Agnico Eagle Mines Ltd (AEM) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Agnico-Eagle Mines Limited 2010 results conference call. (Operator Instructions) I would like to remind everyone that this conference call is being recorded today, Thursday, July 29, 2010, at 11:00 am Eastern time.

I will now turn the conference over to Mr. Sean Boyd, Vice Chairman and Chief Executive Officer. Please go ahead, sir.

Thank you, Operator, and good morning, everyone. Thanks for joining our Q2 conference call. We've got our full team here in Toronto. We've got a short presentation, and then we'll open it up for questions.

Just in terms of an overall summary, we had record gold production, record earnings and cash flow, as a result of us ramping up our newly built mines. We're beginning to see that production growth translate into positive impacts on both the bottom line profitability and cash flow.

The solid quarter, from a production standpoint, keeps us on track for our production guidance of between 1 million and 1.1 million ounces. We've still got some work to do on the cost side, particularly at Kittila and Meadowbank, as we continue to optimize these two mines.

A full-year cost guidance is $425 to $450 an ounce, which is an increase from $399. Part of that increased guidance is due to changes in some of the FX and byproduct revenue assumptions in addition to the higher cost during the commission phase at both Kittila and Meadowbank.

I'll talk a bit about some of the technical issues now, and then we can get into them in more detail in the question-and-answer session. At Kittila, the recent efforts have been focused on reducing the fluoride content of the concentrate.

We've seen some very good results. Although still early, we've seen some results over the last several weeks at 80% recovery. So we're still on track to achieve our recovery target of 83% by the end of the year.

At Meadowbank, we're just in the midst of upgrading the portable crushing facility that's in place now. That will allow us to ramp up throughput in the second half of this year. We'll have a permanent secondary crushing unit in place in the third quarter of next year, which will permanently resolve that situation.

On the cost side, we're getting delivery, on the barges this summer, of new mining equipment. That will also improve our efficiencies in the open pit, which will help us reduce those costs.

At Pinos Altos, we're still on track to commission the first of the new filters this quarter. That will allow us to increase our throughput in the fourth quarter of this year.

So as we look out to the second half, we'll see continued growth in our gold production. We'll see our unit costs decline, which will have a positive impact on profitability and on cash flow in the second half. We expect that second half run rate to carry through into 2011.

As we move into 2012 and 2013, our expansions at Goldex, Pinos Altos and LaRonde will start to take hold, adding more growth to our production profile. Beyond that, as we said, we continue to work on output expansions at Kittila, and at Meadowbank and further expansions at Pinos Altos.

In early July, we closed the transaction, bringing in 100% of the Meliadine project. We now have a $130 million program over the next 2.5 years that will result in extensive drilling of the deposit. It will allow us to take a fault sample. It calls for construction of the road from Rankin Inlet to the site as well as a feasibility study. So we're moving forward very sharply on that project.

I'll move through the slides. I'm not going to go through all of them because we'll leave more time for question and answers, and I know it's a busy day on the earnings front.

But just quickly talking about the financial results, I think what we're happy to see is the cash flow that's being generated as these mines ramp up. Cash provided by operating activities of over $160 million in the quarter. We expect that to grow as we move through the second half with the increases and output and declining unit cost to produce an ounce of gold.

Looking at some of the results in more detail, we see a strong production quarter at over 250,000 ounces, so for the first half, a little under 450,000 ounces. So we're anticipating over 600,000 ounces in the second half at cash cost in the low $400s. So that will allow us to grow not only output, but reduce costs and improve our cash flow as we go forward.

The balance sheet side -- we did increase our bank facilities from $900 million to $1.2 billion. We added another year to that facility. So that gives us extremely good liquidity at a point in time where our cash flow begins to ramp up, as all six mines are now running.

In terms of the transformation, there's still some optimization ongoing, and we've got internal project expansions ahead that will further allow us to grow output and cash flow as we move forward. As we mentioned at the start, exploration activities are being increased company-wide with additional focus now on the Meliadine project in Nunavut.

