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Agnico Eagle Mines Ltd (NYSE:AEM)

Q2 2014 Earnings Conference Call

July 31, 2014 11:00 AM ET

Executives

Sean Boyd - President and CEO

Yvon Sylvestre - SVP, Operations - Canada & Europe

Tim Haldane - SVP, Operations - USA & Latin America

Christian Provencher - VP, Canada

Analysts

Andrew Quail - Goldman Sachs

David Haughton - BMO Capital Markets

Steve Parsons - National Bank Financial

Anita Soni - Credit Suisse

Mike Parkin - Desjardins Securities

Stephen Walker - RBC Capital Markets

Patrick Chidley - HSBC

Tanya Jakusconek - Scotia Bank

Operator

Good day and welcome to the Agnico Eagle Mines Limited Q2 2014 Call. Today’s conference is being recorded.

At this time, I would like to turn the conference over to Mr. Sean Boyd, President and Chief Executive Officer. Please go ahead, Mr. Boyd.

Sean Boyd

Thank you, operator and good morning, everyone and thank you, for joining, our Q2 conference call. I’d like to start with going through some of the highlights of the quarter and then we’ll take you through our operations while also talk about exploration results this quarter because we did put out an exploration update along with our quarterly numbers and results.

If we look at the second quarter and the first half we saw record production and also record safety performance and if you look at the quarterly cost per tonne at our mines essentially all the mines are operating at a cost per tonne level that’s below budget, so excellent results and it’s a credit to the hard work and focus of all of our employees. Another highlight of the quarter was the joint acquisition with Yamana Gold of Osisko Mining completed in June. I’ll spend some time on that during the presentation and talk about where we are and where we’re headed with that asset.

But I’d also like to welcome in the room today with us is an old friend of ours Daniel Racine who is now with Yamana Gold as a Senior Vice President on their Canadian operations and helping them on the operating side and we’re working in our teams working closely with Yamana and Dan on the Canadian Malarctics asset. So as I said I’ll talk a bit more about that in the presentation. We also did increased our guidance and absence the addition of Canadian Malarctics we did see an increase in the ounces being produced out of the Agnico Eagle Mines as we indicated earlier this year we will be updating the guidance which we did and essentially pre-Canadian Malarctics we are seeing our production estimate for this year go from a level of 1.19 million ounces to 1.235 million ounces.

And we’ve also indicated in this press release that given the stronger performance that we expect to see next year at Meadowbank and Kittila, Goldex, and our southern business unit, that will be updating our 2015 production guidance with our Q3 numbers this year as we advance through the budgeting process for next year. And as I said we’ll talk about our exploration results as we move through the presentation when we talk about each of the operating units.

But the highlights there were continued good drilling results at the IDR property which is about 50 kilometers north of Meadowbank. And also a very good deep intersection at Kittila which suggests that deposit is continuing to grow.

As far as the operating results, if we quickly go through just the highlights on each mine. La Ronde we get continued good cost numbers, so good cost per tonne performance. The mine is ramping up in the lower mine we’ll see an increase in grade in the second half of the year continuing into next year as we get more stopes (Ph) open up in the lower mine. Another highlight was Goldex another strong quarterly result from Goldex in terms of production and cost. And we’re also ahead of schedule in terms of our ability to run the operation at 6,000 tonnes a day, probably about six months ahead of schedule.

At Kittila, the mill expansion is ahead of schedule and also the original target was to get the plant up to a capacity of about 3,750 tonnes per day. It looks like the plant will handle about 4,000 tonnes a day, which will have an impact on production over the next several years at Kittila. Meadowbank very good cost per tonne performance. We’re now mining closer to reserve grade. In the second half, we’re looking at average production on a quarterly basis in the 90,000 ounce range but that bounces back nicely next year where we’ll be in sort of 100,000 to 110,000 ounce range in the quarter, so another strong year coming from Meadowbank in 2015.

In our southern business, good low cost, really good cash generation and contribution to the company’s cash flow and the La India project is ramping up nicely.

In terms of cash margin almost $200 million in the quarter, so a good operating quarter. As far as financial results, I would also like to point out the cash flow on a per share basis. So in the quarter our cash provided by operating activity is about $1.06 per share, $198 million, that’s up about 160% from the second quarter of 2013. If we look at the first half of this year, $445 million cash provided by operating activities, that’s a double over where we were for the first half of last year and that’s despite a 12% drop in the realized gold price. So another strong quarter, a strong first half, and that allowed us as we said to increase our production guidance and lower our cash cost guidance.

