Agnico Eagle Mines Ltd (AEM) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Agnico Eagle Mines second quarter 2013 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 with instructions provided. (Operator Instructions). As a reminder this conference is being recorded today, Thursday, July 25, 2013, at 11 AM Eastern Time and I would now like to turn the conference over to Mr. Sean Boyd, President and Chief Executive Officer. Please go ahead, sir.

Thank you operator and good morning, everyone and thank you for participating in our second quarter 2013 conference call. I would just like to remind everyone that this presentation contains forward-looking statements so please be forewarned.

Just in terms of a summary of the quarter in terms of highlights. From a production and operating cost standpoint we were in line with our expectations and as a result of that we are still on track to achieve our 2013 full year guidance. Our financial results in the quarter were impacted by, as we have described before, our extended maintenance shutdown in the autoclave in Kittila but also on concentrate settlement adjustments which were a bit more severe than we normally experience given the sharp fall off in the gold and silver price early in the quarter and that is what caused such a change from what we would normally see with those settlement adjustments.

The Kittila autoclave is back running at steady state levels. Our recoveries were back up almost immediately to the 89% level so performing extremely well.

We did also describe in our press release that we have been undertaking a review of operations to enhance our financial flexibility and as a result of that review we have announced significant reductions in our capital and operating costs both for 2013 and for 2014 and we were able to do it in a way where it doesn't impact our ability to achieve our 20% growth in production through to 2015.

Just a description in general of the reductions in capital operating costs, we are looking at about $50 million in 2013. That would be about half expense and half capital. Of that $50 million about $20 million would be exploration. The rest is capital and some operating cost savings.

In 2014 we are looking for about $200 million in capital cost reductions, principally Meliadine sustaining capital and some capital that we had originally planned to spend at Kittila and at Goldex. We are also looking for reductions next year in exploration expense of about $50 million, which would be roughly around $20 million in capitalized exploration and about $30 million in expense.

We are still going through these numbers. As we go through our budgeting process we will be looking for additional savings and efficiencies and optimizations as we go through a detailed budget for next year and also a full review of a life of mine plan at all of our mines.

As we said, 2013 was always back ended in terms of second half production. We are expecting about a 15% increase in production in the second half of 2013 as we have a full six months out of our Kittila operation. Also a full six months out of Creston Mascota which started about a month ahead of schedule in the first half of 2013.

We are expecting better grades at Meadowbank as we encounter some of the high grade pockets of mineralization which we experienced in June and August of last year. We are going to see some of that in the second half of this year.

The Goldex development has gone well. We expect startup of Goldex within the next few months and we're expecting continued grade improvement at LaRonde.

As we look forward on a quarterly basis we are anticipating roughly 260,000 to 265,000 ounces per quarter in the second half of 2013. That will rise to about 280,000 per quarter on annualized basis in 2014 and at around 300,000 ounces per quarter in 2013 on average.

So you can see we can still significantly increase our production as we move forward. Because the expenditures on these projects which drive that production growth have largely been made and the reductions that we have made were in projects that are longer term.

As far as the actual operating results, again production costs in line with expectations which essentially put us on track to achieve production guidance in 2013. The biggest difference year on year and period to period was obviously the autoclave maintenance at Kittila. We produced about 5,000 ounces in Q2 and that was down from 43,000 ounces in Q1.

So Kittila on a normalized basis is producing plus 40,000 ounces a quarter so that was with the maintenance shutdown. That is why we saw a significant decline in production.

As far as the actual financial results, as we discussed they were impacted by lower commodity prices in the Kittila shutdown. And also the declining metal prices. So the concentrates do contain gold, and so with the gold price down $300 in mid April those settlements were affected by that, not just the decline in the silver price and the zinc price.

As far as the financial position, we had over $100 million in cash, our long-term debt stood at $850 million. Our maturities, the first payment on our private placement long-term debt is not due until 2017 and that is $115 million. So the balance sheet is strong.

We have undrawn under our credit facilities over $1.1 billion as well. And our two principal covenants under our debt arrangements, a net debt to EBITDA and a tangible net worth covenant, were well within our requirements under our debt facilities.