The next slide just highlights some of the key metrics for us in terms of how we've been able to grow the Company over the last several years. We will continue to see growth in all of these metrics as we grow output at all six mines and begin work on the Meliadine project.

Reserves have continued to grow over the last several years. Our resource grew substantially with the addition of Meliadine. As we grow that deposit, it's a large deposit of 5 million ounces. So we will expect additions to our reserve base from our existing projects, including the new Meliadine project as we move forward.

No change to the five-year production profile, but as you know, we're looking at internal expansions at Kittila, Meadowbank and Pinos Altos that we expect will result in additions to that production profile over the next five years.

From a CapEx point of view, we're heading into the final phases of the big construction phase. We move into more of a sustaining phase with the existing assets. That's absent the potential expansions. So we'll have more to say about those expansions as we move into the later part of this year and into the first half of next year.

In terms of cash flow and free cash flow, with this building phase, we've moved into a leadership position in the industry, which is where we expect to be as we decided on growing our company asset by asset.

What I'll do now, I won't go into the individual slides on each of the projects. Operator, I'd like to open it up for questions now, and we can get into some of the details on the projects.

Thank you. Ladies and gentlemen, we will now conduct a question-and-answer session. (Operator Instructions)

Your first question comes from Haytham Hodaly of Salman Partners. Please go ahead.

Good morning, Sean. How are you?

Good morning.

Just a few questions; I should start with the easy one, Meadowbank and Kittila. I think the addition was $22 million in capital. How much of each?

Total, the additions to capital at Meadowbank and Kittila, it's roughly a 50-50 split.

Okay, fair enough. Then looking at, let's say -- let's go to Goldex. Are you expecting a cost per ton to decrease as time goes on? Or is the $24 a ton that you quoted a reasonable number? I think the original expectation was to come down to around $21.

Good morning, Haytham. It's Ebe here. Yes, we expect --.

Good morning.

We expect that to go down. A matter of fact, we've already started transferring a part of the workforce from Goldex to our Lapa division to accelerate and take - contractor development over there. So that will be reflected more in the second half of the year and going forward.

We only have one production blast left, and then the original envelope of just under 23 million tons will have been blasted. Then we will be in a strict extraction phase. So we expect that cost to come down.

Okay, and is the $21 still your targeted level or lower sort of thing?

$20 to $21.

$20 to $21. So okay, good. I guess your production rate of 8,000 tons per day, expected in Q4 this year, what grade do you expect, I guess, going forward into like 2011?

We're expecting reserve grade, which would be around 2.1 grams -- in there.

Around 2.1, okay. With regards to depreciation levels at Goldex as well, since were on Goldex? They've increased significantly from last year. Is this last quarter a good indication of what we should be using on the units of production basis?

Yes.

Yes.

Okay, a question on your recently implemented revised debt levels, was it the $1.2 billion facility that you put in place? What are the terms on the drawn and undrawn portion of that facility?

Right now, there's a little bit drawn under letters of credit. So we've got over $1 billion that remains drawn. You're looking for standby fees, et cetera?

Yes that's correct.

We'll just turn that over to our treasurer.

Yes, hi. It's Claudio here. The terms on the standby fees are about 80 BPS on the standby fees. It ranges from about 80 to 105.

Okay, 80 to 105. What, is this just on the drawn portion?

The drawn portion is 250 to 350.

I -- that a LIBOR plus? Or is that --?

Yes.

Okay. Based on what you indicated in terms of your overall debt levels of $735 million and given that you had the senior unsecured notes, I guess, in the last quarter of $600 million, is it safe to say that this new facility and the other facilities are -- total to $135 million?

Yes. Yes, $135 million is drawn under the revolver. The $600 million of notes, the proceeds, were used to repay the amounts outstanding on the facility.

Okay, and then last question on the facility; how much do you expect to really have drawn down on this facility by the end of this year?

Not very much. We expected the debt level to come down throughout the course of the year as we generate more net free cash flow.

Okay, so you'll pay off some of that $135 million that's already drawn down?

Yes.