From a financial position standpoint, a balance sheet that’s still has a lot of financial flexibility. Our net debt is slightly more than $1 billion, very manageable. We had our investment grade credit rating reaffirmed in the quarter by DDRS at BB-low with a stable trend. On the capital side, we're seeing a slight increase in our CapEx. Some of that’s coming from Canadian Malarctics, I’ll provide some details in a minute but we’re also seeing a little bit more Goldex accelerating. The ramp access in the upper part of the D-zone and that will result in us being able to put that into our life of mine plan as we look at the various satellite zones at Goldex and we also had the completion of the plant expansion at Kittila about six months ahead of schedule. So we’re spending money faster than we had expected actually the Kittila expansion is actually on budget maybe slightly below budget in total.

Just going through each mine individually, La Ronde, again extremely strong cost per tonne performance coming out of La Ronde. In July, we did have a three week shut down, or we upgraded the hoist drive. That was giving us some trouble over the last year so that resulted in some downtime, unscheduled town time. So we fixed that issue right now. As far as the cost performance per tonne we’re about 8% below budget and we’re ramping up nicely in the lower part of the mine. The first half grade about 3.2 grams per tonne, we’re looking at second half grade and the sort of 3.5 grams per tonne.

The underground development is going well and on schedule. At Meadowbank, Q2 cost per tonne, rally good performance CAD71 a tonne, that’s down from a year earlier number by about 15%, so the mines working extremely well record throughout in the quarter 11,500 tonnes a day average grade about 3.7 grams per tonne. As we said in the opening, we’re looking for average production in the second half of about 90,000 ounces per quarter of our rebounding in 2015 to about 100,000 to 110,000 ounces per quarter is great starts to pick up again. And from an exploration point of view as we said we had some good results at IVR. That’s a project we picked up last year and we started drilling it with a small program last year, we extended that program given the results last year.

We went back at it this year, we finished up the expected drilling in earlier this month, and as a result of the strong results we agreed with our exploration team to continue the program in two phases. And each phase has an estimated cost of about 2.5 million within the first couple of weeks of Phase 1 we already agreed to give them a go ahead to just continue on with Phase 2. Not only we’re seeing good drill results we’re seeing good prospecting in that area. So that will continue to be a major focus from our exploration group given the results.

Like to spend a little bit of time on Canadian Malartic and give you a little bit of color on some of the updates that we provided around the guidance. As you saw from a production standpoint the guidance that we’ve put out is for 2014 is 510,000 to 530,000 ounces, that’s down slightly from the Osisko life of mine which would add around 530,000 ounces. In 2014, the average tonnage is around 50,000 tonnes to 51,000 tonnes per day which is fairly close and consistent with what was in the Osisko life of mine.

Clearly both demand and Agnico are looking to optimize the crushing and grinding circuits so that we can improve the throughput levels as we move forward. The grade that we’re expecting for 2014 is about 1 gram per tonne, which is also consistent with what was in the Osisko life of mine. The cash cost guidance increased to around for 2014 to around $700 an ounce, and that includes the 5% NSR. It also includes additional cost related to the acceleration of the Gouldie pit which is going to increase our mining flexibility moving forward.

It also includes increased drilling costs in the north part of our pit which is closest to the town of Malartic, and we’re really doing that to reduce the impacts of noise and vibrations.

We also had an update on CapEx, the CapEx we have indicated is going to increase this year by about $40 million while $13 million of that is the Gouldie pit, there is a $12 million related to capitalized stripping and there is $9 million related to additional mining equipment predominantly to trucks which will allow us to more efficiently manage the waste rock and a lot of contract work in sort waste management. So part of our optimization is focused trying to eliminate some of the contractors that are onsite.

G&A as we said in the press release the initial estimate of annual savings is about $12 million to $15 million a year, we’re still looking at this. We’re in a transition phase for the later part of this year but we’ll have some more clarity on that for 2015 and forward with our Q3 updates. The areas that we’re focused on both the Yamana and Agnico optimize the operation. As we said really to improve and expand the crushing and grinding capacity, that’s certainly something we’re focused on in the short-term. But more medium term we’re looking to expand the capacity of the plant. The life of mine calls for the generation of significant stock piles. So what we’re trying to do is look at a way that we can eliminate the handling costs associated with the stock piling.

