Agnico Eagle Mines Ltd (AEM) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Agnico Eagle Mines Limited Q1 2014 call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session and instructions will be given at that time.

(Operator Instructions)

I would like to remind everyone that this conference call is being recorded today, Friday, May 2, 2014 at 8:30 AM Eastern time. I will now turn the conference over to Mr. Sean Boyd, President and CEO. Please go ahead.

Thank you, operator, and good morning, everyone, and thank you all for joining us at our Q1 2014 conference call. I would like to just make everybody aware that there will be forward-looking statements in this presentation, so please read our forward-looking statement cautionary language at the beginning of the presentation.

And we should also just remind everyone that our annual meeting is this morning at 11:00 AM at the Sheraton Hotel in Toronto. Everybody is welcome, and we look forward to seeing a lot of our shareholders there this morning.

What I would like to do is go through the first-quarter highlights, and then talk about our operations and where we are seeing some improvements on the cost side. As far as highlights for Q1, it was an outstanding quarter, not just from a production point of view, but also from a cost point of view.

We had record production of over 360,000 ounces. Our cash costs were in the low $500 per ounce. Meadowbank continued its strong performance from Q4 of 2013, producing a record amount of gold of over 150,000 ounces at very low cost. We will talk a bit about Meadowbank's cost performance, which is also exceptional on a cost-per-tonne basis.

As a result of the strong start in the first quarter, we expect to exceed our production guidance, the top end of the production-guidance range, and we also expect to do better than the lower end of our cash-cost forecast. As a result of the strong quarter, we were able to repay in the first three months of the year $80 million on our revolving credit facility. The cash generation was very strong at $248 million.

We also, as you know, a couple of weeks ago announced a joint bid with Yamana Gold for Osisko Mining Corporation. As far as that acquisition goes, it is subject to the vote of Osisko shareholders, which is going to take place on May 30. Assuming a successful vote, the plan of arrangement is expected to be approved in early June.

As far as the rationale for that deal, as we have said over the last two weeks, as we have gone out and met our shareholders, we've said that it makes good sense because it is a good fit. As you know, it's in the middle of our foundation, our base, along Highway 117 in the Abitibi region of Quebec. Not only do we have three producing mines, we also have our technical service group and a regional office that supports not only the three mines, but also our operation in Meadowbank from a logistical perspective.

So there's 1,600 employees there; we've created value in that region for over four decades, so it is a natural fit. We're buying an asset that is generating net free cash flow that comes with a land package that has upside, both at Canadian Malartic, but also into Ontario, with the Kirkland Lake property. So it is a transaction that fits from a strategic point of view.

And also, in terms of the size of the transaction, it is similar in size to what we have done in the past with the acquisition of Kittila and Meadowbank, where we issued about 14% of our equity. Here we are issuing a little over 16% and putting cash to work to buy an asset that is up and running and is just at the beginning of what we see as an optimization phase. So it makes good sense.

In terms of the operating results in detail, good performance coming out of LaRonde; that project just turned the corner in terms of its ability to access more of the higher grade ore. At depth, we are seeing that in the grade performance and also affecting unit cost, because we are producing more gold.

Lapa has been has been a steady performer, lower than budgeted on a cost-per-tonne basis. Goldex, we will talk about that when we get to the Goldex slide. But I think what we're doing there is demonstrating that we can mine lower-grade underground and do it very profitably in that part of the world. And that is also played into our thinking with the Osisko property package, because we think there's a lot of opportunity in the region to find 2- to 3-gram material underground of decent thickness, where we can use our mining methods and our cost structure at Goldex to extract additional value.

Kittila, steady quarter, expected to achieve their guidance. Meadowbank, we will talk about that in a minute on their slide. And the Mexican business, our southern business continues to perform well. Low cost, steady production, commissioned La India in the quarter. We should see more production coming out of the southern business as we move forward.

On the financial results side, good solid earnings. We had a little bit lower tax rate; we had a little bit less depreciation, fewer tonnes. On the tax-rate side, a lot of it was driven by Meadowbank where we have shelter, in terms of our tax pools that shelter some of that tax. So given the strong quarter and that was a good portion of our income, we had a more favorable tax result than we had anticipated.

Cash flow, almost $250 million, with CapEx about $100 million in the quarter. That is why we were able to pay down some of our borrowings on our credit line. Financial position, just talked about the ability to pay down our debt; we had net debt a little over $700 million at the end of March, borrowings under the credit facility of almost $1.1 billion, so we'll be drawing about $500 million on the credit lines to -- for our cash component in the Osisko bid. Our interest rate on that borrowing is about 2.25%, so very low-cost funding.

