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Agnico Eagle Mines Ltd (NYSE:AEM)

Rodman & Renshaw Global Investment Conference

September 09, 2013 03:40 pm ET

Executives

David Smith - Senior Vice-President, Finance and Chief Financial Officer

Analysts

Okay. We are going to start. I have David Smith. He is a Senior Vice President, CFO of Agnico. Thank you.

David Smith

Hello, ladies and gentlemen. Thank you very much for your time. I appreciate you making effort to come here today to talk about Agnico.

I would like to start off by actually answering given my opinion anyhow on question from the last presentation which was why do we think the price of gold is going up. Quite honestly, for me it is very simple supply and demand.

When I see globally and it's most certainly not just the U.S. government, but globally, I think governments have proven that there is an unlimited supply of paper money in the world. I assure you there is very much a limited supply of commodities, not much as gold, but gold is in fact very rare metal. In fact there is an infinite supply of paper money on the other side of that.

Short-term, I have absolutely no clue what the price is going to do. Medium-term, I am fairly confident that it's going up and long-term, I am absolutely positive that gold and other commodities are going higher, because they are priced in paper dollars with a more certainly infinite supply, so please do read our forward-looking statements as we will be making some today, but we are about the price of gold going forward, hence we are very confident about Agnico.

Agnico has been around for 57 years, producing precious metals continuously since in fact 1957, and in the last few years, we have actually transformed the company from single asset producer as recently as 2008 to now a company with five operating mines producing about 1 million ounces per year and by the end of the end of the year we will have seven operating mines.

We operate in Canada, we operate in Finland and we operate in Mexico. More recently, we have made six investments this year in junior companies a little toeholds in most cases and all of these are for strategic purposes and one of those in fact was our first foray really. in the South America, we made a small investment only $20 million in our Junior company called Sulliden, which has an advanced project in Peru, so that's really our first official toe dipping in South America, but absolutely there are parts of the world that we are not prepared to operate in and I think you could put some countries in South America in there.

For example, I don't think you can get a lot of business done in the gold mining industry in Venezuela, but we are not going to Africa. We are not going to Russia and China. Not because those countries don't have great mineral wealth, because in fact they do, but we have no relationships there. We don't know how to do business there. In fact as a management team, we feel that it is our job as much as possible to de-risk what is a risky business and the mining business is absolutely a risky business, so taking care of the risks that you can manage is actually very, very important.

A big part of our story is where we are prepared to go. Additionally, where we have come from, 57 years, and you will see this on the balance sheet slide. One of the things I am most proud of for Agnico is that over 57 years been a very capital intensive business. We have issued 173 million shares fully diluted, so that takes a lot of financial discipline. That takes a lot of patience and what it really is, is a focus on the shareholder return and Agnico tends to be one of the most expensive gold stocks in the world. In fact, we are extremely proud of that.

I think that's the ultimate compliment that the market can pay you is to pay up for quality and so Agnico really has been one of those quality companies through multiple cycles in fact. If you look today at Agnico in terms of price to NAV, price to cash flow, NAV's common metrics that we have in the business. You probably see Agnico pretty close to the top of the chart, so we are doing quite well relative to the pack.

That being said, we are not pleased at all with the $30 share price. In fact, the last time the gold price was around $1,400, the share price was about $89, so here we are $30. We are actually progressing about double the gold that we produced back then as well, so some things arrive here and I would say in fact it's the market, but we can't control the market. The market is what the market is, so we just have to take it for the moment.

Our biggest shareholder accused me not that long ago of being depressed, and I said no I am not depressed, but it's not a whole lot of fun and I gave those metrics about the share price. I said yes. It's $30. It's kind of depressing at least and she said, well, you are looking at it the wrong way. She said it gives people like me an opportunity to buy a lot more and so she owns more than 13 million shares of the company and in a strange sort of way it is actually kind of delighted that she gets to buy Agnico a real quality company again for $30. I hope she doesn't have that opportunity for very long, because we believe we are indeed very well positioned to go forward from today.