So what we’d like to do is find a way that we can increase the capacity of the plant and process more of the ore that had originally intended to be stock piled at its mined. So we’re handling that material left, and that’s a big part of the focus. We’re also looking at procurement given our large presence in the region and buying power we think there is a way that not only can we save on some of the cost at Malartic but we may be able to save some of the costs at Agnico, when we combine the buying power of both of the operations. We’re looking at improving the drilling and blasting techniques in the pits to improve the fragmentation. We went through a lot of that at Agnico at Meadowbank so we’ve brought some of the Meadowbank people to look at that and see where we can make some improvements. Other areas that both Yamana and Agnico are focused-on on optimization are on the maintenance side. We also did have some issues at one point at Meadowbank, which we improved dramatically in terms of equipment availability due to a much better maintenance program. So we’re reviewing all of those things and we’ll have more color, lot of those efforts as we go into our third quarter with our third quarter results.

I’d just like to quickly mention on Kirkland Lake the focus is primarily Upper Beaver. There are two drills still going but we’re reviewing all of the targets and looking for a meaningful budget next year on exploration focused on Upper Beaver and some on Canadian Kirkland. But we’ll provide more details as we go through the balance of this year.

And finally on Canadian Malarctics, both Yamana and Agnico are hosting a site visit on September the 30th. So if there is an interest to participate in that site visit then please contact either Agnico or Yamana and express your interest.

Moving on to Kittila, the quarterly production at Kittila was impacted by a two-week tie-in shutdown to accelerate the mill expansion. There is another time coming later this year. But we also had a decline in recoveries, that’s fixable. We’re doing some work in the tailings and polishing pond area. So we’re generating a little bit more thiocyanate in the recycled water, so that’s something that we can fix. But it did hurt our production in the quarter. I think more importantly for us the mill expansion is six months ahead of schedule as we said and our capacity now will be higher than what we thought it will be 4,000 tonnes per day rather than 750 that will allow us to increase our output as we go through 2015 and beyond.

And the focus over the next five years will be to increase output there and do it by way of ramp focusing on the Rimpi zone. As far as the shaft goes, our sense now is we can defer a decision on the shaft for two, possibly three years, and still get an increase in production over the next five years by focusing on the ramp development and taking advantage of the increased capacity of the plant expansion. From an exploration point of view, we know this deposit extends the depth we had further evidence of that with a drill hole that came-in in the Suuri trend which actually extends and plunges to the north under Roura. So that will continue to be a focus for us. And essentially this has a long term asset that will be around for several decades. We’re continuing to drill it and our challenges is to find the right match and the right production rate at Kittila as we grow that deposit.

At Goldex another I would say outstanding result, good production, excellent cash cost, excellent cost per tonne at $33 which is well below what we had guided and certainly well below our budget. Our mining rate is ahead of schedule in terms of that ramp up to get to 6,000 tonnes a day. The plant capacity is actually 8,000 tonnes a day so that opens up the opportunity as we look at satellite zones and actually with something in the region called Akasaba, which we’re working on. So, we’re looking to increase output at Goldex with these additional satellite zones as we move forward and extend the mine life. And it certainly helps as we’ve said before when we were looking at restarting Goldex we said the key for Goldex in terms of future investment and being able to extend the mine life and add additional production was going to be the cost profile. I mean we’ve proven that we could be well below the CAD40 per tonne, so that’s the good sign and that will held us generate increased returns on the satellite zones as we look at how to optimize Goldex.

We do have a long section in the presentation for you to look at.

At Lapa, they’re in the last couple of years the mine life they continue to sort of focus on optimizing what they have left in fact their cost per tonne performance continues to be good. They came in $107 per tonne Canadian versus a budget of $119, so continued good work there. At Meliadine also good drill results, study is progressing, should have the study completed by the end of this year. We’ll be in a position to talk about that likely in February when we put out our updated life of mine and our detailed three-year plan.