Doesn't really increase our financial risk that much, because we are buying an asset that is generating net free cash flow. And in fact, DBRS has put the Company under review developing. So it is not under review negative; it is under review developing, and we feel our credit metrics actually improve with the Osisko transaction.

Just talking about the assets now in more detail, beginning with LaRonde. LaRonde had cash costs of $603, good cost-per-tonne performance, which was on budget at CAD99. That is despite a six-day shutdown, so we didn't process or mine as many tonnes as we had anticipated, and we still met our budgeted cost per tonne.

We have got about almost 80% of our ore coming from the lower levels, so we're starting to see the benefits of being able to access more higher grade ore from the lower levels. The average grade in the first quarter was 3.5 grams per tonne, which is still well under the reserve grade at LaRonde of 5 grams per tonne.

The cooling and ventilation systems are now up and running. That will give us a lot of flexibility as we move through the warmer summer months, in terms of meeting our development objectives. As we ramp up the mining in the lower level, we now have three mining horizons; we will see that average grade increase. And in fact, as we get out to 2019, we are anticipating production at LaRonde in the 350,000-ounce level when we are mining at or slightly above reserve grade.

At Meadowbank, record quarterly production, despite a bit lower-than-normal throughput, due to we had some scheduled maintenance on our ball and SAG mill liners, so excellent cost performance. Even though we had lower tonnage by 2.5%, we saw our cost per tonne drop from CAD87 a year ago down to CAD75. The Meadowbank team is fully engaged on their optimization efforts, and we're starting to see that in the cost-per-tonne numbers.

We continue to see even in April, strong grades, so we got off to a good start in the second quarter. We don't expect those grades to last into the second half, but we do see for the next three years at Meadowbank solid quarterly production in the 90,000- to 100,000-ounce range as we move beyond the second half of this year.

At Kittila, we saw tonnage up about 15% year on year to about 3,400 tonnes, so a steady quarter. Cost per tonne was below budget, so also good cost performance coming out of Kittila.

We're making good progress on our plant expansion. That one, interesting to me, because we were supposed to be building a plant that was going to go from 3,000 tonnes a day to 3,750. Well, the 3,000-tonne-a-day plant is currently doing 3,400 tonnes a day. So the question will be is, what will be the run rate of the expanded plant, which we expect to have it up and running in the middle of next year?

We need to understand what that number is, because that will play some role in how we attack the underground mine, looking for ways that we can increase the mining rate to feed the plant. That will help us, we think, shorten the mine life and optimize that asset.

At Goldex, excellent cost performance, well below budget, really an outstanding performance when you look at a new mining method, a paste fill system. Cost per tonne, in the low CAD30s. To me, that demonstrates our ability to mine low-grade underground, do it very profitably because we have a low-cost method of mining.

The mining sequence and the mining method have responded as we thought they would. And as we said earlier, that, in our view, has positive implications for additional investment opportunities, not just at Goldex on the D zone and the other satellite zones, but also in the Abitibi region with the expanded land package that will come on the successful acquisition of Osisko. So cash cost in the first quarter at Goldex at $707, with an ore grade that averaged 1.4 grams per tonne.

Lapa, we talked about it earlier, cost per tonne below budget again. A difficult mine, narrow, so very good cost performance. And on-site operating costs actually dropped 12% lower than forecast due to the ongoing optimization efforts.

At Meliadine, still working on the study but also still drilling. Study is expected to be done by the end of the year. As we've said on numerous occasions, the focus of the study is on the higher-grade proportion of the underground deposit.

We continue with ramp development and also drilling. We've seen some good results in the Pump zone, so we think there is potential to add the higher grade resources in the Pump zone. Permitting continues, so we're continuing with the permitting process while we're doing the feasibility work, so we will have more details on Meliadine as we approach the end of the year.

Our southern business, talked about it a little bit earlier, production steady at Pinos Altos. Cash costs still low at $450. Hoist commissioning and changeover activity is completed in preparation for shaft sinking; that will give us more flexibility next year in the underground mine and allow us to ramp up tonnage in the underground mine as we start to mine out the open pits.

At Creston Mascota, phase three of the heap leach construction was completed in April, so that is progressing as planned. And we should see higher production in the second half of this year from Creston Mascota.

La India, we talked about it earlier, ore body looks good, positive on grade. Its metallurgy looks good, achieved commercial production in February. We saw almost 14,000 ounces of production. When you take the pre-commercial production and the actual commercial production, our guidance is 50,000 ounces, so a good, steady start and good, favorable costs as we start up that operation.

