Agnico Eagle Mines' CEO Discusses Q1 2014 Results - Earnings Call Transcript

May. 2.14 | About: Agnico Eagle (AEM)

Call Start: 08:30

Call End: 09:07

Agnico Eagle Mines Ltd (NYSE:AEM)

Q1 2014 Earnings Conference Call

May 2, 2014 08:30 AM ET

Executives

Sean Boyd - President and CEO

Tim Haldane - SVP, Operations - USA & Latin America

Dave Smith - VP of Finance and CFO

Analysts

Andrew Quail - Goldman Sachs

Botir Sharipov - HSBC

Anita Soni - Credit Suisse

Josh Wilson - Dundee Capital Markets

Alec Kodatsky- CIBC

John Tumazos - John Tumazos Very Independent Research

Operator

Good morning ladies and gentlemen and thank you for standing by. Welcome to the Agnico Eagle Mines Limited Q1 2014 Call. (Operator Instructions) I would like to remind everyone that this conference call is being recorded today, Friday, May 2, 2014 at 8:30 a.m. Eastern Time. I will now turn the conference over to Mr. Sean Boyd, President and CEO. Please go ahead, sir.

Sean Boyd

Thank you, operator. And good morning, everyone. And thank you all for joining us at our Q1 2014 conference call. I’d 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 this morning at 11 AM., at the Sheraton in Toronto. Everybody’s welcome and we look forward to seeing a lot of our shareholders there this morning.

What I like to do is go through the first quarter highlights and then talk about our operations and where we’re 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, out cash cost 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 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 in the lower end of our cash cost forecast.

As a result of the strong quarter, we are 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. Well also as you know a couple of weeks ago announced the joint bid with Yamana Gold for Osisko Mining Corporation. As far as that acquisition goes it’s subject to the vote of Osisko shareholders which is going to take place on May 30. Assuming a successfully 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 go out and meet our shareholders, we’ve said that it makes good sense because that’s a good fit, as you know that’s in the middle of our foundation, our base along highway 117 in the Abitibi region of Quebec. Not only we have three producing mine, 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 our logistic perspective.

So there are 1600 employees there, we’ve created value in that region for over four decades. So it’s a natural fit. We’re buying an asset that’s generating net free cash flow that comes with a land package that has upside both at Canadian market but also into Ontario with the Kirkland Lake property, so it’s a transaction that sits from a strategic point of view. And also in terms of the size of the transaction, it’s similar in size to what we’ve done in the past with the acquisition of Kittila and Meadowbank where we issued about 14% of our equity. Here we’re issuing a little over 16% and putting cap to work, to buy and asset that’s up and running. And it’s just that’s the beginning of what we see as an optimization phase. So it makes a good sense. In terms of the operating results in detail, good performance coming out of LaRonde that project has turned the corner in terms of its ability to access more of the higher grade ore, at depth we’re seeing that in the grade performance and also affecting unit cost, because we’re producing more gold.

Lapa has been a steady performer lower than budgeted on a cost per tonne basis. Goldex we’ll 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’s also played into our thinking with Osisko property package because we think there’s a lot of opportunity in the region to find two to three gram material underground, a 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’ll talk about that in a minute on their slide. And the Mexican business, our Southern business continues to perform well, low cost steady production, commission lengthy in the quarter we should see more production coming out of the southern business, as we move forward. On the financial result side, good solid earnings we had a little bit lower tax, we had little bit less depreciation, fewer tonne on the tax rate side, a lot of it was driven by a Meadowbank, where we have shelter in terms of our tax pulls 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’s why we’re able to pay down some of our borrowings on our credit lines. 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 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’re buying an asset that’s generating net free cash flow and in fact DVRS has put the company under review developing. So it’s not under review negative, it’s under review developing and we feel our credit metrics actually improved with the Osisko transaction.

Just talking about the assets now in more detail beginning with LaRonde. LaRonde had cash cost of $603, good cost per tonne performance which was on budget at C$99 that’s despite a six day shutdown. So we didn’t process our mine as many tonnes as we had anticipated and we still met our budgeted cost per tonne. We’ve 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’ll see that average grade increase and in fact as we get out to 2019, we’re anticipating production at LaRonde in the 350,000 ounce level when we’re mining at or slightly above reserve grade.