Moving on to the southern business. Again good solid contribution from a cash flow generating point of view, low cost operation, our quarterly production in the southern business unit was 73,000 ounces, cash cost of 496, we’re expecting more output growth from our Mexican operations in 2015, so that will be part of our update with our Q3 results.

Looking quickly at Pinos Altos, the quarterly production was above budget, both 17% above budget and our cash cost Pinos at $481, were below budget, so continued good work there, shaft progressing as expected no major issues there. Creston Mascota, the phase three leach pad is now being commissioned, so that’s been brought back on line very successfully over the last year and a bit and performing well, good solid production, good solid cost. La India ramping up well, in terms of ounce output and also cost performance we’ve done some modifications on the crushing and stacking circuits which we expect to complete in the third quarter. And that should help us with our production cost profile at La India as we go forward. So our good position there.

Just wrapping up before we take questions in terms of production guidance as we said now midpoint of a range 1.35 million ounces for 2014, cash costs in the 650 to 675 range. More details will be provided in Q3 not only on Canadian Malartic but also on our forecast for 2015 guidance. Whereas we said we’re seeing the ability to produce more than what we indicated back earlier this year in February for next year at Meadowbank, Goldex, Kittila and our Southern business units. We’ll continue to focus on exploration, we’ve seen some good results, we’ve actually got some more updates coming given the heightened level of activity at some of these key projects throughout the balance of this year, and we will continue to access some of the satellite deposit as we go forward.

Just ending on one slide which is our growth slide. And we can see that in quite a short of time we’ve gone from 1 million ounces which took the company over 50 years to get to we’ve continually ramped up and what we’ll be in a position to do in Q3 is talk about 2015 and we do see some upside in the number that’s posted here at 1.546 million ounces and ultimately when we update in February that will likely be reflected in 2016 as well.

So, on that operator we’d like to open the lines and take some questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question today will come from Andrew Quail with Goldman Sachs. Please go ahead.

Andrew Quail - Goldman Sachs

Just a couple of quick ones. Firstly, on Kittila, obviously tonnage went down, inventory went down. Can you give some guidance, going forward, on if you see that rebounding over the next couple of quarters, and especially say something about recovery into 2015?

Sean Boyd

I think recovery for 2015 in second half may be a bit challenging as you’ve seen in the second quarter will be probably in the low 80s, little while we’ve had some water or management issues and water quality issues that is bringing some recovery upsets. We’re investigating because we’re seeing other areas, but at this stage we feel that by the end of the year we should be back on track. As far as the guidance is concerned with the two tie-ins the loss production has occurred but we’re going to be advancing that going forward with the stronger throughout rates. So we’ll be in the very low end of the guidance that was published earlier in the year.

Unidentified Company Representative

For Kittila, Andrew I think in terms of that specific asset we’re probably down about 10,000 to 13,000 ounces with some of these issues, but that’s more than made up by the other mines and that’s reflected in the updated guidance number that we put up.

Andrew Quail - Goldman Sachs

And looking at the southern business, guys, if I look at, I suppose, both Pinos Altos and La India, look, sort of on a CapEx, or sustaining CapEx basis, do you think we can sort of use that run rate that you guys are at in the second quarter to sort of extrapolate out through the end of the year and into ‘15, especially coming about La India now, you're sort of at more of a steady sort of state. Is that reasonable to assume?

Tim Haldane

This is Tim. I think it’s reasonable with the caveat that we’ve got some CapEx that’s not sustaining and not sure how it’s broken out there and we’ll have a little CapEx at La India for a leach pad expansion next year and we’ve got the shaft CapEx at Pinos Altos this year. But the sustaining, that should but pretty flat.

Andrew Quail - Goldman Sachs

And last question is tax-related, guys. Just you know, can you give some guidance around what is best to use going into the second half, and maybe guidance around the full-year for FY 2014, effective tax rate?

Sean Boyd

Andrew I think we provided that guidance in the press release and we are seeing 35% to 40% overall. And the reason that that is a little bit lower than it previously was is because a large part of the operating profit so far this year has been at Meadowbank, which is effectively shielded. And there is not a lot of tax being paid through that Meadowbank profit.

Operator

Please go ahead Mr. Haughton, your line is now open.