I will just summarize; with the catalyst, as we said in our press release, at the start of this call, we expect to exceed the upper end of our production guidance range and do better than our cash-cost guidance range in 2014. We will have more updates on that in late July with our second quarter. Assuming a positive vote by the Osisko shareholders on May 30, we expect that transaction to be completed in early June.

We continue to work on satellite deposits and studies, particularly at Goldex, which could extend the mine life and increase the production profile of a mine that's restarted quite well. Meliadine we talked about; later this year, we should have the results of the updated feasibility study. We're working on the expansion at Kittila; it is going well. We think that will give us the potential to have a processing rate or capacity available to us at some level over 4,000 tonnes a day, so we need to work that into our studies as we look at potential shaft and also accessing the Rimpi zone, which is higher grade and has good thicknesses.

I will leave it at that, but I will also remind everyone that we do have a site visit planned at La Ronde and Goldex on May 21st. That is a great opportunity for those that have the time to get up to those two mines, and see what we are doing on the cost side, get underground actually at both deposits and get a good feel of where we are headed with those two assets.

Operator, I would like to open it up for questions now.

(Operator Instructions)

Andrew Quail, Goldman Sachs.

Good morning, Sean. Thank you very much for the update and congratulations on a super quarter. It�s hard to pick any faults. I've just got one question on India. What was the upside do you see there going forward, now you get commercial production? And how much are you spending in exploration around the area?

We'll let Tim Haldane handle that.

Sure. It is early days yet at La India, but we're pretty comfortable with what we see so far, as far as Sean mentioned, the metallurgy is tracking where we want it to be. The ore body is slightly favorable, early days yet. We hope that continues.

Upside at La India, you're right. It is just to grow it. And we are drilling inside of La India, in-fill drilling and then some off-site drilling. We've got a 50,000-hectare land package there. I think we have got news to come in the future; I think there is upside there, and right now we're just concentrating on a good, solid start up behind us.

Botir Sharipov, HSBC.

Good morning, everyone, and congrats on the strong quarter. My first question is on your growth projects, with the Osisko acquisition, assuming it's completed, what's the thinking about your other growth projects? Now that you will probably have to drill down another $0.5 billion for the Osisko acquisition, what is the current thinking for Kittila shaft and Meliadine project, because both will require substantial capital investment? Are you thinking about more debt eventually, just your thoughts on that?

Well, the Osisko transaction, Canadian Malartic is generating net free cash flow, so our overall net free cash flow generated in the business will be higher collectively. So we will be measuring each project on its merits, and we feel we can still build Meliadine, assuming positive economics later this year. So no change in our thinking on our growth projects.

Our current business, absent Canadian Malartic, is generating net free cash flow at the moment. And we were mindful when we structured the deal that we didn't take on too much debt that would have affected our investment-grade credit rating. So on balance, we are in good financial strength, despite the fact that we're going to be borrowing an additional CAD500 million.

Okay. Thank you. My second question is on depreciation. It was lower this quarter from prior quarter. Is this because you're into production method is based more on tonnage, and you actually put on less tonnes this quarter than last quarter, despite higher production?

It is kind of two parts, but you have to look at it on a tonnage basis for sure. If you compare it to 2013, we actually had some write downs in 2013. So on a per-tonne basis versus a per-ounce basis, the depreciation is actually pretty close to where we think it is going to be. It will be a little bit higher in subsequent quarters for the year than it was in Q1, because we have just commissioned and taken La India commercial.

Anita Soni, Credit Suisse.

A question for Dave, and congratulations on the quarter, since Mike is keeping tally. Goldex, could you give us a breakout of all of the sustaining capital at Goldex and at Kittila as well?

Maybe that is something we could do off-line when we have the model in front of us, Anita.

Sure. I am wondering on Pinos, is the mill constrained by the one -- the amount of tonnage that you can put through that operation, is that constrained by the mill at 1.954 or is there opportunities to upgrade that?

Tim Haldane will answer.

I think we're pretty close to the upper end of what we can get through the mill. The quarter was 53 some odd tonnes per day and maybe within average, 55. So I think what we are looking at in subsequent years after we get the shaft up and running is how we can optimize the tonnage through the mill and maintain that 5,500 tonne-a-day rate.

How about the heap leach? Is there opportunities for -- which I think there was a pretty good amount of ore placed on the pad. I'm just wondering about that.

The heap leach at Pinos Altos is always -- it's gravy for us. We mine it as it is in front of us. It comes from the open pits. The open pits -- sorry, I'm changing microphones here.