In fact in the second quarter, we had a terrible quarter from a financial perspective. Our gold production was down largely because of maintenance shutdown that went on for longer than expected in Finland, so gold production was low and some of you may have noticed what happened with the price of gold between April and Again this July wasn't particularly exciting. It went from $1,700-ish to $1,200-ish, so that was pretty hard on us as well, so we made what I'd call settlement losses on our concentrate shipments, but pure bad fortune. We bottom ticked the price of gold a couple of times on our sales during the quarter, so pretty tough financial quarter in the second quarter, but in another way it set us up for a strong second half. We've got about 15% increase in our forecast gold production second half versus first half, updater stopped working, but we are well positioned for what I think is an interesting inflection in the market here where we are running I guess the end of this large short trade that started in April.

Gold has started to trickle back, we are running into that seasonal period, September-October through March-April, where gold tends to be pretty strong due to physical demand, especially of India and China and even through that large paper shortage in the second quarter, the physical demand was very strong, so Agnico sits very well positioned after a tough second quarter, but we are set for a good strong half in the second half. We've got two new gold mines opening in the second half and will be up for seven.

We've laid out a program, just click forward here quickly, where we are going to be cutting significant cost out of our structure with the drop in the gold price. I think, we proved to the market that we can and will react to the gold price higher or lower in this unfortunate case is significantly lower, significantly quickly, but we've had about $50 million of our operating capital from 2013 and another $250 million out of our forecast spend for 2014, so we can and will manage to a gold price if we have to, but really we don't want to. We want to spend that money, because most of that capital from 2014, we have had good new mining projects such as starting the sinker shaft in sinker shaft in Finland, is a good return project. It's something that we are going to do in the long-term, but if we don't have the money to do it, sometimes deferring is the better way to go.

We do have access to capital of course, but we are very, very unwilling to dilute our shareholders. That is one of the core principles of Agnico. Grow the company at a moderate pace, try and cut costs wherever you can, but don't issue a lot of stock as you grow the company. In the end, clearly that means that we will have the opportunity to generate per share value for the shareholders. It always has to be per share, because we are competing not only against other gold mining companies, but we are competing against the gold bar as well.

One of the ways the gold equity can be better than the gold bar is to grow your exposure to the metals, so that's gold per share in the ground, production per share coming out of the ground. That should translate into increases in cash flow per share, dividends per share, free cash flow per share and that's how we are better than a gold bar. We have to grow your exposure to the metal and pay dividend. That yield is a good advantage. Agnico has paid dividend for 31 consecutive years.

I am here to guarantee that we are going to pay one for the 32nd, consecutive year. Actually, we pay quarterly now. I don't know the amount of the dividend. That's obviously up to the board. When I started nine years ago, it was $0.03 per share. It's currently $0.88 per share, so we try to reward our shareholders any chance we can, so we do want to keep a conservative financial structure.

The slide on Page 6 is just the operating results by mine. You guys can look at that on your own. Then the financial results from Q2, not a great quarter, but we are balancing back. The balance sheet as I said, we got very strong position. $173 million shares outstanding, $850 million in debt. $800 of that is long-term debt in a private insurance market. New assets are just going to sit there and how it matures, you can see the debt maturities for that $800 million at the bottom of the screen.

We've drawn $50 million on our bank lines. We have available bank lines of $1.15 billion, so we have very significant financial flexibility. If we do choose to do something in the near-term, we are not going to be restricted from lack of access to capital.

Since the 20% growth that we laid out to the market in February between 2013-2015, what we want to do now is moderately grow this company over time, make sure that it's manageable, achievable. We did double our gold production in 2009 and 2010. You can't double your gold production every year. I think we would be bigger than Barrick just within a few years. Barrick know it's really hard to be the biggest gold mining company in the world.

We have no desire to be the biggest gold mining company in the world, but we have great desire to be the best gold mining company in the world. The only definition of that as far as I am concerned is the highest total return to the shareholders, so we need share price performance plus the dividend and Agnico, I will show you a graph later, we have outperformed literally for decades.