As far as production growth, no change there. We are still expecting 20% production growth through 2015 driven by La India, Goldex, increasing grades at LaRonde and expectation of robust production coming out of Kittila now that the autoclave has been fully relined and the internal components of that autoclave have been upgraded.

As far as our capital we have traditionally talked about our business along the lines of spending about $600 million a year for the next several years. Largely split sort of $200 million to $250 million on sustaining and the rest on growth projects.

Next year we're looking at spending $450 million -- or $400 million. Roughly $250 million or so on sustaining and the rest on growth projects and that's reduction of about $200 million.

We should point out that the biggest decline was on Meliadine, but I think what's important, just as important as the decline in how much we are spending there is the fact of where we are spending it. We are going to continue with our ramp at Meliadine, which allows us to keep that project on the projected timeline for late 2018 assuming we get board approval about a year from now. That was important for us to keep moving that project forward.

We continue to get good grow results there. So it's not just the reduction but how we've allocated and focused the smaller amount of capital that we have planned to allocate out to our business.

I will move through the operations quite quickly. LaRonde is on track to get its cooling plant infrastructure in place by the end of the year. That will improve our operating flexibility in the mine as we move forward into next year and beyond and allowing us to open up the lower part of that mine where we are seeing the higher grade material.

About 60% of our ore in the quarter came from the lower mine and that should increase as we move forward and as we get into 2016 we should be drawing principally all of our ore from the lower level allowing us to mine at or above the reserve grade.

The biggest reason for the increase in cash costs at LaRonde was really the significant decline in by product revenue both from a pricing standpoint and also from a production standpoint. In the second half we should see production increase at LaRonde by about 7% or 8% just driven by the grades.

At Lapa, another steady quarter in terms of production and costs. Still on track to do its production this year. We've had some interesting drill results but that mine is still slated to close within about three years but we will continue to drill it. We have got, I would say, a reasonable drill program there following up on targets. We have seen some of the best holes we have seen in a while there at that property so they certainly do warrant follow-up given the infrastructure that we have in place at Lapa.

At Kittila, we talked about that. Essentially we are operational. The plant was operational for 14 days out of the quarter and that is why production was only 5,000 ounces. And as we said earlier, throughput and recoveries are back to steady state with recoveries at the 89% level. Our expansion plans are also on track where we are looking to increase our throughput by 20% up to 3,750 tonnes per day by the second half of 2015.

In Mexico, our unit costs were up a bit and that was largely the result of a roughly 20% decline in realized silver prices in the quarter. The Pinos Altos mine produces a significant amount of silver. But from an operating standpoint we are achieving our cost targets in terms of cost per tonne. We're also achieving our production targets and we had our Creston Mascota heap leach operation come back online about a month earlier than scheduled. So we expect a stronger half second half in Mexico due to the fact that we're anticipating a full six months of production coming out of the recently started up Creston Mascota heap leach operation.

At Meadowbank we continue to make good strides in our cost reduction program. Our cost per tonne in the quarter was $83. I think you recall those numbers were closer to $100 in the past so the team has done a really good job of managing its overall cost structure.

We have had an ability to increase both the mining rate and the processing rate there in the quarter. We processed over 11,000 tonnes per day. That resulted in production of over 90,000 ounces. As we said the fact that we have got the plant operating at those levels with the benefit of having higher grade components of the open pit available to us in the second half we expect an extremely strong second half coming out of the Meadowbank operation.

On our development projects, La India is going extremely well. We are on track for commissioning in the fourth quarter of this year. The project is on budget, we're well advanced on construction. We actually have a site visit there in September. Actually two visits on the front and back end of the Denver gold show so we are going to be looking forward to showing off the progress that we have made at one of our new mines in Mexico.

At Goldex, also going well. We are expecting commercial production in the fourth quarter of 2013. We continue to work on additional studies. There is a number of satellite zones there. What we were hoping to do all along was get the M and E zone restarted. Establish a production base. And then make a decision subsequent to that on the satellite zones that surround the GE bed deposit. So things have gone well and we look for more upside at that project as we move forward.

