Agnico Eagle Mines' (AEM) CEO John Higgins on Q4 2015 Results - Earnings Call Transcript

| About: Agnico Eagle (AEM)

Agnico Eagle Mines Limited (NYSE:AEM)

Q4 2015 Earnings Conference Call

February 11, 2016 11:00 AM ET

Executives

Sean Boyd - CEO

Alain Blackburn - SVP, Exploration

Bill Gee - CEO of Evolving Gold

Analysts

Andrew Quail - Goldman Sachs

John Bridges - JPMorgan

Phil Russo - Raymond James

David Horton - CIBC

John Tumazos - John Tumazos Very Independent Research

Scott Macdonald - Scotiabank

Mike Parkin - Desjardins

Sid Subramani - Veritas Investment Research

John Van Dusen - CBC News

Operator

Good day, ladies and gentlemen, and welcome to the Agnico Eagle Mines Limited Fourth Quarter 2015 Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Sean Boyd. Please go ahead, Mr. Boyd.

Sean Boyd

Thank you, operator, and good morning everyone, and thanks for joining us for our 2015 fourth quarter conference call. Before we get started, just like to remind everybody does contain forward-looking statements, so please read the qualifiers and be forewarned.

By way of introduction, 2015 very solid year, a strong close as well to the year. We've got excellent execution across the board at all of our mines in the fourth quarter, and with that it allowed us to set another record in terms of annual gold production that once again exceeded our production guidance. That resulted in us being able to drive down our unit cost to produce an ounce of gold, which generated more net free cash flow. And as a result of that, we were able to strengthen our balance sheet in 2015 by reducing our net debt by approximately $190 million. And I think more importantly is that, we were able to improve our financial position and without compromising our long-term ability to drive the growth and create the value because we did continue to invest in our key projects and we did continue to make a significant investment in exploration.

So 2015, very successful year, not only from an operating results point of view, and improvement in financial flexibility, but also in terms of positioning Agnico Eagle for its next phase of growth. So essentially everything pretty much unfolded according to the plan that we outlined a year ago in 2015.

As far as the highlights go, for the fourth quarter and the full year, as we mentioned, our guidance exceeded for the fourth consecutive year by producing 1.671 million ounces. Very good cash costs, with all-in sustaining costs also strong approaching $800 per ounce.

As we move forward for the next three years, we are looking at stable production and costs. We're looking to average production over the next three years of 1.5 million ounces, in 2016 between 1.52 and 1.56 at cash costs in the range of $590 to $630, and it's all-in sustaining estimate at $850 to $890.

As far as the reserve side, we'll get into some of the details, but we did see our grades going up at several of our key mines, we did lower the US dollar gold price used in that calculation again this year by $50. We didn't see ability to replace all the ounces that were mined. That wasn't the focus in 2015. The focus was on expanding the resource. But we did manage to add 1 million ounces to the reserve. We mined 1.9 million ounces in-situ and we added about a 1 million ounces at several other key deposits.

On the resource side, you saw the growth in inferred resources by 23% and I think that was important, because that sets up on a number of projects to be able to drive growth five years from now as we move these projects along the development pipeline and several of those like the key ones, Amaruq saw significant increases in resource, establishing initial resource El Barqueño, and we were able to calculate an initial resource on the parallel zone in Finland. So all of those things are the main focus of exploration in 2016, where we’ve actually increased the budget. We see an ability to drive value creation through exploration again in 2016 and that will be continue to be a focus.

As far as capital spending, we are moving forward at a very measured pace in Nunavut. We have decided to slow Meliadine down, we will talk about that in terms of the context of that full strategy later on in this presentation. And as we said in the intro, entering 2016, we are in a strong financial position given the fact that we reduced our net debt in 2015 and based on how we laid out our capital investment plans and exploration plans, we will be in a position at these spot prices using our budget to generate free cash flow.

As well, we maintained our dividend and I think the quality of the asset base and the soundness of our investment business decisions, and a good example of that is we had no asset impairments as we close 2015.