Heap leach comes from our open-pit mines. Our mine plan right now is open pits deplete around the end of this decade, but we've still got those satellite deposits that we are looking at. And I think we will bring something in to supplement that in the future years.

Last question is on the LaRonde copper grades, those seem -- the gold and the copper grades. Starting with the gold grade, any expectation? Would that grade remain at this level and then, as you said in the MD&A, trend upwards towards the 5 gram per tonne? Or is there any factor that we need to consider as you tie in the circuit -- sorry, if you tie in the heating and ventilation system?

As we move into the, currently 293 pyramid, our grades are typically in the 6 to 8 grams per tonne level. Typically in the 269 pyramid, grades are between 2.5 to 4 grams per tonne. As we move deeper and we increase the proportions, we will meet the reserve grade going forward, and I guess that is about all we can say.

As we move ahead, and maturities establish the 293 pyramid, grades will continue to creep up as we establish what our guidance was.

Could you provide a little bit more color on the per-tonne cost at Goldex? Those were pretty good for a first quarter for commercial production there.

Color in what sense, Anita?

You haven't -- I'm sorry, I was wondering if you would be able to say with confidence that what factors are potentially -- long term, could those costs be at that low $30-per-tonne level?

I think when the feasibility study was initiated, I think we had pretty good handle on the G&A and milling cost. I guess the mining method would be different -- or appreciation of mining costs would be -- was the main factor. I think the costs of backfill, in general, are lower than expected, perhaps a bit on ground support.

I think the biggest aspect is probably getting better-than-anticipated productivity numbers in certain areas. So I think it just contributes to the overall cost structure.

(Operator Instructions)

Josh Wolfson, Dundee Capital Markets.

Just a bit more color on Meadowbank, previously you had redone the block model and the positive grade reconciliation was a factor for higher grades last year. Was that a factor at all this quarter, and what were the grades for the (inaudible)?

The grades at Meadowbank, Yvon will answer that, and the trajectory and the carryover from Q4.

Grades in Q4 and Q1 have been highly influenced by our mining in Goose. I think as we completed the budget last year, we have also upgraded the reconciliation information and the data into our block model for next year. Presently, there is roughly five or six benches left to be mined in Goose.

As we transition towards the end of the year, we are better recognizing that in our current forecast, so there should be less surprises down the road. But essentially Goose will be completed late Q3 or early Q4.

We will also be introducing lower-grade material from the Vault pit going forward, starting in Q1, because we've established commercial production there. We will continue getting strong grades from the Portage sector of the pit and the pushback in those areas.

So I think we have established -- or we've always said from the beginning of the year that our grades would be stronger in the first half, and that is what we are recognizing. And we will have a strong first half, and we will have roughly numbers in the close to $100,000 range per quarter going forward for the rest of the year.

Okay, another question for the northern part of the North business. Looking back on what the estimates provided before production was achieved for Goldex and La India and seeing how those mines are progressing relative to the outlined expectations, is there a reasonable conclusion that you think can be drawn, that maybe the numbers you put out for Meliadine previously are a bit too conservative? And you mentioned earlier on the call, the underground would be the focus of the feasibility, but obviously with the reserve being one-third open pit and the grade there double Meadowbank, there are further opportunities?

I think there has been a lot of work done on the Meliadine studies. I think we've got a pretty good handle on what costs are. Certainly, at the moment, we're in the process of integrating our operation team within the study, and we're overlooking the opportunities that will be coming out.

But at this stage, I wouldn't say that we are very conservative on the Meliadine numbers. I think numbers that we've been working at OpEx-wise and CapEx-wise were, we think are pretty realistic at this stage.

Alec Kodatsky, CIBC.

I had a question about Meadowbank. With respect to the unit costs coming in at $75 a tonne, is that a level that you think you will be able to hold as you start transitioning into other pits?

We will be mining more in the range of low $80s back in the quarter. As we mine from Vault, some of the OpEx are lower in the first quarter because we have capitalized some of the stripping before commercial production involved. But I think the low $80 number is a good target for the rest of the year.

Great. Maybe just a qualitative question about LaRonde, with the ventilation now complete, is the progress on the development side and the ramp-up tracking in line with expectations?

Yes, actually the whole team from La Ronde is in the room today, and we are quite happy with the performance. I think development and productivity in the lower part of the mine has increased, and we are pretty well on target for the year.

Mining flexibility and infrastructures are now in place, and the team there could actually operate and meet all their targets. And it bodes well for the future. We are really happy with their progress.

Great. Thanks for the color.