On Meliadine, we continue to drill and we continue to encounter good drill results which is not a surprise to us. It is a prolific deposit. There's lots of gold in the system. But as we look at the volatile nature of the gold market we felt it was prudent to ensure we have sufficient financial flexible flexibility in our business and as a result we decided to reduce out capital spend at Meliadine from around $125 million from the original plan down to $45 million.

But I think what is important is that $45 million is essentially for the ramp so we are continuing to ramp development to open up the ore body, access the deposit and that leaves us flexibility in the schedule that if our board gives approval to the project about a year from now we can still meet the startup target date of late 2018.

So just in summary one of our objectives in the past quarter was to review our business, look at ways that we can reduce cost, improve financial flexibility while still being able to deliver on our production growth objectives that we laid out earlier this year through 2015 which see a 20% increase in our output.

So we have been able to do that from both ends on the cost side and also on the production side as we advance La India and Goldex.

So operator I would like to leave it at that and I would like to open it up for questions.

Absolutely. (Operator Instructions). Your first question today will come from the line of John Bridges of JPMorgan. Please go ahead.

Good morning, Sean. Congratulations on the results.

Good morning.

The CapEx cuts that you have made, you mentioned them being longer term things. What were they related to?

Meliadine was the principal one. The Kittila shaft is a project that we would consider a nice-to-have but not a necessity. As you know that is a 40 plus year mine life so we will continue to sort of look at that. We continue to drill it and we actually continue to get good drill results as we move to the north at Suuri. So it's a project that has expansion potential but it's not pressing for us and we would prefer more financial flexibility rather than to commit to the shaft at this time at Kittila.

Okay. And you are busy with the cooling plant at LaRonde. How are you doing with respect to your tonnage buildup there? That is something I guess you are watching quite closely.

Yes. We are on track. Our production in the first half has been where we expected it to be. The key component on tonnage ramp up is the cooling infrastructure which is slated to be installed before the end of this year and that's still on track to be in place and that will allow us much more operational flexibility in the deeper part of the mine in terms of controlling the temperature. And we are developing new pyramids which also give us operational flexibility. So we are on track.

Okay. And finally, do you have a number for the concentrate adjustments in the quarter?

I will get Dave to give you the breakdown of the settlement adjustments and the impacts on concentrate.

Hi, John. Totalled about $8.5 million in the quarter.

Excellent. Okay. Thanks a lot, guys. Good luck.

Yes.

Your next question will come from the line of Stephen Walker of RBC Capital Markets. Please go ahead.

Thank you, Operator. Good morning, Sean. Just a couple of questions to touch again on Kittila. What is the capacity of the ramp vis-a-vis producing ore and waste with the mill expansion to 3,750, what sort of production can you expect coming up the ramp?

We can do 3,750 from the ramp. The question with the shaft is always once we get below 700 meters, our analysis suggests that it is cheaper to mine below 700 meters with a shaft. If we continue with a ramp below 700 meters our cost per tonnes would go up so that is the tradeoff. So those are things we continue to monitor.

The shaft gives us, ultimately would give us two benefits. One is ability to mine at a lower cost but also access to develop and explore the Rimpi area. But we can still explore Rimpi and access Rimpi with the ramp access that has not been stopped or slowed down. The shaft would also give us potential to explore at depth.

As you know, this deposit is still wide open below 1,100 or 1,200 meters so that is an objective of ours going forward but we are just trying to balance the financial flexibility needs with a lot of opportunities. Essentially we have a lot of internal opportunities. We will see more presented to us as we go into next year from Mexico and Goldex but we have only so much capital we are willing to commit so we have got to sort of think strategically about where we want to put that capital.

As a follow-up, along the timeline if you don't sink the shaft when do you cross that threshold where you have the majority of your ore or a significant amount of your ore coming from below the 700 meter level?

After 2020. The shaft would take three or four years to construct. So we have a window of a couple of years to decide on the shaft. And we have -- the shaft location has been picked. So they are well advanced in their thinking, just a process of capital allocation right now.