Looking at the individual mines, in total, we produced over 420,000 ounces in Q4, cash cost just slightly below $550 an ounce. Important for us, we generated in 2015 almost $1 billion in operating margin at these mines. So the focus has not just been on cost reduction, but it’s also been on how do we optimize these assets and get as many ounces out of them as we can and that will continue to be a major focus for us as we move forward because several of our facility have extra capacity available in the processing facility, so we would expect to be able to increase the mining rates at several of our mines to continue this optimization and improve not only cost side, but also the revenue side of our business.

Financial position, we touched on that. Our net debt went down $190 million, drew our cash down a little bit, so we paid off some debt more the $190 million. We still have significant drawing capacity under our credit lines if needed, and another thing, we have followed very closely over our long history is to make sure that we keep a tight control over our shares outstanding. We closed the year at 217 million shares fully diluted after 58 years.

So just to sum up on the financial side, as we mentioned, we entered 2016 in a very strong financial position. So our plan in 2016 is to continue to use our cash flow and invest in exploration and in the projects to continue to position ourselves for our next significant growth phase and we can do this and still maintain our financial flexibility and do it and not increase the financial risk in the business. So we said, if we use our budgeted production in costs, and making those significant investments in capital and project and exploration and pay our dividend, we are still in a position to generate net free cash flow and reduce our debt in 2016 if we choose to do so.

In terms of financial highlights, I think what’s important there is the gold price was down in 2015 over 2014 and we were still generating almost as much cash flow from operating activities from the business.

As far as our three-year guidance, as we said, stable production and cost profile over the next years. We went through some of the details on that, but I think for us, it’s really keep this business forward, moving forward steadily, don’t take on excessive risk, focus on adding value through exploration and moving that production profile forward because as we look out we can see the potential to significantly grow the production profile with the existing asses bases.

Just moving forward on to slide 9, which are some of the details. In 2016, the major swing from guidance a year ago was the decision mid-year, last year to move forward with a bulk put extension at Meadowbank, which extended the life about a year. It did have a slight impact on 2016 production, but had a positive impact on 2017 and 2018, so that was important to us to keep the Meadowbank facility working and the team working as we move towards the end of 2018, because of the current plan, we expect to have the Amaruq deposit up and running in 2019.

In 2018, we have put out a guidance of 1.5 million ounces. We do see number of opportunities that we outlined on page 10 in the slide deck to possibly do better in 2018. And many of those opportunities are really designed to take advantage of the increased capacity we have in several of our plants. Just going down the list quickly, the LaRonde optimization potential is essentially to take advantage of the room and the plant that will be available because of Lapa finishing their mining this year. But we see the potential to add possibly boost gate zone to the LaRonde facility. There is over 0.5 million ounces of resource on boost gate, so we are studying that, should have the result of that study done before the end of the year. Believe it not, it’s not possibly done at Lapa, it was up there a few weeks and the team has a couple of ideas to possibly add some ounces in late 2017 and 2018 and run it through the facility at LaRonde, so we are continuing to do some work there, so continued good work from the Lapa crew, not only on their current operations and squeezing out ounces and keeping costs down, but also thinking about how they can generate more net free cash flow as the operations do wind down.

At Goldex, lots of pleasant and positive surprises there, since we restarted that mine. Again, there is capacity available to us in that plant, so we’re focused on how to optimize that. We do feel that and our team feels that we can get that asset up to about 140,000 ounces. There is even a possibility to go beyond and we are working on that right now. In fact, we are also considering possibly maybe increasing the capacity of that plant beyond its current rate at 8,000 tons a day to take advantage of some of the opportunities we see. That’s not in any of our numbers, so there is lots of potential there.

At Kittila, there's increased plant capacity. We have got the Sisar Zone, we will talk about shortly, which is opening up the possibility to access more ore and do it on a cost effective way and given the proximity of that zone to the main zone into existing underground development being the main ramp there. So we are focused on that.

And in Mexico, we continue to look at our satellite operations, and we have had a bump in our reserves at La India, which opens up opportunities there to possibly increase the output. So lots going on on that side.