At Meadowbank record quarterly production, despite debt lower than normal throughput due to we had some schedule 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 C$87 a year ago down to C$75. So that 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’ve 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 that’s 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 is 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 while the 3,000 tonne a day plant is currently doing 3,400 tonnes a day. So the question will be as what will be the run rate of the expanded plant which we expect to have it up 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, [inaudible] system, cost per tonne Canadian dollars in the low 30s. To me 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 mining methods 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 at 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, difficult mine narrow, so very good cost performance. Onsite operating cost actually dropped 12% lower than forecast due to the ongoing optimization efforts. At Meliadine still working on the study but also still drilling, studies expected to be done by the end of the year as we said on numerous occasions the focus of the study is on the higher grade portion 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 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’ll have more details on Meliadine as we approach the end of the year. Our southern business talked about a little bit earlier, production steady at Pinos Altos, cash cost still low at 450, prices commissioning and change over activity is completed in preparation for shaft sinking, that’ll give us more flexibility next year in the underground mine, allow us to ramp up tonnage in the underground mine as we start to mine out the open pits at Creston Mascota, phase 3 of the heap leach construction was completed in April, so that’s 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, achieve 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 stable book cost as we started up that operation.

I’ll 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’ll 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 started 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’s going well, we think that will give us the potential to have a processing rate (ph) or capacity available to us at some level over 4000 tons 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. So I’ll leave it at that but I’ll also remind everyone that we do have site business planned at LaRonde in Goldex on May 21, that’s a great opportunity for those that have the time to get up to those two mines and see what we’re doing on the cost side, get underground actually at both deposits and get a good feel of where we’re headed with those two assets.

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

Question-and-Answer Session

Operator

Thank you, (Operator Instructions) your first question comes from Andrew Quail with Goldman Sachs, please go ahead.

Andrew Quail - Goldman Sachs

Morning Sean, thanks very much for the update and congratulations on a super quarter, [Indiscernible] just got one question La India, what sort of upside do you see there going forward now into commercial production and so how much are you spending in the exploration around the area.

Sean Boyd

We’ll let Tim Haldane handle that.

Tim Haldane

Sure, well it’s early days yet La India but we are pretty comfortable with what we see so far as Sean mentioned 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’s just to grow it and we’re drilling inside of La India, infill drilling and offsite drilling, we’ve got a 50,000 hectare land package there but I think we’ve got news to come in the future, I think there’s upside there and right now we’re just concentrating on the solid startup behind us.

Operator

Your next question comes from Botir Sharipov with HSBC, please go ahead.

Botir Sharipov - HSBC

Good morning everyone and congrats on a strong quarter, my first question is on your gold project, the Osisko position assuming it’s completed, what’s the thinking about your other gold project now that you know you will probably draw down another $0.5 billion for the Oskiso position, what’s the thinking, what’s the current thinking for Kittila shaft and Miller dam project as both will require substantial capital investment. Are you thinking about more debt eventually just your thoughts on that?

Sean Boyd

Well the Osisko transaction, Canadian Malarctics generating net free cash flow, so our overall net free cash flow generated in the business will be higher collectively so we’ll 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 Malarctic 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’re in good financial shape despite the fact that we’re going to be borrowing an additional C$500 million.

Botir Sharipov - HSBC

Okay. Thank you. And my second question is actually on depreciation? It was lower this quarter from prior quarter. Is it because you’re -- I guess, you're into production method is based more on tonnage and you actually put on less tonne this quarter and last quarter?

Sean Boyd

Yeah.

Botir Sharipov - HSBC

Despite higher production?

Sean Boyd

Yeah. It’s kind of two parts, but you have to look at it on a tonnage basis for sure. And if you compare to 2013, we actually had some write downs in 2013. So on a per tonne basis versus per ounce basis, the depreciation is actually pretty close to where we think it’s 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 commission them, taking La India commercial.

Operator

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

Anita Soni - Credit Suisse

Hi, good morning guys. A question for Dave and congratulation on the quarter, it’s nice to keep in tally. So Goldex, could you give us a breakout of all of the sustaining capital at Goldex and add Kittila as well?