Right. Just a question on La India. There has been some comments made about access to water and you have given us a good update on the timeline and development. Two parts to that to my question at La India. When do you expect to have ore under leach or material under leach and then secondly access to water and ultimate water budget over the next five to ten years, is it sufficient within that catchment basin?

Tim will look after that one.

The first question was when do we expect to have more under leach and that is going to be sometime in Q4. So commercial production first quarter next year. Second question about water, we are very comfortable with our water supply now, startup water supply, and we are comfortable with the water rights that we have is acquired and the plan A and plan B for our water sources are in very good shape.

Great. Thank you very much for that, Tim. Thanks, Sean.

Thank you.

Your next question from the line of Patrick Chidley of HSBC. Please go ahead.

Hi, guys. Just a question on Goldex in terms of looking at the current metals prices and returns on investments like that, is there a sort of a point, a gold price maybe, where that project -- you have got the chance to shut it down before you really get going on it? I mean that is one of the projects that might be a little bit at risk at the current gold price level?

No, not at the current gold price level. That project will actually generate some good cash flow. I think the key for us there was to re-establish a production base on the satellite zones because as we were contemplating and studying and analyzing that opportunity we basically selected a base case which was simply developing M and E zones.

We had probably a half a dozen additional cases which contemplated different satellite zones being brought into a mine plan. So we actually think the value is in some of those additional satellite zones and we are analyzing that now.

Now, the question will be -- you actually directed us to the real point here which is we have a lot of opportunities to make decisions on where we should allocate capital. And clearly the higher cost ones will have to compete very hard for capital and so it is up to the Goldex team to demonstrate that they have an opportunity to create value going forward relative to some of our other internal or external opportunities.

So that is being monitored now and that is a big part of the process that we will be going through during this next budget phase and the life of mine planning phase as all of the operations are providing various scenarios on how they can optimize and add value and providing investment opportunities to do that and then here we have to make decisions where we want to allocate that capital strategically. So far so good on Goldex. The all in cost is $1,100 to $1,200, we own it. And we don't -- the carrying value is minimal so it actually works quite well.

Okay. Thanks. Just a quick follow-up then. You mentioned maybe external opportunities. We have seen you do a number of sort of junior investments in the last sort of couple of quarters. Is there anything bigger that you guys might consider or do you think this is a market where there are opportunities there to acquire producing assets? Or do you think that is really -- you would have considered those already and things haven't really improved that much?

No, I think what we have done in our approach in the beginning -- through the beginning of this year was to look at our strategic investment portfolio. We have reallocated some money out of the Queenston transaction to a select number of strategic investments. We have added a little bit more to that portfolio with the five strategic investments.

One of the things we haven't reduced is resources that we're directing to our project evaluation group because there is still a lot of opportunities out there to evaluate. But again we have got 20% production growth over the next two, two and a half years so we are not feeling pressured but we do think it is important from a strategic standpoint to keep that review process going and that is the type of strategy that has worked for us well over the years where we have taken these toehold opportunities and early stage projects which we like. So we continue to look. But we are not feeling pressured or compelled to do something.

Right. And finally, financing, you have dipped into your credit facility $50 million I think. Do you expect to be using a lot more of that through the year to get the capital projects done this year and next year I guess?

We will be using some this year. But what our expenditure reductions do, next year, is put us in a position where we won't have to use that so we will be using that to finish Goldex, to finish La India during this gold price environment but that still leaves us comfortably in a position where we are well within our debt covenants et cetera. So that is the plan.

Okay. Thanks, Sean.

Thank you. Your next question will come from the line of Don Maclean of Paradigm Capital. Please go ahead.

Good morning, guys. Just following up on Patrick's question about the credit line. Is that fully available to be drawn down within the covenants at this kind of gold price, Sean and Dave?

Yes, it is.

Okay. Fully accessible then. And maybe I missed it early on. You are making a significant cut in the capital for Meliadine. Can you give a little bit more of a breakdown as to what those cuts are?

Well, it is largely drilling. Most of the expense next year of the $45 million will be on the ramp. So there are camp costs that we can reduce, drilling costs. Those types of things. But $45 million roughly is to keep the ramp going.

Okay. Thank you.

