Agnico Eagle Mines Ltd (AEM) 2018 Q2 法說會逐字稿

Good morning. My name is Kim and I will be your conference operator today. At this time, I would like to welcome everyone to the Agnico Eagle's Second Quarter Results 2018 Conference Call. (Operator Instructions)

Mr. Sean Boyd, you may begin your conference.

Thank you, operator and good morning everyone and thank you for joining our second quarter 2018 conference call. We'll be going through a series of slides and I'd just like to make you aware that there will be forward-looking statements in this presentation. So there is some disclosure on that in the slide deck.

Just to get a set sort of on our thinking, our mindset, where we are mid-year 2018 in this transition year, as we transition from mining the deposits in the vicinity of Meadowbank and moving to a much larger and broader platform in Nunavut, we remain focused on adding value through the growth in our production base, largely in Nunavut, while keeping the risks in our business low. Specifically, we remain focused on the execution of the Nunavut growth plan, moving those projects forward, and we also remain focused on exploring our existing assets near and around our main deposits to grow our reserves in our resource base and also focused on the project pipeline that we expect to come in, post building out the Nunavut platform.

But as we look at the operations, we continue to see operations that in a transition year are performing well from a production point of view. As a result, we've increased our full year guidance. Our gold reserves and our resources, we expect them to continue to grow this year, based on the exploration results that we're getting in and around our existing mines, which are showing extensions outside of currently known mineralization. Those expanding reserves and resources will support the production growth that we will see over the next several years. We're on track to hit our target of 2 million ounces in 2020 and we'll talk about that, and that's important, because that will drive our growth in cash flow per share and free cash flow, as the [capital] that will be required to be spent in the business to sustain and grow production beyond 2020 is significantly less than the amounts we've been spending in 2017 and will spend in 2018. So we'll update you specifically on the projects, but we continue to make very good progress at our key growth projects.

In terms of the pace of our growth, I think that's important, because what we've been able to do is put together a collection of assets that are well matched to our technical skills and our experience, and it's important to work those project at a manageable pace with realistic targets. And when you combine that approach with the broad range of skill, it gives us a, what we call a high quality, low-risk growth story; low political risk, low execution risk and that will remain the focus as we move through the balance of this year and move into next year when we see our production begin to grow again.

As far as second quarter goes, generally as expected, as we said, from a production and from a cost standpoint, payable production a little over 400,000 ounces. Our costs came in roughly at the midpoint of the guidance as a result of the strong second quarter. As we said, we've increased our full year production guidance to 1.58 million ounces. We expect, based on second half projections, to see a slight decrease in our total cash costs as we move through the second half of 2018 and then as we move into 2019.

Of particular note in the quarter, as we said, was moving some key projects forward. As expected, we received our Water License A, which has allowed us to begin construction of the Whale Tail pit and that time line is tracking very well to have production coming out of the Whale Tail pit in the third quarter of 2019. And at Meliadine, we continue to make excellent progress there, both in surface construction, in underground development and also we've got some new news on the exploration front, because for the first time in 3 years we've resumed exploration drilling in and around the Meliadine deposit.

We also received a permit at Akasaba. That's a satellite deposit for Goldex that allows us to leverage off of the Goldex and LaRonde infrastructure. So reviewing the time line for the integration of that project. And we've also in the quarter declared commercial production at the LZ5 Zone at LaRonde and the Lapa mine life we've been able to extend further into 2018. And both of those situations, again, are allowing us to leverage off of infrastructure and skill sets at LaRonde to add incremental value in those regions where we've been for many decades.

As we said on the operating side on our operating results, we're tracking above the initial guidance on the full year production. As a result, we've raised the guidance. And we're tracking roughly at the midpoint of the cost guidance.

In the quarter, we saw significant contributions coming from both LaRonde and Canadian Malartic. That was important, because they partly offset the lower production and the higher unit costs that was expected at Meadowbank as we complete the last year of mining at the deposits in and around Meadowbank.

We generated good cash flow per share, and our cash flow per share numbers are right in line with the consensus. As far as how we're positioned financially, we closed the quarter with over $700 million in cash. We've got fully undrawn credit lines of $1.2 billion, so we're well positioned to complete the buildout of our next stage of growth in Nunavut.

