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Agnico-Eagle Mines (NYSE:AEM)

Q2 2011 Earnings Call

July 28, 2011 11:00 am ET

Executives

Unknown Speaker -

Jean Robitaille - Senior Vice President of Technical Services

Tim Haldane - Senior Vice President of Latin America

Ammar Al-Joundi - Chief Financial Officer and Senior Vice President of Finance

Ebe Scherkus - President, Chief Operating Officer, Director and Member of Health, Safety & Environment Committee

Sean Boyd - Vice Chairman, Chief Executive Officer and Chief Executive Officer of Sudbury Contact

Analysts

John Tumazos - Independent Research

Tanya Jakusconek - Scotia Capital Inc.

Steven Butler - Canaccord Genuity

Joung Park - Morningstar Inc.

Barry Cooper - CIBC World Markets Inc.

Anita Soni - Crédit Suisse AG

Haytham Hodaly - RBC Capital Markets, LLC

David Haughton - BMO Capital Markets Canada

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Agnico-Eagle Mines Ltd. Second Quarter 2011 Results Webcast Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, Thursday, July 28, 2011, at 11:00 a.m. Eastern Time. I will now turn the conference over to our host, Mr. Sean Boyd. Please go ahead, sir.

Sean Boyd

Thank you, operator, and good morning, everyone, and thanks for attending our Q2 2011 conference call. What we'd like to do today is I'll take you through a bit of an overview on the quarter and then Ebe Scherkus will take you through the individual operations and talk about some of the issues and opportunities we have and also highlight some of the exploration results we're seeing at these properties. And then we'll open it up for questions.

We'll move through the presentation and just focusing on the highlights for the quarter. We had strong cash generation from the mines. We generated cash flow of about $1.00 per share in Q2, which was similar to what we generated in Q1. We've got 6 mines now running steady state in terms of throughput with the addition of the crushing capacity at Meadowbank. As a result, we're in a better position to manage the costs at Kittila and Meadowbank, and Ebe will talk about some of those initiatives.

In July at Meadowbank, we see our throughput averaging now over 9,200 tonnes per day. That's up almost 30% from where we were in Q2. The recoveries are 94%. Our grade is 3.1 grams, which was pretty close to the estimate we had for the month of 3.2 grams.

As Ebe will get into it, our dilution is improving. We're getting better improvement in the blast displacement in the pit. We've got more work to do, and further refinement and optimization is ongoing.

On the cost side, we've seen some really good cost performance in Québec and Mexico. At Goldex, our costs are sub $400 an ounce. LaRonde and Pinos Altos are sub $300 an ounce. And as we said, we've still got work to do at Kittila and Meadowbank, but we expect better cost performance at both of those mines in the second half as we increase output.

On the exploration side, Ebe will provide more details, but we continue to expand west made resource at Meliadine. And we've seen exceptional drill results recently at Goldex and Kittila outside of the known resource, so we should see significant increases in the size of those deposits as we go forward.

We also made a strategic investment in the quarter, a $70 million investment in Rubicon. The way we view Rubicon is that it's a large high-grade gold resource, a large land package and it's in a proven mining camp. But we do have some expertise in the company in the Red Lake camp and it's consistent with a strategy that we've employed successfully over many decades here. In fact, Goldex and LaRonde came our way following the same strategy. And it doesn't mean that when we take these investments that we end up increasing our position. In fact, over many decades we've actually sold positions at a profit when it didn't quite fit our profile. So this is a way for us, like some of our other assets that have turned out to be quite big like Kittila, where we can get the exposure, understand the risk and opportunities with the skills that we bring to that particular area and that particular type of deposit. So actually we're going to continue to use that strategy going forward, because it's worked well for us over several decades.

In terms of terms of the financial position, I'll just really touch on the earnings normalized $0.47, which is pretty much where the market expected us to be. Cash flow again, over $160 million, which is just about $1.00 per share, which is a similar amount even though we had less ounces than in the first quarter. But going forward, we expect with a 20% increase in our production approximately in the second half and the reduction in unit cost as a results of some cost initiatives at Kittila and Meadowbank and as a result of more production, we should see a bump in our cash flow as we move forward. Our plans for that cash flow are to reinvest in expansion opportunities, internal opportunities at places like Kittila, continue to move Meliadine forward more aggressively. We're studying a ramp and acceleration of the ramp, and we'll likely be able to talk more about that later this quarter. And we certainly will be looking at increasing our long-standing dividends, given that we have 6 mines operating near steady-state although we still have some improvements to make from the cost side.

In terms of the more detailed operating results, I'll just briefly summarize these mines. Ebe will get into more details. LaRonde, as you know, it is a mining transition to deeper levels and higher grades, but that's going well. It's still a low-cost mine and still a strong cash generator. We should see about 10% more production in the second half with good cost of that mine and we should be into the higher grade material in the fourth quarter of this year in the deeper mine.

Goldex, record tonnage, low-budget cost per ton despite dealing with a water flow issue, inflow issue at the mine. Ebe will get into that. The exploration at Goldex and potential to double the size of the reserve base there given the results of the D Zone. Ebe will talk about that.

At Kittila, we operated about 15% below design as we had a 15-day downtime in the autoclave. One planned shutdown, one unplanned shut down. Our recoveries despite the start and stop in the quarter, we're still 83%, a little bit down from the first quarter but we didn't have the difficulties with the stop and starting of the autoclave. So no issues with the recoveries going forward. Our production costs performance will improve in the second half. Again, at Kittila, exploration results extending our large resource there, not only at Rimpi but also Roura and wide-open area that still needs to be drilled there.

At Lapa, it's a narrow deposit, tough mining conditions but performing well on the cost side below budget, in fact, on the cost per tonne basis.

At Pinos Altos, a record production, sub $300 cash cost. So a mine working extremely well, and more production expected in 2012 as we get a full year from our satellite deposit at Creston Mascota.

At Meadowbank, as we've said, the additional crushing capacity is in place that will result in increased gold output but also lower our costs because we're not dealing with a significant ore handling issue as we move between portable pressures like we were doing in the first half. So that's gone. That's an immediate cost saving and there's more cost saving to come as we ramp up production at that mine. So we're still positioned for a strong second half, not only in production but in lower cost, which is going to drive our cash flow.