As we look further out beyond the next three years, that’s our primary focus, to add value to drilling, to expand on some of the success we have had over the last couple of years from an exploration standpoint and move several of our key assets forward including the Nunavut platform. If we look at some of the components there and although it’s early and we still have more work to do, and there is still more exploration to do.

If we look at some of the component parts, we could see the LaRonde complex in adding boost gate possibly being a complex that produces 400,000 ounces a year or better, which is a way to add a lot of value and leverage off of the existing skill set and the existing assets that we own in the region. Our Malartic asset, in partnership with Humana to our accounts is set to produce 300,000 ounces to our account as we move forward.

And Goldex, if we just the 140,000 ounce numbers, that gives us mid-range between 800,000 and 900,000 ounces coming out of the Abitibi, even after having the Lapa mined out. I think that base is important for us, not just from that production growth and the quality of that business and the longevity of that business, but also is a significant platform to sell Nunavut and that’s a huge competitive advantage for is our technical skill base, our logistical support base, our experience in managing operations in the far north out of Val-d'Or and our regional office space, the Val-d'Or airport and that is a huge cost advantage in an area that we see tremendous potential. So we as always felt, particularly with the recent success at Amaruq that Nunavut is a place that we can see ourselves for multi-decade.

As we said many times before, we know we can do business there. It is open for business and when you combined with the fact that there is tremendous mineral potential there. As an example, Meliadine at 10 million plus ounces on an 80-kilometre-long greenstone belt. Amaruq now growing 67% in the last year, not 3.3 million ounces. The fact that we have now added to our lime package on the western side of Hudson's Bay where we now have 400,000 hectares under control and major greenstone belt, so we are taking a long-term view.

With that competitive advantage of the base in Quebec, we see none of it becoming a major source of production for us going forward, but more importantly as we're not in a huge rush to get there. And as you can see, we took the approach that we will slow Meliadine down a year. We did have options in front of us that would have called for spending well over $200 million this year that would have gotten us to Meliadine start up in 2019. We felt that in the current gold market that it was best to be more prudent, to be more measured and slow it down and that's the approach that we've decided to take.

But we can see based on the size and grade of Amaruq and what we currently know about Meliadine, that the Nunavut platform certainly has the potential to be about an 800,000 ounce of producer for us. So we can see ourselves five years from now producing in Canada what we're producing in our entire company, but again, we're going to take a very measured approach and do it in a way where we're not increasing the financial or technical risk of the company.

When we add Finland, our mine plan calls for us to produce about 200,000 ounces in Finland a year. That's without taking in the Shear zone, which is the parallel zone. We're continuing to drill that. We've traced that down to 1.9 kilometers underground. We've got good thicknesses, good grade there. Fortunately for us, it's very close to the ramp that’s moving down towards the Rimpi area. Now, we're piecing that altogether to see whether that can impact our production over the next five years.

And then in Mexico, the Barqueño initial resource gives us an opportunity to start with that opening pit operation there and then continue to drill that large mine package and add to our production platform there. So I think what's important there is not just the fact that we have an excellent chance of having a bigger business five years from now, but also the fact that in order to execute on that, it's very manageable from a technical standpoint, it's a very manageable business to run, although bigger than what we have now, because it's still nine mines. It’s still the same for operating regions and there is also assets we currently own. So that's a good solid base to move forward on and continue to build this business and do it in a way that improves the quality of that business.

I don't propose in this call to go through each of the individual mines. If there are specific questions, we'll gladly take it. But I just wanted to close out the formal part of the presentation and just talk a little bit about the reserves and some of the focus on the exploration side of things. We used $1100 gold for the long-term assets. I think what's nice there is our average grade is 2.4 grams, which is significantly above the average in the industry.

As a result of that, even when we stress test our reserves down to $1000, we will only see a little bit better than a 5% decline in those reserves, so good quality and as we mentioned, we saw improvements in grade at LaRonde, Canadian Malartic, Goldex and La India and at LaRonde, our grade now is 5.3 grams per ton. We're planning to mine on average of about 4.2 grams per ton in 2016, so we continue to operate at LaRonde well below reserve grade and as we approach reserve grade, that's what really drives the growth in production.