David Haughton - BMO Capital Markets

Yes, good morning, and thank you, Sean and Tim, for the update. Just following-on on the Kittila, it's pretty good that you've been able to get the extra throughput out of the mill expansion, getting out to 4,000 tonnes a day, but the challenge there is really whether the mine can match that. What's your expectation of the mine being able to get up to that level?

Yvon Sylvestre

Well, I think the plan with the expansion was to process in the next two years the available lower grade stockpile in service. We’ve got 400,000 tonnes to 500,000 tonnes accumulated since the beginning. And the expectation at this year is for the mine to ramp up to that 3,750 rate by 2016.

David Haughton - BMO Capital Markets

Okay, that still gives you some extra capacity in that plant. Would you be thinking about improving the underground production rates to be able to fill that level?

Sean Boyd

Well, I think by pursuing the development in the Rimpi zone down the road we’re also modifying or adapting the mine plant currently to provide more mining rising to increase flexibility in the mine. But the better flexibility down the road will occur in ’17, ’18, once we start getting into production from the Rimpi zone.

David Haughton - BMO Capital Markets

All right. Now, at one stage, there was potential to have almost a step change expansion there, but it was contingent upon possibly getting a shaft in. is that still part of the thinking in the medium to longer term at Kittila?

Yvon Sylvestre

Well, I think it’s still out there going forward but I think in the next two or three years we’ve decided to focus on the Rimpi deposit in the access to it because that will provide more mining flexibility having more ramps will provide also more better access. So, the economics of the shaft are not as solid until we get more I guess result adapt on the reserve side. And there’s actually no rush at this stage to implement the shaft other than to accelerate the exploration strategy and our exploration ramp is providing that access presently, so it’s a good compromise.

Sean Boyd

It’s more David a capital allocation question at this point as we look at a number of opportunities that we have. And as Yvon said it’s not essential that that shaft begins now because we can still see the ability to increase production at Kittila over the next four to five years by accelerated ramp development and getting at the Rimpi zone which is better grades and some better thicknesses.

David Haughton - BMO Capital Markets

Yes. Just switching now back to Meadowbank, interested to hear your expectation of 90,000 ounces per quarter for the balance of the year, then 100,000 to 110,000 next year. Would it be right to think that next year is mainly driven by grade?

Yvon Sylvestre

Well, next year will be mainly driven by mining in vault which is typically lower in the reserve grade and mostly higher grade by getting some of the pushback or the dash get in the south side. So the grades will be coming more strongly next year from the Portage section and not necessarily from Goose which will be terminated by the end of the year.

David Haughton - BMO Capital Markets

All right. So basically, the pushback would get you access to some of the really good material that you got earlier this year, in sequential benches through ‘15?

Yvon Sylvestre

Well, that’s correct. As far as stronger grade in Portage in tonnage throughout the year but not in comparison to the grades we’re getting this year in Goose. So I think that’s the correction.

David Haughton - BMO Capital Markets

Okay, thank you Yvon. Thanks Sean.

Operator

Your next question will come from Steve Parsons with National Bank Financial. Please go ahead.

Steve Parsons - National Bank Financial

Yes, good morning, thank you. Actually, David asked most of my questions, but just to continue on with the grade, look at the grade at Meadowbank. Is there potential for that high-grade chute at the Goose pit to extend that you’re able to push a couple of benches down and get back in there and get that chute?

Yvon Sylvestre

Well, I guess on the pit side the economics of pushing the pit further is not economically. Secondly, we looked at the small underground project and now driving a ramp to try to see if we can make some economics out of the continuity and unfortunately the grade is very interesting but the tonnage is not enough to suffice economics. So we’ve abandoned that idea for now.

Steve Parsons - National Bank Financial

Okay, very good. That's it for me. Thank you.

Operator

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

Anita Soni - Credit Suisse

Hi. Most of my questions have been asked. I just wanted to confirm, were you talking about with the Portage pit grades next year, I think, Sean, that you had mentioned that it was about 100,000 to 110,000 ounces per quarter in 2015 out of Meadowbank. Is that correct?

Sean Boyd

That’s correct.

Anita Soni - Credit Suisse

All right. And then, also, could you just talk about the labor cost reductions that you've been seeing? I noticed that some of the unit costs were down, and you had sided labor costs reductions, and could you just fully elaborate on that?