On the financial position side, we still are generating good cash flow with increasing cash flow going forward. We have $1.2 billion in credit facilities available to us. So extremely liquid. Our shares outstanding on a basic level around $170 million. So that puts us in a good position going forward to be able to create per share value as we move internal expansion opportunities forward, and we continue to stick to a sort of low risk M&A strategy of getting into things early and not betting the company on large acquisitions.

We did have some higher CapEx in the quarter. Ebe will touch on that, about $100 million higher. About $25 million of that was foreign exchange related. $25 million of that was the Meadowbank dyke design, which required the need to use additional materials. About $25 million was related to managing the water inflow issue at Goldex, and Ebe will talk about that. The remainder is really an acceleration of 2012 CapEx into this year and also some additional expenditures at Meliadine which were capitalized.

So I'll turn it over to Ebe and he can give you an update on each of the individual [indiscernible].

Ebe Scherkus

Thanks, Sean, and good morning, everyone. Well, LaRonde, I would say had a reasonable quarter but not a great quarter. The milling capacity was restricted by 2 things, one a planned 5-day shutdown and then also we were having some issues with obtaining cyanide, and that appears to have been resolved. But in the meantime, the mine functioned well, while we were sort of choking back the mill. We did manage to stockpile additional ore on surface, and that will be processed by the end of the year.

Recoveries essentially are according to plan. But the big story at LaRonde is it is a mine in transition. We are currently mining there our stopes. So as a result, we are getting some higher dilution. But the big story is LaRonde expansion will be ready by the fourth quarter of this year. Work has progressed very, very well. The load up facilities, the crushing plant, all of it will be ready by Q4. And we expect to be able to extract our first mining block, a higher grade mining block in October, November of this year.

In the big picture from a CapEx side, this was one of our more complicated projects with an overall budget of $265 million. It will be coming in on time at approximately $15 million under budget. So they did very well.

At Goldex. Goldex actually had a great performance from a material's handling point of view. It had record tonnage in May and June following modifications to the tailing spawn system. Our operations continue to be under control. Our cost per tonne is actually under budget, but our CapEx are over budget. And I would just like to talk a bit about the surface subsidence issue. About 4 months ago, we blasted on the Goldex Expansion Zone, and we re-hit a shear zone that lies above the eastern part of the Goldex Expansion Zone and that has been the source of water. We started getting an increase of water from another blast, a little over a year ago and that was a major blast, so we started getting some infiltration.

Goldex is historically a dry mine. And so it's not equipped to handle a lot of water, unlike some of our other mines at Pinos Altos and even Kittila. So we started getting some water inflow and that inflow gradually increased over the year. So the impact of that water inflow, it lowered the water table and the overburden on top of the deposit and the overburden averages of anywhere from about 75 feet to 150 feet in thickness. So our program of mitigating this issue consists of grouting the shear zone to prevent the water from inflowing into the mine, reinjecting water to restore the water table and then also increase our pumping capacity in the event that we're not able to totally seal off the shear zone. So far, we have had -- it's still very early, but we have had some initial good results. Our pumping capacity has been increased significantly. So as a result, we have started to reinject our water table, water into the water table, and the early results are positive where subsidence, or the rate of subsidence, has declined. At no point or anywhere is the water table or the orebody in jeopardy. We have been pumping water and yet we have been able to establish record tonnage in May and in June.

But with respect to the CapEx, we have taken a provision. We've only spent $6 million of that so far. But we have taken a provision to continue this program to make sure that we complete it from now to the end of the year. But, we will be doing more grouting, more injection and then also we will be pumping. So we'll keep you posted if there are any more changes. But so far, the initial results have been positive. With respect to exploration, the big news is the results on the D zone at depth. This is a zone that we knew about back in 1996. We only had a few drill holes in it. However, we decided not to follow up on it at that time. But with the completion of production and development on the Goldex Expansion Zone, we now started to drill it. And part of that program is a 300-meter ramp below the existing workings. And so far, what we have found are thicknesses equivalent to the Goldex Expansion Zone, grades equivalent to the Goldex Expansion Zone, and although the resource that we have calculated so far of about 75% of 1 million ounces of gold, we can see, with these new drilling results, we can see that resource grow significantly over the coming year.

For Goldex, the D zone has the potential to significantly extend the life of the mine. It could even eventually even be a repetition of the Goldex Expansion Zone, at least from the information that we have so far.

At Lapa, this once again, our nickname for Lapa, it's the little mine that could. It has had steady-state performance exceeding its tonne hoisted and tonnes milled underground development. It's targets have been exceeded despite increased rehab and the difficult ground conditions. It's costs per tonnes are below budget. It's unit development costs are below budget. So overall, a very excellent performance from the Lapa, and the crew has to be commended for their hard work.

Exploration. We've started an exploration drive out to the East. We are developing an east zone and should be able to extend the Lapa mine life by an additional 6 months. While we are drilling parallel to the Cadillac shear zone and we intend to methodically and systematically follow up on some previous surface drilling results that were quite interesting. So we'll keep you posted on exploration results at Lapa as they become available.

At Kittila. Kittila from a grade point of view had an excellent quarter. Actually, it met its budget. We did have a planned shutdown for the autoclave. That shutdown was planned in April. What we did not expect was another one due to an agitator failure and brick lining failure a little over a month later, and that resulted in a second shutdown. But as a result of these 2 shutdowns, what we have noticed that some of the components, the agitator shafts, the pumps, et cetera, were not robust enough so we have been systematically upgrading the quality and the strength of the various components, and so we expect these types of issues to decline.