As we said, we had a significant increase in our resource, largely from Amaruq and Sisar and the initial resource at El Barqueño. Just focusing on those three projects, at Amaruq, the drilling has started. For the 2016 campaign, we started earlier this month, which is about 6 to 7 weeks sooner than the start of last year's program. So we should get a lot more drilling in this year. We've got three drills going at the moment, as we ramp up that program, likely to have 10 drills going as we move into the second quarter. The focus right now with the first two drills is just to the west of Mammoth 1, and we're focused on finding a second source of open pit ore and also on the V zone in IVR, looking to see if the IVR area is in fact connected to the town. So, off to a good start in terms of getting the drills going and up and running and we're seeing some early good signs with some of our drilling.

In Finland, at the Sisar Zone, which is the parallel zone, as we've said, we've traced it down to depth of 1.9 meters now, 1.9 kilometers, the resource of a little over 600,000 ounces is only down to 1.4 kilometers. So there is a lot of potential to increase the size of that resource and we're focused on that three drills form the ramp. So we would expect some good news there and our team is working hard on ways to incorporate that into the future development of Finland and I think what's important there is one of the challenges we've always had with Kittila, it's a large deposit, it continues to grow, but it's been growing away from infrastructure and it's relatively narrow compared to some of the deposits we have in our portfolio. But the fact that we have a zone very close to the main zone gives us an advantage to drive net free cash flow generation, which was always the challenge there and that was always the thing, there's been a lot of time trying to sort out.

And then in Mexico, we've got I think 14 drills going on Barqueño, big drill program, we've picked up some results in a new area, which will be part of the focus in 2016. So for us, it's just after the first year getting started, getting the resource established, identifying some target areas and keeping the focus going on, on exploration.

So I'll wrap it up there as far as the formal part of the presentation. And operator, we'd be happy to have the line open and take some questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And we'll move to our first question from the line of Andrew Quail of Goldman Sachs. Please go ahead.

Andrew Quail

Good morning, Sean and team. Congrats on a very strong quarter and a very solid 2015. Just a couple of questions. First one, on Amaruq, obviously, you're going to be doing a lot of drilling up there and I think you mentioned that you're going to be this year starting to break ground on the infrastructure, especially the road, I mean is that -- can you just give us -- Sean, can you just give us some background and how long this might take and I mean it seems like you've got 3 years or 2.5 years at least to do this, are there any sort of headwinds you see, maybe with permitting or infrastructure road blocks out there.

Sean Boyd

No. I think we've broken it down into two parts. One is the road, which is certainly a key component. So we have the okay to proceed on the road. We will go this year relatively slow and just focus on the portion initially from the Vault Pit, which is at Meadowbank, because we have the waste rock there. So that waste rock is essentially the road material for the first 10 or 15 kilometers. So that is relatively straight forward to do. So over the next couple of years, we would get that road in to place, while we work on getting the permit to begin construction of the open pit.

So that's also a focus for 2016 is to get the permit application in place, use the existing resource base to do a pit outline and put that permit in place. So that timeline, we're anticipating that we will be able to begin construction in 2018 and have the open pit up and running in 2019. We don't see any impediments to doing that, we're not asking the regulators to allow us to do anything that we haven't done up there in the past. There is no significant technical challenges through that project, it's actually relatively straight forward and we're just treating it basically as a satellite deposit to Meadowbank very similar to the Vault deposit, Vault happen to be closer, but the whole concept is almost identical.

Andrew Quail

Yeah. And I suppose second question is maybe about liquidity or debt, I mean obviously you guys have been paying down debt and you do have some maturities coming up, but obviously, you have a hate to liquidity and you do have a little bit of optionality, organic optionality. If we did see a high gold price over the over the next couple of years, are you guys, is there a level of debt or is there a number in your head for leverage that you're comfortable with?

Sean Boyd

Well, in terms of the repayment schedule, there is a payment due next year, but it's quite modest at $150 million. So extremely manageable, the next payment management is not until 2020, but the objective in 2015 was to go into ’16 with a stronger financial position, that's why the focus is on reducing that net debt position.