Sean Boyd

Well, I think we went through rationalization of contractor costs last year mostly in the fall. I think our cost on the rest have not necessarily gone down except in certain areas on some smaller benefits package. But I think the demand aspect as we’ve adopted a more longer term approach to attrition and try to minimize level of staffing to its minimum. So I think that’s more the results from this year on that aspect.

Anita Soni - Credit Suisse

Maybe just more big-picture, are there any similar types of things that you see on the horizon you can see in terms of unit cost benefits at any of the assets?

Sean Boyd

Well at this stage we’re pretty happy with the initiatives that have been driven at sites from each GM and their teams. They’re continuing in that aspect, I think in the last 1.5 year, two years they have continued on a cost return basis to continue and we’ll continue to take that long-term approach to that and we’re pretty happy with the performance from the sites in that respect.

Operator

Your next question will come from Mike Parkin with Desjardins. Please go ahead.

Mike Parkin - Desjardins Securities

Just a couple of questions. You mentioned in the press release that the seasonal cost at Meadowbank has been deferred to the second half. Can you give an idea of what that means on a per-ounce basis, or millions of dollars?

Sean Boyd

I don’t have the exact number with me but I think in the past we’ve budgeted seasonally for some reasons we budgeted on a yearly basis for now. So I think the seasonal barge season and specifically on this but it’s between probably 6 million to 8 million or 9 million.

Mike Parkin - Desjardins Securities

One other question, just with La Ronda, I guess with our wonderfully cool summer here in Canada, the cooling plant probably hasn't been tested to its maximum level, but how has that been running so far?

Sean Boyd

Well I think the second quarter startup of the booster fan has been completed the ventilation network and presently we’re running not at full capacity on all the compressor systems. So we’re quite happy with the performance of the plant and as you have said the summers are performing better than expected. But the plant is presently on stream to deliver the goods for their rest of the deeper development for quite a while.

Mike Parkin - Desjardins Securities

And just last question, with the water issues that were mentioned on Kittila, can you just give a bit more color on what's the biggest issue there that's impacting you?

Sean Boyd

Well there is two or three reasons that are still under investigation, so I’d rather not get into too much details but in the past we’ve run into difficulties with re-circulating water from the pond and interference thiocyanates within the oxidation process. So for the best of knowledge that’s where we’re now but there are other contributing factors that we’re investigating, that’s about all I can at this stage.

Operator

Your next question comes from Stephen Walker with RBC Capital Markets. Please go ahead.

Stephen Walker - RBC Capital Markets

Just a couple of things. First of all, the IVR discovery north of Meadowbank, 50 kilometers, is that as the crow flies? What is the potential infrastructure like to get up there, and at what stage is it at? This is obviously relatively new, but sounds like it's coming together pretty quickly. Can you give us a little more background on -- I guess maybe what I'm asking is when that could potentially be, or if it could potentially be transported to Meadowbank?

Sean Boyd

Well it’s still early Steve, but seems I think you’re right things are moving quite quickly and there is probably another update coming within the next several weeks on that. And given some of the things we’re seeing. So we’re actually surprised with some of the explorations results. I think the way we have approached it now is our guys are saying that in order for it to be viable in terms of being able to ship. We probably need to see about a million ounces which creates sort of 5 gram. So that’s still very much possible although it is early.

So all we’ve really done is add a $5 million program, allow ourselves to drill likely through the end of September, certainly by the middle of October you have to be out of there given the fog and the fact that you’re moving everything by helicopter. But in order to make it work it would be a road from Meadowbank. But we sort of need a rough sort of million ounces at 5 grams to make it work. So still early, but things are actually moving quite quickly there.

We’ll have some samples, there is trip to Meliadine on August 26th, but I think there is a couple of slots left. We will be sort of featuring IVR as well have core there and some samples that we’ve collected on surface as well.

Stephen Walker - RBC Capital Markets

Is there potential for a year-end resource estimate, or is it still too early for that?

Unidentified Company Representative

It’s probably still too early, although we’ve got about 20,000 meters going in this next phase here. So that’s a lot of drilling because these are in deep holes. It was section et cetera and drill holes plotted on the 26th of August at Meliadine.

Mike Parkin - Desjardins Securities

Just to change gears a bit, David, the move to reporting under IFRS, is there a regulatory reason, a tax reason, for that? Is there -- why the decision now, and not previously?