Overall, gold recovery was on plan, averaging almost 83%. Currently, we're seeing 85% to 86%. Since the last shutdown, we have had excellent performance averaging once again, steady state over 3,000 tonnes per day. The grades have been in the 4.8 to 5.4 gram per tonne range, so that bodes well. We have 300,000 tonnes stockpiled on surface. We're back in the Suurikuusikko pit after delaying work in it for over 2 months, and that was part of the reason why some of our costs were high. We had higher than normal stripping costs. We did go into the Rouravaara pit, and we did extract some ore from that pit. But that pit as a contingency, had a significantly higher stripping cost than Suuri, and that is reflected in our cost per tonne. Had we made capacity and not had the stripping issues, the Kittila costs would have been approximately EUR 72 per tonne.

And now what we are focusing on in the second half of the year is the continued elimination of contract workforce as we are transitioning to self-mining. These are underground and surface contracts that have helped us out with waste stripping. They have also serviced the mine and installed all of the facilities. And typically in Finland, they also muck out all of the development material. So Agnico will be taking this function over totally in the second half of the year.

But also having said that, some other performance indicators. Underground development performance was excellent and on plan. Underground ore production, we hit our target. It was on plan. So basically, I think we're setting ourselves up for some significant cost reductions and better results in the second half of the year.

I think the big news at Kittila are the exploration results at depth on the Rimpi Zone way to the North. To put it in perspective, like everyone that visited the mine site over the past year, when you look at this new current intersection, it is located approximately almost 1.5 kilometers further north away from the mine and at a depth of 850 meters. And as we were saying yesterday, every now and again, an intersection comes along and we'll think about going forward, and the significance of it, and this has the potential of being one of those intersections. It intersected over 21 meters of true thickness of 7.1 grams per tonne. So one of the best holes ever on the Suurikuusikko trend.

So in light of our current expansion study, up to 4,500 tonnes per day, which we expect to complete by the fourth quarter of this year. We also have to start looking at how are we going to access this new deeper expansion. What are we going to do? And one of the options is an exploration shaft, and we will be providing you with more updates as our thinking evolves on that.

Pinos Altos. There's not much that you can say about it. It had a record quarterly gold production. It was our flagship operation this quarter, over 51,000 ounces of gold produced. Cash cost below $300 per ounce. The underground mine averaged 3,000 tonnes per day in June. It's on time, on plan, actually ahead of plan. The open pit, great performance on a cost per tonne basis. So over on all cylinders, on all metrics. Pinos Altos performed exceptionally well.

Mascota, the ramp up was faster than what we had planned. It contributed over 9,000 ounces to the Pinos Altos account. All in all, a great quarter for Pinos Altos.

We are focusing on the satellite deposits. As you know, we have the center deposit. We had Cubiro and we're still drilling on them. We are looking at the various ways of accessing them. So that will continue to be the focus going forward on Pinos Altos.

Meadowbank. Well, we can also say it's a mine in transition from a mine that has caused us a lot of grief, especially over the last, I would say over the last year since the start-up. However, it did produce over 59,000 ounces of gold. But the cash cost of the denominator was just too low. So the costs were $910 per ounce. Now one of the main reasons for the low production was the dilution in the open pit. When you look at it on a cost per tonne basis, over the last quarter, our cost per tonne declined and this is currently around $81 per tonne in June. And with the current performance in July with the start-up of the secondary crushing plant, we expect to continue to see a downward trend.

With respect to the dilution issue, so far, and it's still very early, we've only had a couple of blasts. And we have seen an approximate 50% reduction in our projection. For those of you who were up on the Analyst Tour in the end of June, we were getting displacements of the ore pile in the neighborhood of 10 to 13 meters. We are now seeing displacements in the neighborhood of 4 to 6 meters. And when you look at the performance of the plant itself in July, we are currently averaging 9,300 tons per day. Our recoveries are actually on plan, close to 94%. And the grades for the first time, our plan is 3.2 grams per tonne. And the current grade is 3.1 grams per tonne. So at least from the grade point of view being sent to the mill, we are very close to our plan. So if you do the math, Meadowbank so far as of the July 25 has produced close to 22,000 ounces. And when you put that into the context of the 59,000 ounces that we produced during an issue and trouble plagued quarter, we are well on our way to realize our objectives at the Meadowbank for the coming quarter.

We've also been able to improve our operating staff. Positions have been filled. As we all know in the industry, labor and management, to be able to get that is challenging. But over the quarter, we have now virtually filled all of our positions.

Our drills are currently performing well in the open pit. We are getting increased performance out of the open pit on the basis of tonnes hauled. However, CapEx has been an issue, and the biggest issue has been dyke construction and that has been the central dyke as part of our dewatering program on the Goose and Portage pits. When we did the detailed engineering, we were given a certain quantity of material. When we went into the pit and then started drilling and sounding for bedrock, we found in one location that rather than the expected 8 to 9 meters of overburden material, we found 17 meters of overburden. So as a result, the quantities required to build this dyke increased.

So what we are doing now, we are looking at potentially modifying the design or seeing whether it could be modified to see whether we could reduce the quantities of material required for the dyke and reduce the CapEx. However, we have taken that provision and that is one of the reasons why there is an increase of CapEx at Meadowbank.

Meliadine. Meliadine is another project in transition. We have just completed 100-man camp. We're just in the process of acquiring another 100-man module. And we're looking at increasing the number of drills on the property. We are also looking at increasing the underground development. We currently have a contractor on-site. We are in the process of rehabilitating the ramp and the underground workings that were initially put in by Comaplex. So they are on-site and that is going on schedule.

But when you look at the overall challenge at Meliadine, we have to get the road permitted. That is what we are working on because we do want to accelerate the underground program. We are looking at a 4-year program that will enable us to be able to drill the Tiriganiaq zone at depth of below 350 meters.

Now when you look at Slide 18, Page 18, the overall extensive property position. What this particular map just shows, these are grab samples that our geologists who went out into the field and systematically acquired by chipping away various outcrops that they saw. And so there are some very spectacular samples that we haven't even drill tested yet. And you could see Aklak 116 grams per tonne and Prairie 217 grams per tonne. So across the 80-kilometer strike length, or length of this property, what these samples show us is that there are numerous untested targets that we will be following over and above the Tiriganiaq and Wesmeg and Discovery zones that we currently have.