One of the key sort of parameters we've always used is that we wanted to keep moving this business forward in a way that didn’t increase the financial risk and one of our sort of data points is our investment grade credit rating on the debt. We could likely take on a few hundred million dollars more of debt and not impact -- negatively impact that credit ratings. So that's a bit of our buffer there.

So that's what really guides us, that's what guided us in the transaction with Osisko. We did put up $500 million in cash, that’s start of our rough limit there in terms of not impacting the investment grade credit ratings. So there is room, but I think we're going to move forward steadily and cautiously with some of these development plans and that's reflected in the approach we took to Meliadine in 2006.

Andrew Quail

Thanks very much.

Operator

Thank you. And we'll move to our next question from the line of John Bridges of JPMorgan. Please go ahead.

John Bridges

Thanks. Sean, and congratulations again on the result. Just interested in the Meliadine, you've taken it down from 200 million spending to 90 million, how did you frame that because you do have a lot of calls on your funding and certainly Amaruq and some of these others may offer better returns. How do you frame that?

Sean Boyd

Well, potentially, it's important for us, given the performance of the underground development, to keep that underground development going. Even in 2013 and ‘14, when the gold price was under a lot of pressure that was the one thing that we were maintaining, because it is starting as an underground mine, that's where the best grades are, that drives the return. So it's important to keep that moving, which is still the focus in 2016. The big difference from what we could have spent to what we have decided to spend is really on the surface and we decided that there was a couple of key components on the surface that made sense to move forward, because they lower the cost of doing business up there, including doing exploration work.

So that was sort of the minimum that we thought and we had numbers that were a lot higher than that, but we still think that as we look at Meliadine and we're involved in the process of taking that large resource and taking subsets of that and running them through different mine plans and generating higher returns. So that's a project that we feel will still be a mainstay for us as we move forward, combined with Amaruq, gives us a really strong platform for a number of years and it was to try to strike that right balance.

John Bridges

Interesting. And then in your release, you spoke about finding a sort of analog to Amaruq at the very early stage, could you talk about what you got there and is this one of a number of – you’ve identified with that or is this just one-off?

Sean Boyd

I'll let our exploration guys give you an update on the Amaruq drilling and the drilling.

Bill Gee

Hi. It's Gee speaking. So basically, what we’ve identified and in the early days, we’ve identified bunches of early stage opportunity like we did at Amaruq and we've intensified a significant amount of them, close to 10 or a dozen of other opportunity and we're continuing with our plan to assess the potentials of these early stage opportunity and move them forward and start to work on them at a measured pace. This is our plan in the near term.

Sean Boyd

I think John just to add to that, as we look at Nunavut, we know there will be additional investments in infrastructure up there. We know we’ve talked to the government about how that area opens up and what we wanted to do is take a bunch of ground that we feel will benefit from infrastructure investment over the next 10 years or so covering major greenstone belts between Rankin Inlet and Baker Lake. And so we’ve done some initial work on some of those properties and we're encouraged by what we see, but it's more just taking that long term view if that’s the part of the world we want to be and we want to get as much ground as we can, get it as cheap as we can, get it early and then use our exploration team which has an excellent track record of turning those early ideas into resources and ultimately meaningful parts of our business. So that’s what we are going to continue to do up there.

John Bridges

Okay, well done. It’s not a long term view, it’s actually a part. Congratulations. Thank you.

Operator

Thank you. And we'll move to our next question from the line of Phil Russo of Raymond James. Please go ahead.

Phil Russo

Yeah, thanks. Good morning, Sean and the team. Just on the three-year guidance on 2018, happy to see you being able to maintain some stability there. I just wonder what's your feelings about sort of embedded portfolio risk here, as you sort of ask a few mines to do a little bit more to plug the gap. And I know you talked about other optionality in the portfolio to come in around that time, but it seems like three or four assets have to sort of step up to bridge the gap. Are you guys comfortable that they can get there?