Specifically on the assets. As we mentioned, LaRonde made a major contribution, not only to production, but also to our cash generation and operating margin. Their grades were over 5 grams per tonne. They produced 85,000 ounces at a total cash cost of $395 an ounce. So we can see the impact that the lower part of the LaRonde mine is having, not only on production and cost, but also on cash generation. We continue to drill at the lower part of the ore body. We'll be systematically adding additional levels as we move forward over the next several years. And as you remember, some of our best drilling is on the lower part of the mine, on the western side of that deposit. So that should be important for production and unit costs as we move into the lower part of the mine.

And as we said, LaRonde Zone 5 hit commercial production. And what was important about LaRonde Zone 5 is the use of a new communications technology to test automated equipment. So we're looking to employ that at LaRonde. And we have the pleasure today here in the room to have a team from LaRonde that put the concept together about automated equipment using the LTV technology and they're here to accept an award that we give annually to the best idea coming from the site to improve our business. So congratulations to the team at LaRonde for that technology. And that will be important as we open up the lower mine to manage costs and become more efficient in that part of the mine.

I talked about LaRonde Zone 5. The opportunity there is really not just to bring the smaller zones that we're working on now. That was the base case. The opportunity is to prove the concepts in the original feasibility, because there're several hundreds of thousands of ounces on that property, which we'll be focused on analyzing to see if we can also bring that into the mine plan over time.

And we mentioned Lapa. It just never seems to go away. Not that we want it to go away. They keep doing an exceptional job of taking advantage of already built infrastructure and skills and allowing us to add additional ounces. And we're expecting them to add about 15,000 more ounces from the original guidance earlier this year. And that's one of the reasons why we're confident in setting a new full year 2018 production target.

Canadian Malartic, we also mentioned that as being a major contributor in the quarter. They set several records, 2 of which are quarterly record gold production and also a quarterly record for average daily throughput at the mill, which averaged almost 58,000 tonnes a day. To recall, 4 years ago in 2014, when Yamana and Agnico acquired the asset, the throughput rate was 48,500 tonnes a day. So the team at Canadian Malartic has done an exceptional job of steadily each quarter optimizing that mine and taking advantage of efficiencies and turning it into a significant cash flow generator for both Yamana and Agnico.

We're on track for the Barnat extension, and the construction work is proceeding as planned. We also continue to do exploration work at both the Odyssey Zone and the East Malartic Zone. And we're continuing to do that work to determine the extents of the mineralization and then to figure out the appropriate next steps for both Odyssey and East Malartic.

At Goldex, the focus, as we said, was on acquiring the permit for Akasaba, which we did in the quarter. But we've also been focused on drilling at depth at Goldex, drilling Goldex, the Deep 2 and the Deep 3 Zone and also the South Zone. We've got drill holes in the quarter that suggest that those zones can continue to grow. And we've also been -- our drilling has also suggested that the currently smaller, but higher grade South Zone has the potential to expand. And that could be important given the grades. And we haven't done a lot of drilling there in the past, so that's certainly open for expansion.

At Meadowbank, as we said, it's the final year of mining at Meadowbank, essentially from the Vault pit, which was always a bit lower grade. The production and costs, we expect them to slightly improve in the second half. But essentially at Meadowbank, we had, in Q2, about a 26% decline in grade year-over-year in the quarter. Our tonnes processed were down 15%. All of this was expected in that final year. Our production was down 36,000 ounces. Our unit costs were up about $360 per ounce. So as we said, the offset to that was partly LaRonde and Meadowbank.

So as we look out from -- sort of go back a couple of years, the expectation was that we would've had a significant production gap at Meadowbank -- between Meadowbank and Amaruq. The team has done an exceptional job of squeezing out additional tonnes at Meadowbank, of extending the life at Meadowbank. We'll be processing Meadowbank stockpile into 2019 to smooth that transition between Meadowbank and Amaruq. So everything going as we expected.

At the Amaruq site, the important milestone there was the receipt of the Type A water license. That's now allowed us to begin the dike construction and the overburden and waste stripping. That time line is sort of tracking as expected in terms of permit and beginning the construction. Everything is tracking according to the original plan, which is startup in Q3, 2019. Also tracking close to the budget. What we've been doing as well, waiting for the permit to develop the pit has been extending the ramp. The ramp's now been advanced to -- total advance of 478 meters, down a vertical depth of about 16 meters.

So that ramp is important to do some drilling to determine the extent of the mineralization in both the Whale Tail area and the V Zone area, and drilling in the quarter does suggest that we can extend the size of both Whale Tail and V zones from underground. We've got drilling outside of the known mineral resource and we're going to continue to follow up with drilling as we move through the second half of this year.