When you look at Page 19, it shows what our thinking is with respect to the underground ramp expansion and proposal. Currently what we have rehabilitated is the ramp highlighted in black and that's where we will be taking an additional bulk sample later on this year to be able to validate the sample. But come spring, we would like to be able to continue with development and complete the area highlighted in red. And this would be a 4-year development program. Of course, the size of the program, the ramp and the location of the ramp, we would be able to use this underground infrastructure for production purposes going forward.

So in summing things up, we have had a difficult quarter. There is no 2 ways about it. We have identified our issues and we are starting to see some of the results, positive results of these issues, especially at Meadowbank with the commissioning and start-up of the secondary crushing plant. We are seeing increased performance from the open pit and tonnage move. We are starting to see improving grades coming out of the pit.

At Kittila, we're back in the Surry pit. We know we're going towards a high-grade cycle in the pit. We also know it's a more mature pit so the stripping ratio will decline significantly and that will reduce our mining costs. We also know that we are getting rid of a contract force on-site and going to self mining. And we also know that from our underground workings that the performance has been excellent from the development from the tonnes that have been coming out of Kittila. So there are a lot of positive signs.

So with that, I'd like to turn you back over to Sean.

Sean Boyd

Thank you, Ebe. And why don't we, operator, just open the line up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from John Tumazos from John Tumazos Very Independent Research.

John Tumazos - Independent Research

First question on Rubicon, do you have right of first refusal or any protection from subsequent interlopers? You're a $10 billion company, so I'm sure you're not in here to make a quick tenure, $50 million trading profit.

Sean Boyd

No, John, we don't have right of first refusal. We do have the right to participate in future financings to maintain our position, but we don't have right of first refusal.

John Tumazos - Independent Research

Second, there are a number of your blue sky exploration and investment alternatives that look very good. You participate with Ron Parratt and Rich Bedell of Renaissance Gold, have the venture near Long Canyon. I spent 3 nights at a truck stop in Argentina were there was a core shack of [indiscernible] gold. And there's some very interesting things there, and I just went to Spain and that's just one of your friends. With Rubicon and other things that I'm sure none of us know about, you must have an array of opportunities of 5 or 10 things that could be your 8th mine or 9th mine. Could you talk just to sort of the big picture of where you want to go building human resources and the next wave of Agnico's growth?

Sean Boyd

Sure, John. It's a good question because we've just come off of this massive mine building phase and we're feeling collectively internally that we broadened our skill base and combined with an increased financial capacity, we would like to invest in the industry. We're looking at more opportunities now than we ever have. But having said that, as per our strategy and style, we're not going to do anything where we are betting our company on. We're going to continue to do what we've done to bring in things like LaRonde and Goldex, as I mentioned earlier, and invest in some things under the radar screen, which we have as you suggested. Some things we take a bit more of a public profile on because we are actually, in some cases, being the technical engineering group of these companies and using our expertise to add value. So there's lots on-the-go and there's more internal capacity to help these companies and to also move our own internal opportunities forward. Where do we want to end up? Well, we want to have more non-dilutive production and reserve growth. And that's why we invest early and try to get involved with things that we can move forward and make bigger. And then if it looks like there's a value proposition for our shareholders, we may take a bigger stake as we have in the past. So we're going to continue with a very consistent strategy over the next 5 years, which will involve strategic investments, which may ultimately turn into acquisitions or projects. We're going to move our internal opportunities forward. But I think more importantly, for us, which also ties into our history is reemphasize exploration now that we're through the mine building phase. And you'll see that not only in the budgets, but the amount of resources we're spending. And the next phase of that, is something we did successfully at Goldex and LaRonde is an acceleration of underground infrastructure. To get into these deposits, open up the structures, get a feel for their potential and then put a development plan to it. And so that's why when Ebe talks about looking to accelerate at Meliadine, it makes total sense to us, given the grade and the size and the exploration success we've had at that deposit, that prior to making a construction decision, it makes good sense to us to put a ramp in. That will give us much more flexibility upon starting up a plant. And it will allow us much earlier access into the highest grade portion of that deposit and story. And so we're going to look to do that at Kittila. And we were going to do that anyways and we've had more recent drill results as we've seen that actually reinforce the decision to do that at Kittila. I'm not a geologist, but when I look at the Kittila long section, 20 years from now, it'll probably look like LaRonde. It'll probably have 2 or 3 shafts given the size and the potential of that district, and we own it 100%. So that's the way we're thinking. So 5 years out, we'll be a bigger producer. But our focus is just not too big, it's also to do it in a way where we're not taking on a lot of dilution for the shareholders.

Operator

Your next question comes from Anita Soni from Credit Suisse.

Anita Soni - Crédit Suisse AG

My question is with regards to the recovery rates at Kittila. The downtime that you experienced at Kittila is what, a couple of weeks every 6 months? And I guess, I'm just wondering, if this is going to be kind of continued pattern of having higher recovery rates in the quarter that you are not taking a downtime and then lower ones in the quarter that you are taking the downtime? Or what should we be thinking about as the long term recovery rate for Kittila right now, 83%? 85%? 87%?

Ebe Scherkus

I'll answer the first part, Anita, and then turn it over to Jean. I think what we have noticed with the current two shutdowns is that the recovery period, or the period to be able to get back on track, has been a lot shorter. So when we look after each of these shutdowns, once we started them, they were down -- the recoveries were in the mid-70s to 77%, and then rapidly climbed to 83%. And now we are seeing 83% to 86%. So I think whenever we refurbish an autoclave or put it back online, we gain the experience where we come back on track a lot quicker than we used to say 1.5 years ago. So with that, Jean, can you add anything?

Jean Robitaille

Yes, hi, Anita. For your model, I will recommend as I mentioned to the last conference call to use 83%. For sure, we're targeting to be above that. We're able to maintain 86%. On the long terms, until we'll have the expansion study completed and all of the test work around it, I will be -- I will go on a safe side to use 83% for your model. But yes, we have absolutely upside on that.

Operator

Your next question comes from Richard Heuermann, private investor.