A big reason that Agnico was well positioned to perform going forward is of course because our giant CapEx bubble is in fact behind us. I can our IR guys modify this graph when I get back to show a couple of years, probably 2006-2007 as well. We spent over $3 billion building new gold mines over that period through 2009. As I said, now with that CapEx behind us, we are in the luxurious position where we can really harvest cash flows or reinvest in the business depending on the price of gold, frankly.

As I said earlier, we will manage to the price of gold, so we were forecasting a spend of about $600 million in 2014 on CapEx, return that back to $400 million. We don't think that's going to impact the schedule of our major capital project, so probably going forward, I would say it's very manageable to spend $400 million, $500 million, $600 million a year.

Again, knock on wood that price of gold cooperates for us, but I sat up in front of the board very recently and promised them that we would deliver a balanced budget at least for the next couple of years 2014-2015, and balanced budget means, we will spend $400 million on CapEx, we will pay $150 million dividend and still come in with effectively a zero change in cash, so we can manage that at a $1,300 gold price, so at $1,400, $1,500, I actually think it will be $1,500 next year, we will be generating good net free cash flow and that's after $150 million dividend.

That's in the plan. That dividend is a line item in the plan and the real goal here is to continue to generate higher and higher cash balances, especially because we do have some data. It would be nice to see growing cash balance as we come towards some debt maturity just to give the market the confidence that we are in good financial condition.

I'll run very, very quickly through the operations. I know there is at least one of our mining engineer in the room, but I don't want to bore you with the details. Needless to say, LaRonde is the flagship, the company builder. It's been operating since 1988. The current mine life goes for another 14 years at least. In fact, we've got wide open drill intersections at the bottom of the mine. I am of the personal belief that it goes through the center of the earth and out the other side, but we are going to find that out much, much later.

The current plan is to go down to over 3.3 kilometers and we are already down to about 3 kilometers in the deepest levels of the mine at the moment, so it is actually a very deep, very complicated mine. We produced five metals from this mine, gold, silver, copper, lead, and zinc, and so the very technically challenging mine as well. In fact, we love it so much, we call LaRonde and all of our best employees, maybe not all of them, that's slightly insulting, but a lot of our great employees have come through LaRonde and its technical challenge is on every level going deep, metallurgy, rock mechanics. It's really a great training ground for our employees and a great future in front of it.

I made up a fact very recently, and I know if you make up the fact, it maybe doesn't make it true, but I believe this is probably the only gold mine of significance in the world that is currently mining at half of its reserve grid. Last year, we mined at 1.8 per tonne. This year, we are mining at about 2.3 grams per tonne. You can see here, the reserve life is 4.5, so LaRonde's better days are in fact ahead of it. The value of the ore through the remaining mine life is in fact 50% higher on a per tonne basis than what we mined last year at the same metal prices, so LaRonde's better days are in fact ahead of it.

Lapa, very small mine just down the road of around seven miles east of LaRonde, close enough that we didn't even build a mill there. We just truck the ore down the road for processing at LaRonde. It's has been a fantastic little moneymaker for us. Unfortunately, it only has a few years left. We have had some drilling success on a parallel zone, called Zulapa, so it's possible we could add another year of mine life here. We will see how it goes, but this cost is a $150 million to build and it's been cracking out $80 million, $90 million, $100 million of cash operating profit for the last number of years and is forecast to continue doing so, so great moneymaker for the mine and for the company.

Kittila in Finland has exactly the opposite problem that Lapa has. Lapa doesn't have enough ore left and Kittila, frankly, probably has too much ore. Including the resource, we are looking at about a 40-year mine life and we all know in fact that what we are mining 40 years from now has zero value today, because of the time, value of money, so our job in Finland is in fact to double the throughput ultimately we are hopping and short mine life from, say, 40 years to 20 years. Doing so will create a lot of net asset value per share. That of course is our job, so good future and Kittila is operating extremely well now.

Pinos Altos, Creston Mascota, our two current operations in Northern Mexico are our higher margin, operations as well. We are cranking out of it $300 million of operating profit here per year. It didn't even cost us that to buy and build these properties. Again, fantastic moneymaker and our goal is to continue growing that southern business. The Mexican business as I said is very high margin and we are doing very well down there. Very encouraging results so far.