Dave Smith

May be that’s something we can do offline when we have the model in front of us, Anita.

Anita Soni - Credit Suisse

Sure. And just wondering on Pinos, is the mill constrained by the one -- the amount of tonnage that you can put through that operation? Is that constraint by the mill at 1.954 or is there opportunity to upgrade that?

Sean Boyd

Tim Haldane will answer.

Tim Haldane

You know, I think we’re pretty close to apprehend where we can get through the mill. The quarter was 53 somewhat tonnes per day and maybe within average 55. So I think our -- what we’re looking at in subsequent years after we get the shaft up and running is how we can optimize the tonnage to the mill and maintain that kind of 5500 tonne a day, right.

Anita Soni - Credit Suisse

And how about the heap leaches that, is there opportunities for -- I think there was pretty good amount of order placed on the pad, I am just wondering about that?

Sean Boyd

Heap leach, Pinos Altos is always -- it’s kind of gravy for us. We minded as it is in front of us, it comes from the open pits. The open pits -- sorry -- well, the open pits -- okay, sorry I am changing microphones here. Heap leach comes from our open pits mines, our mine plan right now is open pits deplete around the end of this decade, but we still got those satellite deposits that we’re looking at. And I think will bring something in to supplement that in the future years.

Anita Soni - Credit Suisse

Great. And then last question is on the LaRonde copper grade, those seem -- the gold and copper grade. So just starting with the gold grade, any expectation, I mean 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 sort of factor that we need to consider as you time the circuit -- sorry as you time the heating and ventilation system?

Sean Boyd

As we move into the, currently 293 pyramids, grades are typically in the 68 grams per tonne level. Typically 269 pyramids grades are between, I guess, 2.5 to 4 grams per tonne. So as we move deeper and we increase the proportions will meet reserve grade there, going forward. And I guess that’s what all we can say. I think as we move ahead and maturities established in 293 pyramids this grades will continue to creep up as we’ve established our guidance once.

Anita Soni - Credit Suisse

All right. And then just could you provide a little bit more color on the per tonne cost at Goldex it was pretty good for us, first quarter for commercial there?

Sean Boyd

Color in what sense Anita?

Anita Soni - Credit Suisse

Just I mean, you haven’t -- you -- sorry, I was just wondering if you would be able to say with confidence that what factors are potentially -- long term could those cost be at that low per day -- 30 buck per tonne level?

Sean Boyd

I think when feasibility study was initiated, I think we had pretty good hand along the G&A and milling cost, I guess, the mining method would be different and our appreciation of mining cost would be -- was the main factor. I think the costs of backfill in general are lower than expected, perhaps a bit on ground support. And I think the biggest aspect is probably getting better than anticipated productivity numbers in certain areas. So I think it’s just contributes the overall cost structure.

Operator

(Operator Instructions) Your next question comes from Joss Wilson with Dundee Capital Markets. Please go ahead.

Josh Wilson - Dundee Capital Markets

Hi, good morning guys. Just a bit more color on Meadowbank, I guess previously you had redone the block model and deposit a great reconciliation, was a factor for higher grade last year. Was that factored all this quarter and I guess what are the grades for plan (ph)?

Sean Boyd

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

Tim Haldane

Yeah. Grade Q4 and Q1 have been highly influenced by mining in Goose (ph), I think as we completed the budget last year have also upgraded the reconciliation information and the data and to our block model for next year. Presently there is roughly five or six benches left to be mine in Goose as we transition towards the end of the year. We’re 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’ll also be introducing lower grade material from the vault pit going forward starting in Q1, because we’ve established commercial production there. And we’ll continue getting strong grades from the Portage (ph) sector of the pit and the push back in those areas.

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

Josh Wilson - Dundee Capital Markets

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

Sean Boyd

Well I think there has been a lot of work done on Meliadine studies, I think we got a pretty good hand over on what cost are. Certainly at the moment we’re in the process of integrating our operation team within this study and we’re overlooking the opportunities that will be coming out, but at this stage I wouldn’t say that we’re very conservative on the Meliadine numbers. I think numbers that we’ve sort of being working at OpEx wise and CapEx wise we think are pretty realistic at this stage.

Operator

Your next question comes from Alec Kodatsky with CIBC. Please go ahead.