Your next question will come from the line of Farooq Hamed of Barclays. Please go ahead.

Hi, good morning guys. My question really is related to this commentary you have in your release regarding your plan to review your metal price assumptions for your mine plans. I just want to get some understanding of your thinking around that. Like will you base your assumption, your metal price assumptions, on the all-in costs for your different mines or would it be based on something like the three year trailing average. So do you starts with costs or do you start with prevailing gold prices in doing that planning?

As you saw last year we based it on costs because we used two different prices depending on the quality of the asset. So for our long-term assets we used a lower gold price. For our short-term assets we used a higher gold price. So we do look at the assets. We don't necessarily have to take the trailing three year average.

In fact, last year some of our mines we used less than the trailing three year average. That is part of our review process now is what is the most appropriate price for each mine based on the life of mine plan to essentially maximize the ore body and improve the quality. So short mine life have different considerations versus the long life assets. So we are still going through that process of what is the most appropriate price and we saw when we did that exercise last year, when we were selective on which gold price we used for which mines, we saw in a couple of cases that the grade of the reserve went up so it improved the quality. So these are the types of things we are looking at right now as we begin the budgeting and life of mine planning process.

And maybe to just expand on that then, Sean. Do you think there is for Agnico and for the industry as well do you think that there is a need to maybe kind of sharpen the pencils more in terms of starting at a cost base and then doing mine plans at below all-in cost base so kind of building in a return on your mine plan below what your current cost base is rather than just closer to the cost base?

I think that can happen. I think what the industry is doing and we are seeing it where they are looking at carrying values and reserves and the quality of reserves, is the industry is going through a transition here and transitioning out of a significant growth phase into a phase which is more focused on returns and manageability of the businesses. So reserve pricing is certainly something that companies will be using to stress test the businesses and look at ways that they can improve the quality. And the ability to execute and deliver with some of the projects. So that is part of the process, you're right there.

And then maybe just one last question, just switching gears on CapEx. So there is a CapEx cut in 2014 to $400 million and most of that is coming at Meliadine and then at Kittila. I think previous to that your guidance was looking out beyond even 2014. It was going to be CapEx all in, all CapEx sustaining plus development in that $500 million to $600 million range for the foreseeable future. I guess that is now dependent on these decisions that you are going to make in terms of going forward at Meliadine and the Kittila shaft so $400 million could be the new run rate or maybe even lower?

Well, we are still looking at the ultimate number as we go through the budget process. So $400 million is our starting point. On the existing assets. But as you say, we have an ongoing review. We'll have updated studies next year on a number of opportunities including Meliadine.

Kittila will continue to update their studies and present them to us on a quarterly basis. This will be a constant process where we refine opportunities and continue to evaluate those opportunities and look at how we can create the right balance between our need for financial flexibility ina volatile market but also the need to reinvest in our projects because it is a long-term business and that is the way we have looked at it and that is the way we have sort of applied ourselves over the last several decades, because we have been around a long time, is just to take that measured approach and that is the way we are looking at this right now.

Okay. That's great. Thanks, guys.

Your next question will come from the line of David Haughton of BMO. Please go ahead.

Good morning, Sean and thank you for the update. First question is just focusing in a little bit on the difference that you're getting between the average price for the quarter and the realized price. Just -- I have seen the se variances in previous quarters but nothing of the magnitude that we have had in the quarter just gone. I wonder if you could talk us through what had been happening in that.

Yes, Dave's got some number there for you, David.

Thank you.

Hi, Dave. As I mentioned earlier we were about $8.5 million down just from the market to market and settlement losses but we did a little bit of math this morning just to see what we lost. Basically by unfortunate timing, if we could have sold all of our gold at the quarterly average we would have realized about $12 million more. I think in this extremely volatile pricing environment that we had I'm just going to put it down to bad luck this quarter that we got hit with about an extra $12 million. We often do much better than the average during rising gold price environment. And this time we did worse.

Do you utilize any intra period hedging to be able to smooth out some of the volatility?

Haven't used any, no.

Okay. And had you been trying to time yourselves, had you been holding back as the gold price was going down thinking it might recover or do you have just a systematic resell every certain period?