As we said at the start, we continue to make excellent progress at Meliadine. The sealift is underway as first barge arrives in early July. Surface construction has gone extremely well. Site construction at the end of June is 74% complete. We could actually finish the mine -- this multi-service building that includes the mine dry and the offices, that was turned over to the team in the second quarter of 2018. In the plant, we've actually done substantial work on mechanical and piping and electrical and instrumentation work, to the point where essentially we're just waiting for the larger key components to be offloaded off of the barges, so that we can get them installed. So we're tracking extremely well to start commissioning that plant in the first quarter of 2019, which sets us up nicely for production from the original plan in Q2 of 2019.

We are also well positioned, given the advances we've been making in underground development. While we've been building on surface and developing underground, we've also been compiling a stockpile of development ore. And when we combine the development ore that we have stockpiled and will continue to stockpile over the next few quarters, combine that with the mining blocks that we expect to extract in the fourth quarter and in the first quarter of next year, we will have a sizable stockpile available to us when we start up the plant in the first quarter of 2019.

And I think what's also got us quite excited besides the progress we've been making on construction and development is exploration. As we mentioned earlier, we had stopped exploration at the Meliadine deposit over the last 3 years, just been focused more on moving the project forward from a construction point of view. We've resumed exploration drilling, we have encountered very good grades over very good width outside of the currently known reserve and resource. And I think what that's telling us is that we expect the deposit to continue to grow.

So in the second half, we will continue with follow-up drilling. We're looking for additional extensions of that, as we said, zone mineralization at depth. The deposit is wide open. So our job now is to, as we get it up and running, is continue with an active exploration program to determine how big that structure is.

In Kittila in Finland, the expansion is progressing on schedule and on budget. We're also focused at Kittila on improving the reserve picture, it's already our largest single reserve base. Our focus on drilling this year is to convert more of that large resource into reserves for the end of the year. So we continue to encounter mineralization outside of the known envelopes and we should not only see an increase in reserves, but potentially an increase in resource.

Moving to the Southern Business at Pinos Altos. We're moving towards, almost entirely an underground mining operation at Pinos Altos that's associated with the higher cost structure. To help offset that we'll focus on developing a few satellite zones in the near vicinity of the Pinos Altos infrastructure. At Sinter, we continue to do work also at Cubiro and we're drilling Reyna de Plata. So these will be 2 or 3 additional satellite deposits that we will bring into the mine plan over the next couple of years.

At Creston Mascota, same strategy, focus on near surface mineralization, in and around the deposit, both at Bravo and Madrono to extend the mine life at Creston Mascota. And at La India, essentially the same strategy as well, looking at areas like El Realito, which was acquired a couple of years ago. We've been active in exploring in and around the La India deposit. We'll be adding additional sources of ore, largely to extend the mine life at La India, so they've made good progress there.

Just quickly in summary, as we said at the start, the objective is to stick to the strategy, it works, just focus on bringing these growth projects in on time and budget, focus on the platform in Nunavut, which we think has the potential to be a major contributor to Agnico Eagle for many, many years. We know Meliadine is going to grow, but I think importantly what that platform does, combined with the other production basis, including the large production bases in the Abitibi, is put us in a really good position to begin to generate some significant net free cash flow next year, because our CapEx is expected to come down from peak levels in 2018.

So what I'd like to do operator is open up the lines and take some questions.

(Operator Instructions) You first question comes from David Haughton from CIBC.

With Malartic, very good to see the rates exceeding the 55,000 tonnes a day. What should we be thinking about as a sustainable throughput at that operation?

We think the 56,000 tonnes is a pretty good number to focus on at this stage going forward.

Okay. And does it alter in anyway when Barnat comes on?

Perhaps yes. The (inaudible) this has been defined as to be potentially softer in Barnat. We'll need to validate that. But let's hope that opportunity to have perhaps less pre-crushing in that area to maintain that throughput rate.

Okay, excellent. Over to LaRonde. The gold grade and particularly the zinc grade was ahead of expectation. What should we be looking at for the remainder of the year, do you think?

Pretty similar to what you saw in the second quarter. We continue to mine some zinc ore from the upper portion of the mine, which we will continue throughout the rest of the year. And as we continue to develop the western pyramid grades profile, that would seem in Q2 we'll pursue.

Okay. And the throughput rate there, should we be thinking, similar to what we had in Q2, which was a bit of a dip compared to recent quarters?

Yes, well we had a 1-week shutdown, we had a maintenance shutdown and a unplanned ball mill shutdown in the quarter. So I think you should model on Q1 rates.