Unknown Speaker

My question is a financial one relating to currency fluctuations and particularly concerning the current environment here in the States, regarding the dollar's strength against the euro, the Swiss francs and the yen. I'd be interested in your thoughts about what impact the devaluation of the dollar, for example, would have on your bottom line or your operating income, either good or bad?

Ammar Al-Joundi

Good morning, Richard, it's Ammar Al-Joundi. I'm the CFO. With regards to currency, a lot of our operations, all of our operations are in either Canada, Finland or Mexico. So we do have significant currency exposure. We have some currency hedging in place that has obviously proven to be profitable given the weakness of the U.S. dollar. And we are actively looking to add hedges opportunistically as opportunities present themselves.

Unknown Speaker

Do you view the devaluation then as a negative or positive? Or is it kind of a wash?

Ammar Al-Joundi

Well, overall, there is a correlation between the devaluation of the U.S. dollar and the appreciation of gold. And we have great leverage to the gold price. So we benefit as the gold price increases. That said, we remain very bullish on the gold price. And we are, therefore, aware of the pressure on the U.S. dollar. And so we would go in and hedge when we can. But overall, we want gold prices to go up and...

Unknown Speaker

What is the current spread roughly for your company?

Ammar Al-Joundi

I'm sorry, the current spread?

Unknown Speaker

Between your costs, all costs and the gold price which is, gold is around $16, $19 now, and I think your last release said your costs were around $578 of $560 something like that.

Ammar Al-Joundi

Yes, so those are the right numbers. It's about $1,000 to $1,050 right now.

Operator

Your next question comes from Joung Park from Morningstar.

Joung Park - Morningstar Inc.

It seems like most of the increase in the CapEx forecast comprises of onetime items. But I'm also wondering how much of this is due to structural increases in the gold mining industry, which will affect the company's just run rate CapEx levels going forward in 2012, 2013, et cetera?

Ebe Scherkus

General labor and consumable or material escalation would be about 15%. So that's just strictly on labor and the materials that we would see CapEx increase. So that's just a general industry-wide consensus. However, having said that, there are also other potential issues like just general infrastructure and contractor availability, the quality of engineering, et cetera. So all of these other factors have a more important role to play in overall CapEx escalation. And from our experience in dealing with the engineering companies, et cetera, they are being pushed to the limit as well and frequently, the people to be able to do detailed design are just not available. So the final product may have some flaws in it. So when it comes time to do more work or execute or refine it, you'll see escalations in CapEx.

Joung Park - Morningstar Inc.

Okay. And do you guys expect to increase your CapEx forecast for 2012, 2013? And not just for the [indiscernible]?

Ebe Scherkus

Well, we're always going to look at other internal opportunities or to see whether we can accelerate some things. But I would think going forward, if you look at what we have done this year, we are continuing to de-risk like things like dyke construction. And once those dykes are built that's a onetime item. The subsidence issue at Goldex, which is a large ticket item. Once that water inflow is resolved, that's a onetime item as well. So it's not as if this is going to be perpetual and we're going to have other issues. However, if we do get an opportunity to accelerate underground development because of interesting exploration results or add more drills or buy a piece of equipment or change or modify a mill and get a very good short term return on investment on it, we're going to continue to actively pursue these types of opportunities to be able to keep a lid on our operating costs.

Joung Park - Morningstar Inc.

Okay. And speaking of opportunities. What are some aspects of the Phoenix deposit that made it interesting to you? Because obviously, there are tons of juniors out there even within the Red Lake district alone. So what was particularly exciting or interesting about Phoenix and Rubicon?

Ebe Scherkus

Well, I guess, the #1 answer is I like Red Lake. But no, I think the second thing is when we started looking overall at our overall portfolio of properties, grades, et cetera, and it was a discussion that we had after building the Penna Shaft, we were biased towards deep underground mines, et cetera. So we decided to look at opportunities that had easier open pit type operations. And so we looked at our overall average grade, and I think our portfolio, what we needed, what we would like to be able to obtain at some point in time is a high-grade deposit, a real sweetener. And that's one of the reasons Rubicon does offer that potential. The grades are in the neighborhood of 17 grams per ton and it also has a significant upside. And then the other thing is when you start looking at overall execution risk, permitting risk, things of that sort. Well, you look at Rubicon. It does have underground access. It's got some of the permits in place. It is close to infrastructure. It's in an existing and well-known mining camp. So these are all pluses that you have to look at going forward. So Rubicon offered the opportunity on all of those issues.

Operator

The next question comes from David Haughton from BMO Capital Markets.

David Haughton - BMO Capital Markets Canada

Perhaps for you, Ebe, looking at Goldex, you're doing quite well on your throughput, well in excess of your 8,000 tonnes a day. Can you sustain that kind of level, the 8,500 tonnes a day level? Or should we be backing it off a bit going forward?

Ebe Scherkus

Keep it. We have 13 million tonnes of broken underground reserve in the Goldex Expansion Zone as we speak. So we feel with the modifications that we have made with the mill, with the SAG mill motor, with the pumping capacity to the tailings spawn, those are the -- that is the tonnage that we feel comfortable with. Jean, do you want to comment?

Jean Robitaille

No, with the pre-crushing circuit and all of your [ph] component we are in line to maintain that cap.

David Haughton - BMO Capital Markets Canada

Okay. That's a pretty good result. Having a look at that D Zone that you had shown in your slides, should we be thinking about this as another mass blast potential?

Ebe Scherkus

We -- this is very early days, I mean, if I start arm waving a bit here. We view this as a potential repetition of the Goldex Expansion Zone. When you start looking at some of the thicknesses and grades, they're very similar to what we had obtained between before 1996 to 2005. So it's very early conceptually, but we've only -- we started the 300 meters of ramp development. The other thing that we may do or recommend and we're toying around with right now is why stop the ramp. Keep it going and to be able to have more drill platforms deeper down to be able to assess the deposit. But I think the second time around, it will be a lot easier because we have all of the experience in history of the Goldex Expansion Zone above. Back in 2005, it was very difficult to quantify the grade, and we did extensive sampling. But I think this time around, if it looks like a duck, quacks like a duck, it probably is a duck so...