John Tumazos with John Tumazos Very Independent Research.

Congratulations on the great first quarter. 5, 10 years ago, Sean, you used to use an expression, something like Agnico 2,500, 8,500 tonne a day underground mines that weren't big enough for Barrick or Newmont. Now there is the underground mines, there is multiple heap leach targets in the southern system, Canadian Malartic brings in a large 60,000 tonne-a-day grinding mill. Kittila is running the autoclaves very nicely.

Should we look at Agnico as able to approach any project in any setting, for the most part, that you wish to pursue, where size is no constraint, first question?

Second question, could you give us a little background about some of the unique features of the final Osisko deal? Did you suggest them? Did you get a call at a late stage saying, here is the deal.

We are inviting you in, but if you say no, we are going to call competitors XYZ in the next hour. Make a decision. Or how did all of this unique, precedent-setting structure get created?

Those are two interesting questions. I will deal with interesting question number one on our skill sets. I think it is fair to say that over the years, that we have developed a much broader range of skills and a much broader pool of talent within our Company. And I would match our talent base and skill base up with anybody in the industry.

There are projects, and if you look at it, and you mentioned a few of them, whether it is deep underground mining at 2.9 kilometers in the Abitibi region of Quebec; whether it is mining north of the Arctic Circle in Finnish Lapland, with a complex metallurgy autoclave, which is working quite well, with recoveries of almost 90%; whether it is our skill set in Mexico, where we are mining in the Sierra Madres at altitude, open pit, not only open pit but underground, and getting good productivity, it is a pretty broad range of skills.

One of the things that we've tried to do over the years, and one of our focuses is, in a very tough and challenging industry, for us, it is about manageability and fit and being able to deliver on targets. So we have taken a very measured approach, a step-by-step approach, and that approach has helped us develop those skill sets over time, as you know.

We tend to do all of our own feasibility work. We do generally all of our general contracting. We have those skill sets internally. We have a large technical service group that provides support and skill and provides skills and experience in unique disciplines to all of our operations. It is a nice position to be in.

We can actually look at more things, whether we do them or not is another story. One of the things we have been very measured on, which helps with the manageability, is the physical location of assets. That is why the Canadian Malartic transaction makes sense.

We don't add any overhead at all. We have got three mines in the region. We have got a technical service group just down the road with a lot of skills. We have got the Goldex project, which is demonstrating they can mine underground, very low-grade, and make good money, and generate a great return. Those are the types of skills that we can bring to that particular story.

As far as Canadian Malartic, I would guess, I'm not sure, but I would think we probably were the first guys to make a call, and we were probably one of the first guys to actually sign up and start our technical due diligence. We had insisted from day one in our initial discussions that we felt the only way this could be done and we could participate is if we had a mining partner, not a financial partner, but a mining partner.

And we felt that Goldcorp, high quality company, one of the leaders in the industry, that was the competition. They were putting up solid paper with some cash. We felt the only way that we could be competitive, assuming we liked what we saw when we went there, was that it would need two high quality equities with some cash, and also to help finance it, a quality Spinco, not your typical Spinco, where you throw in the lowest quality stuff and you throw some cash on top and that happened.

We probably developed a view on value early. We communicated that view on value to Osisko and the Board and the special committee. And just throughout a period of several weeks, made it known that we are still waiting to be able to be allowed to speak to mining -- potential mining partners.

The process required everybody to work independently. The process required everybody to work independently, remain, and keep all the data confidential. And in fact, not even tell people that we were in fact involved or looking or had signed a confidentiality agreement.

When the Osisko-Yamana proposal was put on the table, we again said we would like to be able to speak to a mining partner. Who else has been looking? Who else would share similar types of view on value? Can you release us on a selected basis from the CA, so that we could have those discussions?

It wasn't until Goldcorp made the second bid, I think at CAD7.65, that we sent a letter over to the special committee and the Board, and said we would like to be able to engage in discussions with Yamana and propose the following transaction, which is pretty similar to the one that is on the table for consideration of the Osisko shareholders at the end of this month. Does that help?

Anita Soni, Credit Suisse.

My question is a follow-up. Could you give us the grade of the Vault pit, the remaining life of mine there?

Sorry, I don't have the exact number with me, but I think we're taking about 2.7, 2.8 grams per tonne.

Lower then, but still a pretty good grade?

Yes.

There are no further questions at this time. Please continue.

Thank you, operator, and thank you, everyone, for your attention and time. And again, like to remind everybody you're all welcome to attend our annual meeting this morning at 11:00 AM at the Sheraton Center in downtown Toronto. Thanks again.

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