Right. And last question from me, over to Kittila. Still mining and processing below reserve grade of 4.2 grams. What should we be thinking about for the grade there and when would we expect for the grade to move into the 4-plus kind of category?

Well, we've had some development delays, mostly in the rural area. We had some higher grade stopes that -- 2 or 3 higher-grade stopes in the sequence that were supposed to be mined in Q2 and Q3, that have been basically delayed through Q4 and Q1 in next year. I think you should be modeling the guidance grade for the year starting in Q4.

(Operator Instructions) Your next question comes from Stephen Walker from RBC Capital Markets.

Just a follow-up to David's question. The Zone 5, I know historically when Lac and Barrick were mining, there was significant positive reconciliation or at times there was good positive reconciliation. Are you seeing evidence of that? I know it's relatively modest production into 2019. But are the grades holding up as expected?

Well so far the grades have been on target. We've seen some periods were grades little bit exceeded expectations. Recovery is certainly exceeded expectation at this stage, but so far, pretty well, everything is on prediction models.

Great. And Sean, just to step back, talking about free cash flow and I think we've all got that modeled into our forecast 2019-2020. With respect to returning capital to shareholders in 2013, there was dividends of $0.88 a share and clearly that declined as gold price declined and you're kind of back up to $0.44 a share. I realize it's a board decision as to what the return of capital may be in future periods. But do you have any view where you'd like to target the dividend and at what point we could kind of get back up to the $0.88 or possibly above that level on an annual basis?

That's clearly gold price dependent, but I think if we look at the history here, 35 years of paying a dividend consistently even after 2013 not eliminating it, reducing it. But then since then, since it was reduced, we've moved it up each of the last 2 years albeit small, but we still did move it up sort of signaling our confidence in the plan to grow production and grow cash flows. So it's certainly a focus of the board, certainly a focus of the team when we're looking at capital allocation. If you ask us, we never really sort of have the specific numerical balls that if we don't sort of get there, we feel that it's been a bust. But I would say that the one number that we certainly all like to get back up to a beat is that $0.88 a share. So that -- we keep that in mind as we look at our budgeting, as we look at capital allocation to the pipeline. I think that's one of the things about how the pipeline, which ties in a bit to this question is that we're spending a lot of time prioritizing the pipeline. We do have the permit at Akasaba, that doesn't mean we're going to rush and start to build it, because we're doing our budget now and we have an envelope in mind on capital that we want to spend for next year and the year after. So that's got to fit in and the dividends, which sort of play into that, the concept of returning to shareholders would play into that discussion. So we're hoping that it can trend up. We feel confident that it can based on where the business is headed. But the gold price will be a determinant of that.

(Operator Instructions) Your next question comes from Carey MacRury from Canaccord Genuity.

Sean, you mentioned some of the exploration that's happening underground at Amaruq. I'm just wondering if you could touch on exploration from an open pit perspective, is there any confidence that you'll be able to increase reserves or resources from an open pit view this year?

Yes, (inaudible) speaking and we already have rigs on the site [8 rigs], and we have good results on the western part of the zone and depending on the design or what is it kind of make could be nuances coming from that deposits could increase in the future, but we have good number right now.

Okay, great. And I'm just wondering on the workforce as Meadowbank kind of winds down and Amaruq ramps up, is it more or less the same workforce or are there changes going to be happening there?

Well, the workforce that is at Meadowbank will essentially be the same, although there has been some transfer from Meadowbank to Meliadine, so that's proceeding as planned. On the Meliadine recruitment side, I think we are following the plan as far as staffing up both the mill and the pit and the underground mine operation staff and service. And so far we are tracking very well and getting the whole crew on board.

And you also mentioned the stockpile, how big a stockpile do you think you'd have before you start up the mill there, in terms of months of production or weeks?

Well, at this stage by the end of January, we would be in a position to have about 200,000 tonnes of high-grade stockpile in service.

What sort of grade?

Around 7 or 8 grams.

There are no further questions at this time. I turn the call back over to Mr. Boyd.

Thank you, operator and thank you everyone for joining us on the conference call. We would like to remind you that we do have a site visit planned to Meliadine, September 6 that sort of 1 full day, leave early in the morning from Toronto, return that evening. So that's a opportune time to come up and see the progress that we're making and will make through the summer as we offload the barges and get some of the key components installed in the processing facility and the power plant. So thanks again. If there is an interest contact Brian or Lea or Melissa and we'd be happy to have you join us. Thanks again.

This concludes today's conference call. You may now disconnect.