We do not hold it back and try and time the market. We do not have complete control of when we sell our product. In terms of we do have a fair amount of gold in concentrate so when that gets processed we realize those prices at that time. So we don't try and manipulate the price.

Okay. Because the numbers coming through on gold was particularly more than what we have seen in previous periods and I guess the bad luck of timing.

Also, David, Dmitri has done some work looking at our previous 29 quarters on these movements and this was a real aberration from the average of the previous 29 quarters due to the sharpness of the drop in April but also just bad timing on some of the sales so it lowered our realized price.

Okay. Just switching back to Kittila if I may. When you are talking about the shaft sometime out in the future, would you also be thinking about a plant expansion that would go with that?Would you be looking at higher throughput and consequently potential additional autoclave?

Yes, there is a number of scenarios that the Kittila team has been working on. Anything above 3,750 tonnes a day would require an expansion to the plant capacity. So that certainly is also part of the study. The other part of the study would be a second autoclave.

We had considered a second autoclave anyway without expansion just as a risk mitigator but our sense now is based on the experience we had with the relining and how quickly we got it back up and running that we don't think it makes sense to spend $80 million to $100 million on a second autoclave just to have some insurance. We are confident with the one autoclave and its robustness given the fact that it is relined and we upgraded the internal components there including the walls between the compartments.

And with that extended down time that you experienced during the quarter does that push out the requirement for the next scheduled down time or does it influence the availability going forward?

We'll let the operators give you some insight there.

Thank you.

We will continue to have regular maintenance and maintenance to maintain scaling issues within the autoclave and within the process but we believe that the modifications that have been done will provide for more robustness and the length of these shutdowns will be shorter when done.

Excellent. Thank you very much, guys.

Your next question will come from the line of Anita Soni of Credit Suisse. Please go ahead.

Just a follow-up on the concentrate pricing but we can take this offline. I just wanted to know what the actual realized prices were for each of the metals this quarter.

It is the -- I heard that. It became a bit muffled. You're looking, Anita for the average realized prices for the main metals.

For the main metals in the concentrates at LaRonde.

We are just getting a sheet here.

Anita, that is in the press release, I believe. The realized prices.

I'm drilling at sort of specifically at LaRonde because I just wanted to separate out the sort of the concentrate you know quarter end pricing that I know impacts you and just sort of the rest of the operations but we can -- you can just send that another time. And then just also on Kittila, follow-up question in terms of the maintenance for next year. Is that a 44 day shutdown and is it back to its regular sort of Q1/Q3 pattern of split or is it shifted a little at this point?

We will continue with a roughly five to eight day shutdown per quarter over the next few years I think.

Five to eight days and that evenly spread each quarter?

That is about right, yes. It will vary as per the sequence but that is about the average rate we will be looking going forward.

That is it for my questions. Thank you.

Thank you.

(Operator Instructions). Your next question will come from the line of Cary MacRury of TD Securities. Please go ahead.

Hi, good morning. One other question on Meliadine given the pullback in metal prices. I am just wondering what your current thinking there is in terms of what development options you guys are considering?

The current thinking there is to continue working on updating the feasibility which will be finished in the first half of next year. That process is ongoing. We are continuing to drill it now. So we will be updating our reserve and resource and as we indicated we have -- continue to get good drill results.

As far as scenarios what we have been discussing with our team there is to present us with options and review options of different throughput rates and different throughput rates from underground versus open pit. So that is what we continue do there is look at the options and the drilling is dictating where some of the emphasis is. We are looking at different options which would give us different capital results and that will help us because we are looking at maintaining our financial flexibility.

But the objective, the way I look at that one is that we are less concerned about the exact start date of that project and trying to get the right mix and blend at the start and try to make it scalable as we can because it is a large structure. We've still only drilled about 10% of that project area, only at 100%. We are taking a long-term view of that asset.

Okay. Thank you.

Your next question will come from the line of Tanya Jakusconek of Scotia Bank. Please go ahead.