Meadowbank, a reasonably small short mine life, but a very large producer. Unfortunately, it's our largest producing mine, but it's also our highest cost mine, so we are working on that. They've actually had great success driving down the operating cost maybe giving us the opportunity to extend this mine life as well, but what we have learned at Meadowbank in the Canadian Arctic, we will apply to our new Meliadine project if we end up building that, we've got about a year of study to go there before we decide what to do.

In terms of the development projects La India is our third mine in Northern Mexico. That's opening before the end of the year. This is a fantastic opportunity for us between buying it and building it. It was $300 million, $150 million to buy, $150 to build. It will have an operating cost of $500 per ounce and great exploration outside as well, so we are very excited about the eminent opening of La India.

Goldex is actually a restart. We are going to be pouring gold there, I believe, within a month. A real success story here, we had problem there. We had to suddenly close the mine and ground problem and now we are going back into few different zones, but we are very proud of the team that's shown us a big upside at Goldex in fact, so one of the things we are most excited about is the possibility of a much longer mine life at Goldex, because that deeper D zone, the blue bar at the bottom, we already know it's bigger than the GEZ, where we were mining, bigger than it ever was, so it's pretty exciting there as well.

Last but not least, our other Canadian Arctic project Meliadine is the big question mark for us, because this would be a $1 billion plus of CapEx. We have another year of study before what if anything we are going to build there. If it's a good return project and our definition of good is 15% after-tax IRR, if it reaches that hurdle rate or better, we will start thinking about how we are going to do it or maybe we will do something else. If we, in the meantime, find a bunch of other things that are better, then so be it.

I do remind people that just because we own Meliadine, doesn't mean we have to build it. $1 billion plus of capital is a lot of money for Agnico, we are not Barrick and Newmont, but it's a project that we would consider partner zone as well, so I was in Hong Kong last week talking to an interested party, a private investor that wants to directly invest in mining assets, so we will see where it goes. We can't sell something that we don't know what it is, so a year from now at least we will have done the lag work on potential partnerships on this projects. We'll see what the gold price environment is et cetera, et cetera.

Really that's all I wanted to say beyond, the blue line on top here is the Agnico share price. You can see that over the 15 years and it's a 15-year graph, our CEO, Sean Boyd has been the CEO of Agnico for those 15 years, so we are pretty proud of their performance and the darker grey line is the gold price. Since our rapid growth phase, we've really created a lot of shareholder value, we've outperformed over very long period of time and not taking any responsibility for the crash in 2008. That was not me. Though I admit probably in 2011, some of that was self-inflicted, we had a bit of a final ramp-up of our new assets. Then 2013 crash, we are not taking responsibility for that either, so Agnico has bounced several off the gold price and I think we are very well positioned to do that again, so we are very, very happy with where we are operationally. We are feeling confident about the price of gold and therefore we think we are ready to have one more up trend here and really outperform gold in more certainly our peers, so I think that is it.

Unidentified Analyst

We have few minutes for question.

Question-and-Answer Session

David Smith

Yes, sir.

Unidentified Analyst

When you buy juniors, do you (Inaudible) influence their management's decisions or do you want to get to know the areas or do you think of them as potential eventual acquisitions or what and you buy yourselves, do you trade them over time?

David Smith

Yes. All of our investments have a strategic purpose, so all of our investments we could see someday taking over the company if everything goes according to plan. Now, things change on Agnico side and it doesn't always go according to plan, so we have an investment portfolio of about $100 million and I would say we are very serious about probably half-a-dozen in the portfolio at anytime, we are doing a lot of work on it kind of hoping to drive it towards acquisition, but we are trying to get close to the people. We are trying to get closer to the asset, we are trying to get comfortable with whatever the region that asset is in, but they all have to have a strategic purpose and because we run about $100 million in investment, one of the ideas of course is, well these guys we want to buy this, one of the others ideas we should probably sell that. We truly manage it as a portfolio. I just think that's a very conservative prudent financial way to do it.

Unidentified Analyst

Thank you.

David Smith

Welcome. Good. Get off easy today. Thank you all very much.

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