David Smith

It’s basically just through their comparability with our peer companies, everyone is going there eventually and we didn’t see any reason to be the loan one holding on to U.S. GAAP.

Mike Parkin - Desjardins Securities

Okay, thank you for that. And maybe Sean, yourself, and again, Danielle if wants to add in, when you, it's been six weeks now since you've basically stepped onto the Canadian Malartic property, what if any, surprises, positive or negative, has come out of that initial six-week period that you've been on the property?

Sean Boyd

Well, I think from our perspective we were actually through our due-diligence looking at higher cost per tonne, particularly in the early years than what Osisko was modeling in their life of mine, and so we’re essentially seeing that as we put out our guidance. So our job now is to use our sort of collective efforts and expertise in certain areas to bring that down but also to use our efforts on the environmental and permitting side to continue to move the Barnett opportunity forward. So the transition has actually gone very well the teams are working well. And we’ve been fortunate from our side to be able to have some particular expertise at Meadowbank where that team has dealt with some of these issues.

And the way we always looked at Canadian Malarctics in terms of the time line and a progression is that we saw some of the things that they’re dealing at Meadowbank a couple of years ago. And so you can see Meadowbank’s cost per tonne performance cost came down from about $100 or more down to the low 70. So, our focus is certainly on optimization but cost control overhead control but also to help us increase the throughput there which would make the mine more efficient and also help unit cost.

Mike Parkin - Desjardins Securities

The current cost of CAD21 a tonne, I guess is it the hardness of the rock? Is it just the awkwardness and having to use the smaller blast hold drills on the north side of the pit? What are the drivers or what are the main sort of moving parts to that per-tonne cost?

Sean Boyd

Higher strips ratio, right now. So that gets better as we go forward. So the mine after two or three years the cost go down just because the strip ratio goes down. So I’ll turn it over to Christian Provencher who sort of represent our side on the ground up there and he can provide a little bit more detail.

Christian Provencher

Good morning. As Danielle mentioned this morning at the Yamana conference call for sure the cost for year-end was risen by mainly an old pit that was introduced in the budget this year that was not budget just to gave like Sean mentioned earlier better flexibility on the mining side so with the higher strip ratio for this so it was not budget. For sure, some cyanide costs and fuel costs that we have to add to the budget relate mainly to the Goldie pit addition in the plant for this year.

Mike Parkin - Desjardins Securities

Has there been any change in the internal waste in either of the pits, either Goldie or the existing? Has there been any change in the internal dilution increase?

Christian Provencher

No, there is no change in the number since over that (Ph) but so we’re looking to do the optimization of the life of mine this fall so to be able to provide some new number this fall.

Mike Parkin - Desjardins Securities

Great, thanks very much for that. That’s all my questions.

Operator

Your next question will come from Patrick Chidley with HSBC. Please go ahead.

Patrick Chidley - HSBC

Good morning, everybody, just a quick question back to Malartic. The cash costs are guided here $695, so nearly $700 an ounce, and I just wanted to find out what is the all-in sustaining cost on that basis going to be this year?

Sean Boyd

It’s probably in the range of about $900 to a $1,000, and it depends on sort of capital that’s gone up a bit because we’ve added about $40 million to the capital side so that’s probably closer to the $1,000 number.

Patrick Chidley - HSBC

And all that capital that you've talked about this morning, that's going to be operating capital, let's say, that's included in all-in sustaining costs.

Sean Boyd

That’s correct.

Patrick Chidley - HSBC

All right, okay. And then, moving forward, do you expect that to come down, or what's the sort of longer-term outlook? Or do you still need to do your analysis?

Sean Boyd

No, that will be coming down.

Patrick Chidley - HSBC

Okay. And that's because what, because grades are going to go up when you get to the Barnet side or?

Sean Boyd

In a cost basis less stripping.

Patrick Chidley - HSBC

Okay. Strip ratio's 2.6 to one this year?

Sean Boyd

Yes, going down to about 2.

Patrick Chidley - HSBC

In 2015?

Sean Boyd

2.1, over time over the next two to three years.

Patrick Chidley - HSBC

And just if you could comment on the Yamana call this morning, someone mentioned that there was a legal dispute about what's known as the Odyssey zone, and I'm wondering what your sort of initial impressions on that are?