Great. Thank you. I have a question just on the cost cutting and I don't know if Sean or Dave is going to take this question. Just on looking at your cost structure, some companies have been saying that they are starting to see some relief either in their labor cost consumables, other, and also I wanted to talk a little bit about the sustaining capital in terms of what could be cut from the $200 million to $250 million. Maybe just on those major items, what you seeing in your cost structure?

We are certainly seeing less input price pressure but it is dependent on location of the operation and the type of operation so I think that is consistent. We are seeing good cost per tonne performance across the mine which is also a good sign. Labor is selective. It is still very competitive in certain parts of where we are doing business so we continue to look at that.

But Sean, are you still seeing that sort of 3% to 5% wage inflation for your labor?

We saw it last year and where we get to this year I think we have seen some moderation in some of our areas of operation in terms of bonus structures and performance incentives. I think that is positive because it is certainly down from where it was a year or so ago when it was very competitive and there were incentives being paid to induce workers to leave. We don't see a lot of that any more in the main area of operation.

And then maybe just in your consumables maybe in your [sign life] or your tires or some of the other key items are we seeing some relief there?

We are seeing some small declines in certain areas. We are certainly seeing an opportunity to reopen some of the contracts which we're actually engaging at this stage so I think the context is making it favorable to renegotiate certain contract areas and we are looking into that at this stage.

And what about your maintenance?

What specifically on the maintenance side are you --

Some of the companies use contractors. Would you be doing all of your maintenance in-house?

All of our maintenance is done in house. We are also looking at parts availability from major suppliers that are also going down so that is all part of our contracting approach.

And what about just the sustaining capital which I know Sean you mentioned was $200 million to $250 million a year. Is there much to be able to cut from that?

Well, that is an exercise where we are going through during the budget and life of mine planning process. That type of stuff is largely deferrals and the mines will make a case that they need a replacement component or a truck or et cetera and so that is an analysis where we look at well, could you do without that for two years and push it out. So it's more of that exercise and we have to do that in more detail as we go through the normal budgeting process.

Okay. And all of these new budgets that you are talking about, would they be available to us probably when you report your year end numbers so that would be February of next year?

That is normally what we do. The process is underway now.

All right. Thank you.

Your next question will come from the line of Steve Parsons of National Bank Financial. Please go ahead.

Hi, good morning. A couple of questions, Sean. First off on Pinos Altos just to get into some of the details and the cost increases there. It looks like costs increased by about $200 an ounce from last quarter. I believe some of that is obviously from the lower silver price. Is there anything else happening there that would explain the higher cost and if so is that going to get pushed into subsequent quarters?

The direct operating costs are basically flat quarter over quarter or half over half. They are not going up. Our costs are always dependent on a proportion of how many tonnes are coming from an underground mine or an open pit mine and how many are being milled and how many are being heap leached. So on the cost per tonne factor there is lots of inputs into that. I like to look at the direct operating expense but -- which is relatively flat. But for Q2 specifically silver price for sure and then there was some stockpile adjustment as well. Both of those worked against the cash costs per ounce number.

Right. Okay. And on LaRonde there was a big drop in zinc production there in Q2 and obviously with lower zinc prices and provisional pricing as well, you got hit. How do the next couple of quarters look as you are moving towards higher gold grades are you really going to see a drop-off in the zinc grade as well summer to Q2 and consequently you could see elevated cash costs for a couple more quarters?

As we continue to move into the deep portion of the mine or the zinc grades will go down and the gold grades will go up. The cash costs that were shown in our guidance are essentially going to be met going forward assuming that metal prices start -- there is no more fluctuations in metal prices.

Got it. Okay. That's it for me. Thank you.

Your final question will be a follow-up from the Anita Soni of Credit Suisse, please go ahead.

Actually, my questions have been asked. Thank you.

Excellent. This does conclude the question and answer session. Mr. Boyd I will turn it back to yourself.

Thanks, operator and thanks everyone for participating in our Q2 2013 conference call and as we mentioned I'm not sure if there is much room left but if anybody has an interest to go La India in September you can contact the Investor Relations group. Thanks again.

And thank you. Ladies and gentlemen this does conclude the conference call for today. We thank you for your participation and you may now disconnect your lines.