David Haughton - BMO Capital Markets Canada

And how does E Zone fit into that broad scheme of things?

Ebe Scherkus

Sorry...

David Haughton - BMO Capital Markets Canada

How does the E zone fit into that scheme of things? Would that just be a smaller project on the way down to D or...

Ebe Scherkus

These are all potential zones that we are evaluating individually. We have the M Zone. We also have the S Zone. So I think in the overall mine plan, like D Zone, is so fresh that we will probably put all of our energy on the D Zone because it has the biggest economic impact. It has the biggest potential to increase our reserves. But of course, all the other satellite zones over time will be looked at in detail and over time will be mined out. I think what is interesting at Goldex, and we did this exercise back in the mid-90s in the early days with John Tumazos. I mean, the overall envelope at Goldex, we came up with over 90 million tonnes of an average grade of 0.04 ounces of gold per tonne, which translates into 3.6 million ounces of gold. So if you look at the 1.6 that we currently have and around the 750,000 in resource, not including this latest drillhole -- these latest drillholes, we're well on our way to that overall big number.

David Haughton - BMO Capital Markets Canada

All right. Switching continents now and looking at Kittila, you had made reference there to an expansion. Are you thinking there about an expansion of the plant?

Ebe Scherkus

Well, we are looking at the 50% expansion to 4,500 tonnes per day. That is the -- what the underground ramp and can sustain comfortably. That's the maximum capacity of the ramp. Anything bigger, anything higher than 4,500 tonnes per day would require either a second ramp or shaft, et cetera. So we have decided just right now to look at maxing out the ramp, expanding the mill. But of course, in the mill, anything we do, there will be provisions made for further expansion, if so required. This latest drillhole on Rimpi, 1.5 kilometers to the north of the main Suuri infrastructure, well, that's a very -- that opens up a lot of -- and asks a lot of questions. It's -- can that be a second operation? As Sean mentioned, this is looking very similar to the area between [indiscernible] and the Penna Shaft. In terms of distance, should we be looking at putting down an exploration shaft size at core production and have a separate satellite or second mine there, not conflicting with the Suuri mine and then shipping that ore to the Kittila mill and still have the economies of scale to be able to have with respect to overhead to be able, with both minds, keep or help in keeping our costs down. So it's very early days, David, but nonetheless, a very exciting intersection.

David Haughton - BMO Capital Markets Canada

Yes, I also understood that the autoclave capacity was at 4,500 tonnes a day. So it sounds like it matches the ramp. What sort of timing would you have in mind for the expansion to that level, the 50% lift in throughput?

Ebe Scherkus

Well, the underground part, I wouldn't say, is easy but it is simpler. It just means additional mining equipment and additional development to prepare mining blocks to sustain that tonnage, so that -- and additional ventilation and things of that sort, so that really isn't overly technically complex. With respect to the mill, I'll turn it over to Jean. He can give you a bit more detail on what his thinking is.

Jean Robitaille

David, we plan in the Q4 to have the results of the study for the 4,500 tonnes per day. Let's assume that it will be positive, then you have to figure out, let's say, at 2 years after, to go with. In terms of the autoclave 4,500 presently. The current autoclave will be able to -- with some modification, will be able to handle the throughput. One point with the new discovery, with the Rimpi, the possibility to go at 6,000 maybe more high, and we will have to revisit -- we may have to revisit on the positive side if we move it faster than expected at the potential 6,000 tons per day. So it's early stage. By the fourth quarter, we will have more information.

David Haughton - BMO Capital Markets Canada

And ultimately, this mine is transitioning from the open pit to the underground. What proportion was the underground of the throughput for the quarter just gone?

Ebe Scherkus

1/3. The underground is currently averaging 1,000 tonnes per day of the 3,000 tonnes per day capacity. And going forward, by the end of next year, end of 2012, we expect that to have increased to 70%. And then in 2013, when the open pits get depleted, it will be at 100%.

David Haughton - BMO Capital Markets Canada

All right. And as far as the unit costs go, kind of all over the place from one quarter to the next in Euros, EUR 79 this quarter, EUR 75 last quarter. What should we be thinking about notwithstanding the one-off issues? What should we be thinking about going forward?

Ebe Scherkus

Well, based on our internal calculations, if we get -- we do succeed in getting rid of the contract and we do have steady-state operations of 3,000 to 3,300 tonnes per day and we are back on the Suuri pit full time without any production disruptions or whatever and we do mine our -- our roughly 100,000 tonnes per month, that figure should be somewhere in the mid-60s in terms of Euros, low- to mid-60s in there from the present value. That's what our internal target is.

Operator

Your next question comes from Haytham Hodaly from RBC Capital Markets.

Haytham Hodaly - RBC Capital Markets, LLC

Just a couple of quick questions. Maybe I'll start with Ebe. Just on Meadowbank, you provided some good details there on throughput, higher at 9,300 design is 85. I think you're operating well above that. Cost per tonne have obviously come down because of the throughput. What type of cost per tonne are you seeing if you were to be at the 8,500 tons a day, Ebe?

Ebe Scherkus

Currently, we saw 81, and we believe that we can see low-70s and maybe high-60s if everything goes well. But it's -- I would say it's a fragile number. I'm not kidding anyone or myself. We have made progress, and it's going to be a steady progress. But it's not going to be next quarter. It's going to be 72, and then the quarter after that, 65 because we still have a lot of work to do. So that's what our target is.

Haytham Hodaly - RBC Capital Markets, LLC

Okay, no, that's good. Maybe a question for either Sean or Ammar. Just with regards to the increase in CapEx, $110 million increase. Can you outline what the accelerated portion was? And I guess that's the first question to start. There was $45 million, I think, accelerated from 2012. Where is that going?

Ammar Al-Joundi

It's Ammar here. There is the -- of that $45 million, roughly half is accelerated underground development in different mines. I can talk to you off-line on specifically what those items are. $11 million of that is accounting reclassification. So it's really not additional spend. It's just spend that was going to be expensed that now is getting capitalized as a result of faster than expected or faster than budgeted development. That's the majority of it. And then the rest is effectively capitalized drilling at existing mines because of some good results we've been getting. And we're frankly being aggressive in developing these mines, which is a good thing.