Unidentified Company Representative

Well because there is a dispute there is not much we can say about it at all.

Operator

Your next question will come from Tanya Jakusconek with Scotia Bank. Please go ahead.

Tanya Jakusconek - Scotia Bank

Just wanted to ask a question to Yvon and Tim if I could. Just on Kittila, so that I understand correctly, as we go through next year, that greater 1,000 tonne per day higher rate, is it safe to assume that the previous guidance that we had was assuming just half a year, and then I think we would have assumed a better recovery since we didn't have this water issue. Is that correct?

Sean Boyd

Yes that’s correct. And I think in the previous guidance that we put out on the market we’re expecting the full commissioning of that new capacity in Q3 of 2015. So we’ve essentially advanced this almost three quarters.

Tanya Jakusconek - Scotia Bank

So, three-quarters, and yet I should then assume, though, a lower recovery because of the water?

Sean Boyd

Well at this stage I think it’s premature to do that, as we try to identify what’s happening because some of the issues seems to be seasonal. So as we know more we’ll provide that information going forward.

Tanya Jakusconek - Scotia Bank

And maybe just to finish off on Kittila, just the stockpile that you have, the 400,000 to 500,000 tonnes on the surface, maybe just the grade on that that you're going to be processing over the next two years.

Sean Boyd

I don’t have the exact number with me but it’s probably in the neighborhood of about 3.5 grams per tonne.

Tanya Jakusconek - Scotia Bank

I think that's on Kittila. Just on Meadowbank, if I could, you mentioned that we're going to be in the Vault and the Portage pit next year and hence the 100,000 to 110,000 ounces per quarter. Are we going to continue that into 2016, the Portage, or do we phase that out and go just to the Vault in 2016?

Sean Boyd

We will be mining in Vault and Portage in ‘15, ‘16 and ‘17 as well. But we’re going a larger proportion of Portage next year and probably a larger proportion of Vault in ‘16.

Tanya Jakusconek - Scotia Bank

And can you just remind me, because I have the Vault's grade, I just don't have the Portage grade?

Sean Boyd

I don’t have it off hand but it’s above reserve grade in the Portage.

Tanya Jakusconek - Scotia Bank

It's not the five grams per tonne that we saw in the Goose. Would it be in the four gram range, or -- because life of mine I think is 3.23 -- sorry, the reserve grade.

Sean Boyd

It will be slightly above reserve grade Tanya.

Tanya Jakusconek - Scotia Bank

And Vault’s about 2.8?

Sean Boyd

That’s correct.

Tanya Jakusconek - Scotia Bank

And maybe if I could ask Tim, I think Sean mentioned that there's upside in the South American unit, I think it was mentioned Pinos Altos, when we get the new guidance in Q3. Are we looking at it as Pinos Altos where we're currently mining, or is it the addition of satellites that you're seeing?

Tim Haldane

Our upside in Mexico as compared with our previous guidance is probably going to come from both Pinos Altos and La India and those are just going to be efficiency a little bit more efficiency maybe than we’ve forecast last year a little bit more throughout Pinos Altos, Creston Mascota, and La India.

Tanya Jakusconek - Scotia Bank

So it's not any additional satellites? Because I think there's some upside, too, in satellites.

Tim Haldane

Yes not yet, I mean we’ll get to the satellite in their order but not in 2015.

Sean Boyd

Just a follow up on that Tanya, we haven’t provided the mine by mine guidance for 2015. So all we provided on earlier this year was a number of 1250 pre Canadian Malartic. So we’ll be able to break that down as we get through our budgeting process.

Tanya Jakusconek - Scotia Bank

No, I'm just trying to understand myself, Sean, as I look at the news coming out, like, where are we looking for some of these upsides to come from, and just make sure that I understand the grades and where some of these things could come.

Operator

(Operator Instructions). And we seem to have no further questions at this time. I’ll turn the call back over to management for any closing comments.

Unidentified Company Representative

Thank you operator and thank year everyone. And just another reminder for upcoming mine trips. So Meliadine, August 26, we’ll have an update also on IVR project there Canadian Malarctics with our partners Yamana on September the 30th and we also have a key Kittila trip in November, that’s tied in with London Mining Conference of RBC. So, if there is interest in those trips, please let us know. Thanks again.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation. You may now disconnect your lines and have a great day.

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