Okay, fair enough. Let's kick into Kittila. I saw that there's a royalty that came into place this year, which previously wasn't incorporated, I guess, last year. Is it an NSR, NPR -- refresh my memory -- and at what rates?

It's an NSR.

2% NSL.

Sorry, 2% was it?

Yes.

Yes.

Okay, perfect. I'll leave it to somebody else, and I'll come back later. Thank you, gentlemen.

Thank you.

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

Sure, thanks. My question was with respect to Pinos Altos. The grades dropped there in the quarter. Can you just elaborate a little bit on that and whether you expect that to come up or stay at those levels?

The grade dropped a bit, and it's a question of a blend between the Santo Nino pits and the Oberon de Weber pit. The Oberon de Weber pit is supplying about 30% of the mill feed, and we're in the upper benches. The grade is a bit lower.

We expect that to improve as we mine deeper down. This is something that we saw in the Santo Nino pit as well. That's what is currently expected.

Then in terms of Kittila, could you just explain? I noticed, obviously, that you've got a good recovery rate improvement in the last 40 days, 81% average. Could you explain as much as you can exactly what the process is that kind of unlocked that?

Yes, essentially, as mentioned in the press release, we were able to maintain about 81% average. We just were able to control the level of chlorine going inside of the autoclave. By doing that, we're able to avoid the low chloride formation. That's --.

Right. So, yes, I was just curious as to how exactly you're limiting the amount of chloride -- chlorine, sorry -- that's going into the autoclave in the first place.

Presently, to be honest, we're investigating. We see that it's a big potential, and we do not intend to give too much detail on that specific matter.

Okay, sorry.

It's a potential patent issue at some point. We've come up with a solution on our own.

Okay. All right, thanks. Then just in terms of the throughput at Kittila, do you expect that to ramp up toward the end of the year? It was relatively flat quarter over quarter.

Presently, for the milling, we dropped a little bit to stabilize the circuit. We intend to be able to raise over 3,000 tons per day.

Okay, so can you give guidance on where you're at right now in July?

We're at roughly 2,600, 2,700 tons per day presently. We're also running higher grade material. So there is some restriction there. But as Sean mentioned, we are making some further mechanical changes, and we will be able to sustain the 3,000 tons per day-plus going forward.

Okay, and then just at Meadowbank, some of the throughput rates; I understand you've got now a second temporary crusher as well?

Yes, we do. It's a secondary crusher. It's the same issue that we experienced at Goldex where we don't have the distribution of fragmentation that we had expected. So we used a portable crusher that we had onsite. It was an older model. We currently are in the process of installing a newer version. Once that gets installed by the end of August, we expect to be able to maintain the tonnage at 8,500 tons per day.

When we do have the proper distribution in the dome, we have achieved daily tonnage rates of over 9,000 tons per day. So we know the mill, by itself, is capable of attaining a minimum of 8,500 tons per day. We just have to make sure that we provide it with a consistent product.

Okay, and then lastly, just in terms of the grades at Meadowbank, was it a little higher this quarter than what I was expecting? Is that expected to continue or to trend down more towards what it was in previous quarters?

Well, I would say it's still early days. It's been the first quarter of full production, and we still have a 600,000-ton stockpile. We have a mill that's brand new, and we are also extracting ore directly from a pit into the gyratory crusher to try to avoid all the extra manipulation.

What I would say right now, we are starting to come very close to reconciling the ore body with what we are getting in the mill. So we expect for the rest of the year to run at about the 4.0 to 4.3 grams per ton range. That's what's in our mining plant.

Okay, thanks very much.

Your next question comes from David Haughton of BMO Capital Markets. Please go ahead.

Yes, good morning, Sean, et al. Just having a look at the LaRonde unit cost up at CAD79 per ton, there was some commentary of it coming down. What's your sort of target expectation of that?

Well, we are on budget for the rest of the year on $75 a ton. This is a quarterly spike. There is a difference with respect to deferred development and operating development. Our development is slightly ahead of schedule, so more was charged to operations.