Haytham Hodaly - RBC Capital Markets, LLC

Okay, and then the $25 million that you outlined as part of the remainder, the remaining 65, I think you allocated it to FX changes. What exactly are you talking increasing CapEx because of FX changes? Or are we talking -- I mean, what is that? It's that another accounting thing? Or is that an actual cash thing?

Ammar Al-Joundi

No, it's -- most of the CapEx we spend is either in Canadian dollars or Euros or Mexican pesos. So we -- those have not had cost overruns. Those are still on budget. It's just that we express numbers in U.S. dollars, so the Canadian dollar equivalent, for example, or the U.S. dollar equivalent of the same Canadian dollar has gone up.

Haytham Hodaly - RBC Capital Markets, LLC

Okay. And last question, do you have an indication at this point how much of the Meadowbank fire added in overall CapEx?

Ammar Al-Joundi

Yes, the overall cost of replacing the kitchen will be in the neighborhood of $15 million to $16 million. We should get a credit of about $10 million from the insurance company. The other thing that we did is we kept everyone on payroll. And really, we did not get any productivity or anything from that. What we did do is maintain our workforce. So there's probably another $4 million in there. And ultimately, it proved to be the right thing to do because everybody came back when there are so many jobs out there and they could have left.

Operator

Your next question comes from Barry Cooper from CIBC.

Barry Cooper - CIBC World Markets Inc.

Just wondering, what was the due diligence that you did on the Rubicon investment? And then, Sean, you mentioned in the introductory remarks that the strategy is to take a toe hold there, kind of see what, how things evolved and whatnot and basically de-risk the -- any further investment, if indeed there is further investment. So what do you see as kind of the main risk of the Rubicon investment right now?

Ebe Scherkus

The due diligence that we did, Barry, there was a small group of us and myself included. We went underground into the F Zone. We met with the people. We looked at all of the data and satisfied ourselves that, number one, the gold was there and that there was upside potential. And so we did some internal checking with respect to resource models, et cetera. But we felt very comfortable. I mean, Red Lake, when you start seeing that high frequency of visible gold, I mean, we saw it at Gold Eagle, when you start seeing that sort of frequency. I'm not trying to market for Rubicon here, by the way, but you start seeing that. Then traditionally, in the Red Lake camp, that bodes well, and that has been the history at Campbell, at Dickenson and at Goshen.

Sean Boyd

And as far as timing goes, I think one of the other things that the group highlighted when they came back is that Rubicon is a very good explorationist, but when it comes to underground development and planning, there's very little expertise there. And that's what's certainly Ebe and the team bring to the table. How does that sort of factor into timing? It's hard to say right now. We'll certainly give them our input on how we think they should tackle the deposit and the next steps there. But traditionally, if you look at some of our historic strategic investments that we've ended up taking bigger positions in, it was anywhere from 1 to 3 years before we decided to increase our positions. And conversely, those things that we sold, it was pretty much the same timeline. A couple of ones that are current single asset producers right now out there did have meaningful investments in those over the last few years that have been sold at a profit. So generally, those take at roughly the same time, 1 to 3 years.

Barry Cooper - CIBC World Markets Inc.

Right. Sean, you may have misinterpreted my question then. You implied, though, that de-risking the project, I wasn't thinking of the timing, and although maybe that is the answer. I was wondering, do you see the risk of maybe the project is not as big as what you had hoped? Do you see that the risk is in the reserve? Do you see the risk is in the permitting? Do you see the risk is in the capital costs and what could evolve? I was sort of trying to get a sense of what risk you were applying there.

Sean Boyd

Well, I think with respect to Rubicon, the biggest risk there is grade. And then, of course, the exploration upside. I mean, that is the story. If you -- can you get Red Lake type camps, everything else like from infrastructure, the region, permitting. These are all relatively known issues. As far as capital costs, the developed and underground mine, whether it's the size of a Lapa or whether it's slightly bigger or whatever. This is all very well in our comfort zone. It's very close to homes, so we feel that those really aren't risk issues. Rubicon, the F2 Zone or the Phoenix deposit, we feel will need a lot more diamond drilling. We feel it may need a lot more underground access to be able to get a better handle on. And that has to be figured out in our view, and that could conceivably be a risk factor. But then once again, every time you see all of that visible gold spread out over the longitude in all sections and you start looking at all of the drill core, and it looks very familiar to this material that you've seen elsewhere and the camp and that bodes well. So -- but I think I have a lot of work to do.

Barry Cooper - CIBC World Markets Inc.

Right. So when you see it in the longitude, how did that look on the cross sections?

Sean Boyd

We feel it looks quite intriguing on the cross section. What I mean, the cross sections, the way it was drilled, I mean, there's a lot of off section holes and we tend to be a bit more geometrical. I mean, they did that out of necessity to not put in the underground development. They also had to do it from drill platforms on Bruce channel. So there's a lot of questions with respect to surveying, projections and locations. So our way of thinking is, we like to go and touch it and feel it and see it and open it up and then get a better sense of the ore geometry.

Barry Cooper - CIBC World Markets Inc.

Right. Okay. And then on a similar vein, no pun intended but a different place, how comfortable are you with projecting the true widths at Rimpi? 21 meters, you indicated as a true width. What was the core width? And how comfortable are you that that is indeed true width?

Ebe Scherkus

Well, we look at -- we've been drilling there now since 2005, so we've got 6 years of experience. And now we're able to judge the precision of our drillholes along the belt and we've intersected drillholes at depth. And actually, when you start looking at the foliation or the coring, you're getting pretty -- you're pretty close. So the actual core length here was that 58 meters. And of that, at the angle, at acute angle, it ended up being around 21 meters.

Sean Boyd

We're pretty comfortable just judging on the orientation of the foliation, survey data, experience. So it might be 19, and then again, it might be 23.

Operator

Your next question comes from Anita Soni from Credit Suisse.

[Technical Difficulty]

Operator

Your next question will come from Richard Heuermann private investor.

