries not so much, at least right now. I'm just wondering is that a situation where you focused on the gold and will now focus on getting the silver recoveries up? Or perhaps what we're seeing is the silver recoveries are just a little bit more difficult than where it was initially anticipated? Could you flush out some of the details there?

Tim?

Yes. I think it is fair to say we've been focusing on gold recovery and also we're running the mill right now with a little bit lower cyanide and the lead circuit and to make a long story short, that's to help us out with our filtration, the solution or the pulp chemistry and the filtration. So, we should see improvements in the silver recovery long-term and it just hasn't been a huge focus for us early.

Right. Ok. Thanks a lot. That's all of my questions.

Your next question comes from Chantal Gosselin of Sun Valley Gold. Please go ahead.

Good morning. I noticed that at five of the six assets, the reserve decreased but the grade increased and the reason provided is higher projection for operating costs, which presumably increased the cutoff grade. Could you share your assumptions in cost that you used for calculating the cut upgrade and are they different from your last guidance?

I can touch on intro and then Marc, you can help me with that. I don't think your statement of the five mines is entirely correct. If you look at Goldex, we maintained reserves at LaRonde. I think we were down 3% and the upside potential on LaRonde is at depth. Until we get the development in place, then we will be able to drill more. I think so at Kittila, the reserves went up. At Meadowbank, they were flat. The only place where we had issues with the reserve statement where at Lapa and at Pinos Altos. And at Lapa, yes, the cutoff grade did go up because of cost pressure, higher costs because of significantly higher ground control than what we had originally planned for in the feasibility. But also when we -- definition drilled, some of the zones at depth, we found them to be too irregular and therefore, did not meet our criteria for mining. Also, with respect to Pinos Altos, the western part of the Santa Nino pit tended to be significantly more irregular than we had -- and disjointed than what we had planned originally. So, this material tended to be lower grade and therefore, once again, did not make our cutoff projections. So, maybe, Marc, you can add more color to that?

Yes. Hi, Chantal. Yes, in effect, a large part of the -- when you look at the table, the differences of LaRonde is only natural. I mean we produced -- we extracted almost 250,000 ounces of rock to produce the 225. So, there was -- at LaRonde, we're not seeing any increases in reserves there. Depletion. As a matter of fact, it only depleted by 125. So, we actually got more ounces back in spite of lower base metal credits. So, you're right, Ebe. Lapa is the key factor at Pinos Altos, it is less than about 5% decrease. So, it is a wash for the rest of them.

Ok. I guess I should have rephrased my question. Five of the six were a decrease or flat but if you look at the comment at Lapa and Pinos Altos and Meadowbank, seems like you have used a higher cutoff grade. Is the operating cost projection used in those cutoff grade, is it different from your last guidance?

No. I'm sorry. Essentially, no. We guided that in December.

Ok. So, all there. The cost per tons were pretty much the same as your last guidance.

That is correct. I can also add to that. Part of the sort of internal questions that we had have. There is look of historical production data and cost data at Kittila, even the meadow bank and the Pinos Altos. And the three Abitibi mines, we're starting to get some historical cost data and performance data. So, it is a lot easier to calculate those cutoff grades. So, there is a bit of a question mark on the other deposits. And we feel, as Sean mentioned, we can do better and we expect, going forward, to be able to lower some of the operating costs and to be able to perhaps lower the cutoff grades. But in the interim, we're tending toward the more conservative position.

Ok, thank you.

Greg Barnes of TD Newcrest. Please go ahead.

Sean, I was wondering where recoveries stand at Kittila. I believe you're heading into a shutdown in March. And also what you plan to do during the shutdown.

Perhaps you can add a bit more color to that of the shutdown?

First of all, on the recovery, if we just look at 2009, the first quarter, we're at 28. Second quarter at 49. The third quarter -- sorry, first, 28. Yes, 49. 64 in the third and the fourth quarter at 76 in December. We did 70.6. Recovery is going on a good curve. Presently, we achieve some date and consecutive date over a week and more than one time over 80% and 83%. Now, we just want to have a more stable process and in the first quarter, we'll do some more tests to bring as a kind of stabilizer inside the play, we cannot give anymore detail. This is a new chemical and that we have some result that we expect to have a more stable operation. But at least we were able to do the demonstration that we are able to achieve 80%, 83% goal recovery.

Where is the chemical being added?

Excuse me?

Where is the chemical being added?

Added with the seed.

Added with the seed.

Ok. For the shutdown, it is a normal shutdown for to we'll have to go at least once per year and view the plate. At the same time, we'll work on the oxygen pipe to -- for the oxygen distribution. So, the normal inspection. Which will be in March or if we can postpone, it will be in April.

I thought the shutdown was going to be a bigger maintenance shutdown to be replacing some components, pumps, pipes, things like that. But it doesn't sound like that.

We'll change some pipes but we have everything normally that kind of shutdown, it will be roughly a week.

Roughly a week. Ok. Just switching gears to Dave, the tax rate for 2010 at 40% seems kind of high.

It will probably be in the 35% to 40% range. It should -- it should trend down over time as we get more income from Finland, Mexico which have lower statutory rates. Probably over the long-term, 30%, 32%.

When would that kick in? In 2011?

Probably 2012, 2013.

Ok, thanks.

Your next question so a follow-up from John Flanagan of Fundamental Equities. Please go ahead.

Sean, I wonder now that you've seen the light at the end of the various tunnels, whether it is time to crank up the dividend somewhat. What's your attitude on that?

Well, as you know, we've paid one for 28 consecutive years which during some years has not been easy. So, we're certainly predisposed to a dividend. We've said consistently during the building phase that once we came through the building phase that we would look at increasing that dividend. So, the next time that we would be considering that would be in December as we put together a revised mine plan which we hope will incorporate additional expansion opportunities and growth in throughput. So, we're certainly in a good position to be able to do that and given our track record of paying one for 28 years, it shows that it is something that we pay attention to and would look to increase at some point.

Ok.

Your next question is from Anita Soni of Credit Suisse. Please go ahead.

Could I get you to -- Dave, to elaborate again on the inventory adjustment? I'm having a little bit of trouble reconciling my cash costs for LaRonde.

We sold 5,000 ounces -- we produced 5,000 more ounces of gold than sold. We produced about 2,000 tons or sold more zinc than we sold and we produced -- I guess about 100,000 ounces more silver than we sold and those aggregate when the price extensions to it, an inventory adjustment. In order to reconcile from your cost of sale on the income statement to production cost analysis.

And you guys quote production cost of sales in terms of production rate?

Yes, our cost per ounce are -- production basis whereas our realized prices are on a sold basis. We do have to do have a reconciliation from the income statement under SEC rules.

And I don't know if you can let us know but what are the TCRCs running right now?

For 2010, it is not -- expectation on the market, I will say -- we expect to be in the 275 basis, 2500 for zinc. Seven minus four. And for copper, a little bit lower than 50 and 5 cents. 48 or 47.

Could you say what the zinc was again?

Zinc, 275, 2500.

Ok. Thank you.

(Operator Instructions). Mr. Boyd, there are no further questions at this time. Please continue.

Thanks, operator. Thank you very much, everyone. If there's any other questions off-line, please feel free to give us a shout. Thanks again. Ladies and gentlemen, this concludes the conference call for today. Thank you for your participation and you may now disconnect your lines.