Also, we had a shutdown where we changed the hoist cables. So there's also a stockpile adjustment in there. So we expect the mine to maintain its cost, and this is only a quarterly situation.

Thank you, Ebe. Just having a look at Meadowbank, depreciation rate there looked to be around about $170 per ounce. Is that what you expect for it to be on an ongoing basis?

We missed that, David.

Oh, I'm sorry. Just having a look at the Meadowbank, the depreciation rate on a per-ounce basis looked around about $170-per-ounce mark. Is that something that we should be thinking about going forward?

Yes.

All right, and thinking of Meadowbank, I know that you've got a number of modifications in place with temporary crushing, et cetera. I'm just trying to get a gauge as to how these unit costs might unfold. Could we expect to see unit costs on the order of $80 per ton for the remainder of the year and then coming back to much lower levels once you've got your own crusher in place?

That is correct. We're also faced with a bit of accelerated stripping, which we will be expensing. The secondary crusher that we have with all of the manipulation, we expect that to cost between $3 to $5 a ton. Also, we expect significant improvements with respect to drilling.

Over the past winter, even though we had new production drills, their availability, due to a design defect, was only about 40%. That has since been -- in the process of being resolved. We're very close, to having resolved that with the manufacturer.

But as an insurance policy, we have acquired additional drilling capacity. Also, our emphasis at Meadowbank was getting the mill, the process plant, going. As a result, the maintenance facilities' progress has suffered. They have since been completed and will be operational this month.

So the availability on the truck fleet and the shovel fleet will improve significantly. Secondly, on the barge season this year, we have a new fleet of 650 150-ton trucks and two new shovels coming, which will be put into operation.

So we expect performance in the mine to improve significantly. With increased the tonnage through the mill, we expect the unit cost to drop.

The kind of unit cost target, once you stabilize all of these things, could we be looking at the CAD65 to CAD70 per ton?

I would say we'd like to maintain that for now.

Okay, now with each of those remedial actions that you mentioned there, Ebe, I presume that there's some capital costs associated with it.

Well, the CapEx definitely has increased by acquiring a crushing plant. We've already started to acquire some of the components for the secondary crushing plant. So that has been incorporated in the increase.

Also, with the issues that we've had with the mining equipment, we have from the life of mine shifted expenditures from later on and acquired equipment earlier on. So it's a timing issue.

Then, also, I would say one of the other additions that we've experienced is in the construction of the final [bay goose] dike whereby overburden underneath the water we found out there was, once we started digging, was deeper. So there will be some additions to dike construction. Now those are the main areas where we have experienced some increases in capital.

Okay, so you've spent, so far this year, about $75 million. Would you expect that number to be repeated for the second part of this year?

Second half of this year, the CapEx at Meadowbank is about $90 million to $91 million.

Thank you, Sean. We're seeing now quite a lot of cash flow being generated by this business as the producers can capture these better margins. Have you turned your mind to any change to your dividends?

We look at that every year in December. Each of the last 28 years we decided to pay one. We're on record over the last year, as we've moved towards the end of this building phase, to say that our dividend will go up. So we'll revisit that, like we always do, once we complete the budgeting process and the five-year plan in December.

Okay, thank you very much, guys.

Your next question comes from [Richard Curman], a private investor. Please go ahead.

My question relates to your hedging policies and programs in light of the [Babitch] report from the Fed here in the United States yesterday that appears we are going to have deflation for at least through 2011. I'm wondering could you comment a little bit on your hedging programs as far as both currency fluctuations and as well as the price of gold?

We've do nothing on the gold side. We've never done anything on the gold side. We've done a little bit around the Canadian/US dollar, but not much. So we've got very little hedging in place. Does that answer that?

Yes, it does answer the question. I just wondered whether or not, in light of the rather pessimistic outlook that came out of our Fed yesterday, that that has any impact on your business or your hedging policies or not or whether you have a fairly constant program that doesn't really fluctuate based on Fed reports.

No, that report is not going to impact our view on hedging our output.

Thank you very much.

Thank you.

Your next question comes from [Athan Balley] of [Solomon Partners]. Please go ahead.