Unknown Speaker

This relates to a question I asked some months ago regarding your Mexican properties. The drug wars, of course, have escalated substantially since then. Apparently, local law enforcement is almost nonexistent. Federal law enforcement apparently is moving in to take their place. Again, my question is, what is your perspective? What is being done regarding to the Mexican properties?

Tim Haldane

Richard, it's Tim Haldane. I have the same answer to the question from a couple of months ago. We're very aware of what's going on around us in Mexico. We're most of what you hear in the news, and concerns that you expressed, this is happening in the border areas or some poorly populated zones, we're not in those zones. And we've had no direct security impacts on our operations in Mexico. So we're just remaining alert, following good practices and...

Unknown Speaker

You've had no incidents of concern then?

Tim Haldane

No, nothing related to the mining operations.

Unknown Speaker

All right. Well, but not related to the mining operations then?

Tim Haldane

That's right.

Operator

Your next question comes from Steve Butler from Canaccord Genuity.

Steven Butler - Canaccord Genuity

Well, guys, I'll squeeze one in there. Ebe, it looks like good progress for sure at Meadowbank, and you talk about the potential for $70 to $65 per tonne? We won't nail you on that, but we'll see how Q3, Q4 comes through. The grade was expected to be 3.8 grams per tonne in the second half. Do you have confidence to get the grade up from the -- just over 3 grams in July up to the 3.8 for the second half?

Ebe Scherkus

That is largely based on our mining plan and accessing higher grade packets in the open pit. And if we access the ore, we will make that grade. I'm actually quite pleased now because the grade we are seeing is what we are predicting and what we are getting in the mill. But once again, that is a risk factor. If we continue to dilute it, that could be a problem. But right now, based on July's performance, we're encouraged.

Steven Butler - Canaccord Genuity

How was dilution in July, Ebe? Was it the new buffer blasting implemented?

Ebe Scherkus

Well, we were -- we only have a couple of blasts, as we -- as I mentioned. And we don't have the -- a number to say, all right, it was -- used to be 25 and it's now down to 15. We don't have that number. But all -- when -- what we do have is, we know that the displacement has been cut in half. And when we do put the grade control balls in the production drillholes, we can locate them a lot faster. And we don't lose them by them being projected all over the place. We can actually mine them for a change. So this is good progress, but we still have to work on quality control at depth of drillholes, location of the charges. All of these things have to be -- they are a work in progress, and we will continue to make progress as we move forward.

Operator

Your next question comes from Tanya Jakusconek from Scotia Capital.

Tanya Jakusconek - Scotia Capital Inc.

I just wanted to have a little bit more clarification on Goldex, Ebe, just so that I understand it. Just on the soil settlement issue, my understanding is that now you're grouting the share zone and you're pumping the water back into the water table to stabilize that. When is all of this $19 million that you're spending going to deal with it all? Has it already been done and you've seen settlement and so it's all taken care of or...

Ebe Scherkus

Well, we have an overall budget now of about $19 million and we have spent $6 million. We still have a lot of grouting to do. What we first did is, we put in the diamond drills and we defined the structure, we -- to make sure that we will be grouting in the right place. So that structure now has been very well located. There are a couple of ways in which to do it. So we have a 2-tiered approach. One, seal the sheer zone, pump it full of cement, so that the water doesn't go into the underground workings. And then the second thing, and then let nature take its course, and gradually, the water table will build up and the subsidence will end. But to accelerate that, we have got wells drilled and we are injecting water. And what we have found, the moment we inject water subsidence slows down almost immediately. So we'd like to make sure that we'd seal it. And worst comes to worse, we'll just inject water into the water table, and it will be a net benefit of 00 and the subsidence should stabilize.

Tanya Jakusconek - Scotia Capital Inc.

Okay. Now when do you think this project will be completed? You said you've only spent $6 million, you've got $19 million. Is it a 2011 project by the end of the year it should be done?

Ebe Scherkus

That's our objective.

Tanya Jakusconek - Scotia Capital Inc.

And what -- how much impact have we seen from surface? Like, what sort of area is the soil impact?

Ebe Scherkus

I would say there's probably an area of 150 meters in diameter. And it's an area for those of you that had been at the Goldex mine site. It is an area that starts just at the edge of the dome and goes towards the highway [indiscernible]. And the center of that area is where it is.

Tanya Jakusconek - Scotia Capital Inc.

Okay. And how much displacement have we seen?

Ebe Scherkus

Well, the maximum displacement that we have seen is 5 meters at the center. It's like a cone of depression.

Operator

Your next question comes from Anita Soni from Credit Suisse.

Anita Soni - Crédit Suisse AG

Just a follow-up with the Goldex. Were there any houses that were impacted by the subsidence issue?

Ebe Scherkus

Yes, there are -- since we are very close to existing houses, there are some houses and a business that are impacted by that. We have been in discussions. We've already acquired some of the houses. So that it is part of the $19 million provision.

Anita Soni - Crédit Suisse AG

Okay. And just with regards to continuing on with dilutions but at LaRonde, the grades dropped there. You said it was as a result of dilution. Is that something that we should be forecasting or that you've already forecasted into your LaRonde deeps guidance going forward in the next 2 to 3 years? Or should we be taking down our grade?

Ebe Scherkus

No. The dilution at LaRonde was mostly in the narrow or in some of the zinc stopes that we mined. They are on the eastern and western limits of the pyramid, so they tend to be higher stressed and they tend to be narrower. And so it's just a mathematical thing, Anita. If the zone is 3 meters wide and you end up with 1 meter, you'll get 33% dilution. Or if you end up with the larger stope at LaRonde expansion, which is 20 meters thick, and you end up 1 meter, your dilution will decline. So I wouldn't change anything.

Operator

[Operator Instructions] Mr. Boyd, there are no further questions at this time. Please continue.

Sean Boyd

Okay. Thanks, operator. Thanks, everyone, for tuning in, and we look forward to keeping you updated on the progress we're making on our projects and the exploration results. Thanks again. Bye.

Operator

Ladies and gentlemen, this does conclude our conference call for today. Thanks for participating. You may now disconnect your lines.

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