Alec Kodatsky- CIBC

I just had a question about Meadowbank. With respect to the unit cost coming in at $75 a tonne. Is that a level that you think you’ll be able to hold as you start transitioning into other pits?

Sean Boyd

We’ll be mining more in the range of low 80s back in the quarter as we mined from Vault, some of the OpEx are lower in first quarter because we’ve 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.

Alec Kodatsky- CIBC

And maybe just a qualitative question about LaRonde. With the ventilation now complete, is the progress on the development side and sort of the ramp up tracking in line with expectations?

Sean Boyd

Yeah actually the whole team from LaRonde is in the room today and we’re quite happy with the performance. I think these [inaudible] and productivity in the lower part of the mine is increased and we’re pretty low on target for the year. I guess mining flexibility and infrastructures are now in place and I guess the team there can actually operate and meet all the targets and it bodes well for the future and we’re really happy with their progress.

Operator

Your next question comes from John Tumazos with John Tumazos Very Independent Research. Please go ahead.

John Tumazos - John Tumazos Very Independent Research

Congratulation on the great first quarter. Five, 10 years ago Sean you used to sort of use an expression something like Agnico 2,500, 8,500 tonne a day underground mines that weren’t big enough mines. Now there is the underground mines, there is multiple heap wage targets in the southern system, Canadian Malartic brings in a large 60,000 tonne of grinding mill, Kittila was running the auto very nicely. Should we look at Agnico as able to approach any project and any setting for the most part that you wished 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 late stage saying here is the deal we’re inviting you in, but if you say no we’re going to call competitors xyz in the next hour, make a decision. To sort of how did all this unique president setting structure get created?

Sean Boyd

Those are two interesting questions; I’ll deal with interesting question number one on our skill sets. I think it’s fair to say that over the years that we have developed a much broader range of skill 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, and so there are projects and if you look at it and you mentioned a few of them whether it’s deep underground mining at 2.9 kilometers in the Abitibi region of Quebec, whether it’s mining north of the Arctic in Finnish Lapland with a complex metallurgy autoclave which is working quite well with recoveries of almost 90%, whether it’s our skill set in Mexico or we’re mining in the Sierra Madre at altitude open pit, not only open pit but underground in getting good productivity. It’s a pretty range of skills and one of the things that we tried to do over the years and one of our focuses is, in a very tough and challenging industry, for us it’s about manageability and fit and being able to deliver on targets and so we take 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 provides skills and experience in unique disciplines to all of our operation, so it’s a nice position to be in. So we can actually look at more things, whether we do them or not’s another story. One of the things we have been very measured on which helps with the manageability is the physical location of assets and that’s why the Canadian Malartic transaction makes sense, we don’t have any overhead at all, we’ve got three mines in the region, we got a technical service group just down the road with a lot of skills, we’ve got the Goldex project which is demonstrating that 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’re 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, a spin co, not your typical spin co where you throw in the lowest quality stuff and you throw some cash on top and that happened so we 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’re still waiting to be able to be allowed to speak to mining, potential mining partners. 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 at or have signed the 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 also has been looking who also would share similar types of view on value, can you release us on a selected basis from the CAA so that we could have those discussion. It wasn’t until Goldcorp made the second bid, I think at 765 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 proposed 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. Did that help?

Operator

Your next question will come from Anita Soni with Credit Suisse, please go ahead.

Anita Soni - Credit Suisse

Sorry to have cut off John there, the question is a follow up; could you just give us the grade of the vault pit the remaining life of mine there?

Sean Boyd

Sorry I don’t have the exact number with me but I think the, we’re talking about 2.7, 2.8 grams per ton.

Anita Soni - Credit Suisse

Okay so lower than, but still a pretty good grade.

Sean Boyd

Yes.

Operator

And there are no further questions at this time, please continue.

Sean Boyd

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 11am at the Sheraton Center in downtown Toronto, thanks again.

Operator

Ladies and gentlemen this concludes the conference call for today, thanks for your participation you may now disconnect your line.

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Agnico Eagle (AEM): Q1 EPS of $0.61 beats by $0.39. Revenue of $491.77M (+17.0% Y/Y) beats by $53.47M. Shares +1.4%.