Thanks, guys. Just a couple of follow-up questions to housekeeping issues; just at Lapa, your [GB&A] levels increased significantly, obviously, in Q1 and Q2. I think they're filling around 300, 302. Is this a reasonable level for the second half of the year? Or do you expect this to go down?

It's the same.

The same, okay. Then, Kittila; what proportion of your total throughput will be from underground in 2011 roughly?

2011, we will be getting about, I believe it's 20%, 25% of our ore from underground.

What type of grades are you looking at from the underground there, Ebe?

Well, I would say similar grades as the open pit in the five to six gram range.

Okay, so no real change there. Perfect. Then last question on the housekeeping; Pinos Altos depreciation levels, I think they're 177 on a units production basis in the second quarter. Is that also a reasonable expectation for the remainder of the year?

Yes.

Yes.

Perfect, that's all my questions. Thank you, guys.

Your next question comes from David Christie of Scotia Capital. Please go ahead.

Good morning, guys. Just on Kittila, I guess, quickly. The recoveries, apparently, are good for the past 40 days. Sean, what kind of grades are you getting in that ore like what, is it different than we were mining before? Is it the same stuff?

Weekly, in the last 40 days, we have different [RECP]. So it's not just specific to one zone in the great play between five and seven grams per ton.

So it's pretty typical of the deposit. That's great. The mineralogy is being similar to the problems you were having before? Same impact?

We touched some zone that we have a full recovery, and we're able to maintain over 80%.

Okay, that's great. What kind of additive, like what kind of expense have you had to have to maintain this? Are you going to increase the nulling cost there at all?

Presently, it's very minor. We speak below EUR1 per ton. I don't have all of the numbers, but it's very not substantial.

That's great.

To add to that, David, I think anything we do from a CapEx point of view will be to get us to the next level closer to 87%.

Great, perfect. One more question; just on the rock, I guess, hardness, or rock quality, up at Meadowbank, is it harder? Or is just the rock quality was stronger than you were expecting?

I would say it's probably a bit stronger than what we had expected. But I think the big issue is more like in production blasting, that it does not give us the distribution of fragmentation. It tends to break up.

I guess that perhaps it's banded iron formation, and it breaks into bigger chunks and with very little finer material in it. So that may be just a function of the banding within the ore. But that is the main issue there. We have found in the process plant that it really isn't that much harder than what we had predicted.

No, so this is like the silica banding in the formation as opposed to the sulfide and --?

I would guess so, yes.

Yes. Now will you have similar issues at Meliadine? Is it similar?

Well, I would say what we have seen, I would say there's a lot more quartz or silica. So it may be an issue. But then on, also, long term, Meliadine will be an underground operation. But, certainly, we will take that into consideration after the Meadowbank experience.

Okay, one more question just on the Meliadine -- Meliadine, however we're going to say it. Are you going to building a road into there in the near term? Or what's the decision on that?

Well, we have proposed to the Board to build the road, but timing and construction in [loom] of what is contingent on permitting. So what we have said that we would like to accelerate the permitting and get the road in as quickly as possible and, therefore, basically, set the tone for the project, even in the latter stages of exploration. It would facilitate construction.

This is, once again, based on the Meadowbank experience where the road construction was delayed. Then to be able to maintain the big picture, then we had to airfreight and use other ways and means of getting material in. That resulted in CapEx experience.

So we are applying what we learned at Meadowbank and would like to ideally get the road in as soon as possible, especially during the summer months not have to helicopter everyone in.

Now that way you wouldn't have to upgrade the port facility in Rankin Inlet that way, right, like you had to in Baker?

Well, I think Rankin is blessed with a bit more infrastructure. We have to look at, perhaps, more fuel storage. We don't have any fuel storage at Rankin. So there's going to have to be some upgrades. But our initial discussions with Rankin Inlet with respect to fuel and the government of Nunavut have been very favorable, very pro-Agnico.

Excellent. Thanks, Ebe.

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

I think most of my questions have been asked, thanks.

Your next question comes from Richard Curman, a private investor. Please go ahead.

You've had a fairly aggressive acquisition program for the last year or so as far as mines are concerned. But I'm wondering can you tell me a little bit more about what your plans are for the future. Are you going to stand pat? Or do you have an acquisition program or policy in place in the Company? Thank you.

The program's been fairly consistent over the last several years looking for those smaller, earlier stage opportunities and growing them. As you said, we just completed one this month.

We continue to look. The foundation for our growth over the next several years will be the existing projects. Now that we've added Meliadine in the pipeline, that gives us a big deposit that we feel will grow and will add another sizeable production mine for us.

But we never stop looking. But we are looking for those smaller, earlier-stage opportunities that we can get exposure to and drill and grow them and then decide what sort of infrastructure we can build on them.

You seem to continue to focus on pretty safe-haven countries, Mexico, Canada and Finland. Is that an integral part of your policy? Or are you a little bit more open on that now?

It's been an integral part of the history of the Company. With six mines in pro-mining jurisdictions we could probably go into areas that are new to us now, given that we're well diversified. But, again, you won't see a dramatic change in Agnico's approach in terms of where we're going over the next few years.

I think my last question is going to be on safety. Due to the fact that we've had some both coal mine accidents and, of course, the Gulf disaster, I'd be interested in hearing your comments about safety programs and policies since I suspect your mining operations do have a fair amount of risk connected with them.

Thanks for the question. Agnico has historically been one of the safest mining companies in the Northwest and Quebec. Our mine rescue crews established a new record by winning the Quebec Mine Rescue championships five years in a row.

In terms of our peer group, we have always consistently been at the top of our peer group. Just recently, two of our mines in Quebec both won -- two of them won safety awards, recognized for their hard work, the Lapa mine and the Goldex mine. These are new operations. That was also a first in the Quebec mining industry.

Everything that we have learned we have applied elsewhere. Our stats of our mines, be they in Mexico at Pinos Altos, Kittila in Finland or Meadowbank in Nunavut, their safety numbers are right on track or is now even better than some of our Northwest and Quebec mines.

So the safety of our employees has been a cornerstone and foundation of our growth. That has been recognized by employees, by the governments, by the people and by mining agencies.

Are you generally satisfied that your mines are being operated well within the regulations of the various countries where you operate?

Absolutely. Our relationships, be they with the various ministries of environment, workman compensation boards, our relationships are excellent. We've always had a policy of transparency and very open. As a result, we believe we've developed great relationships and maintained our credibility with all of the various agencies and now also in various international jurisdictions.

Thank you very much for answering.

Thank you.

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

All right, I did have two follow-up questions. The first one, the royalty; could you remind me who that gets paid to, the royalty at Kittila, the NSR? 2%?

The Finnish government.

Then, secondly, with respect to the capital cost increases that you're talking about at Meadowbank, all the improvement to get the cash, the unit cost, down, is that going trickle into 2011? I mean, you mean you've spent $11 million this year. Are you expecting anything for 2011?

Well, we look at the major ticket for getting the tonnage up would be the secondary crushing plant. We have very early estimates. That number could be anywhere from about $24 million to $29 million. That would be spread out over two years, so this year and the following year.

The other item, as I mentioned earlier, was improvements to the mining fleet. That was a $13 million ticket. But that's sort of a life of mine ticket that we've accelerated from. It was originally budgeted in 2011 and 2012. So with the barge season and the issues we were having, we thought that it would be in our best interest to accelerate that.

Then the other major items are like dike construction. As I mentioned, that would be about an additional $5 million to $7 million, mostly due to grouting of the dikes and more material to be deposited. But those are the major changes.

Okay, so that --.

The total amount for this year would be about, as Sean mentioned, $90 million to $92 million and then moderate increases next year as we spill over with the crushing plant and final dike construction.

Okay, thank you.

(Operator Instructions)

Well, if there's no further questions I'd like to thank everybody for their attention. Just to remind everyone, we will have an exploration update out in September. That will incorporate the drilling that's being done or has been done at Meliadine. We have three drills or (technical difficulty).

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