Sean Boyd

We are and if we actually look it, there is several that will contribute to that and if we run down the list quickly from LaRonde, the expectation from LaRonde was strictly based on the mine plan, so we are not sort of deviating or pushing that particular asset which will be a significant producer for us in 2018. That’s simply a function of the grade. The potential add on there we still need to complete the work in that Bousquet zone, but given its proximity being right next to LaRonde, it certainly makes a lot of sense. We’ve studied that perhaps, the challenge we always had is that it would have required significant investments in the LaRonde processing capacity to find a home for it. Well, now there is a home for it if it makes sense.

So I think that one, we would see ultimately 400,000 ounces coming out of that. [indiscernible] is simply the mine plan, no change there. Goldex as well, we are not – we see that number as being very comfortable and the Goldex team is – their own ideas that we saw few weeks back based on the fast - more importantly the development performance that they are getting underground which is exceeding plan and their expectation which opens up possibility to access some of the other material there. So again that’s good.

Kittila, again that’s a mine plan. The mine plan was expected to average a couple 100,000 ounces over the next five years or so and now the focus is how does - what does the Sisar zone mean in terms of accessibility to good grade thick, relatively thick mineralization, that’s not factored in and Mexico has really been no changes there with the exception of La India where we are seeing some potential there as we grow. And with additional ground that we’ve added at La India, we haven’t really been that focused on some of that exploration in close proximity to the pit. That starts this year. So that stuff can come into production fairly quickly after drilling, so we are very comfortable with this. These are plans that our guides generated and a lot of good ideas have come forward in the last six months or so that we are sort of supporting and helping move forward with our tactical service group.

Phil Russo

Great. Thanks, Sean. Just maybe one more. Just on Meliadine, would you like the same decision at today’s gold price?

Sean Boyd

Yes. The way we sort of concluded on that is that, yeah, I guess if we had said it needs to be 2019, then we could have done it 2019. What we were not comfortable with was the increased financial risk and the fact that that would have been a tight timeline, so given that we expect to be in Nunavut for 20 or 30 years, we concluded that an extra year really makes no difference. If it’s an extra two years, it doesn’t really make a lot of difference, what’s important is how we build it and we didn’t want to sort of place all our eggs in one basket and we wanted to move forward on exploration. We are still focused on early stage M&A. There is a lot of things that we are capable of doing in this market and wanted to make sure we struck the right balance.

Phil Russo

One more quick one.

Sean Boyd

I should add though, which I think is kind of interesting, you are looking at the screen this morning, the Canadian dollar growth by $720, that’s approaching $1,720. That’s approaching all time high. That’s not to have two-thirds of your production coming out of Canada.

Phil Russo

Why not go and hedge then and - some of your cash flow and then go and do it?

Sean Boyd

We will be looking at hedging currency, there is no doubt about that.

Phil Russo

Okay. Great. The 100 million capital that you will spend this year and the extra year, you take to build Meliadine, how does the upfront capital here for name change, will it go higher or stay the same or –

Sean Boyd

At this point, it hasn’t changed, so we are working through a lot of those things and will over the next four quarters fine-tune a lot of the analysis. We do more detailed engineering.

Phil Russo

Sounds good. Thanks a lot.

Sean Boyd

Thank you.

Operator

Thank you. And we will move to our next question from the line of David Horton of CIBC. Please go ahead.

David Horton

Good morning, Sean and team. Thank you for the update. Just going back to Amaruq, I am looking at your slide presentation on page 20, and you’ve got a comment there and I know that John Bridges touched on this before, but looking for the second pit, is your thinking there that the second pit would be the V zone or are you thinking about something outside of that footprint

Sean Boyd

Yeah, Alain will touch on that, but it’s really two slots of the focus right now and that’s where we have our drills right now.

Alain Blackburn

When you look in the map, you can recognize the well, this is where we have the resource, the conversion, but IVR is the new idea last year when we drilled. We find in fact three zones, the 1.3 and V2 was higher grade and the V2 is completely open to the east and what we are focused this year to be sure that we can develop the resource and we are just moving a rig between Whale Tail and V zone and we try to lean Whale Tale with V horizontally. This is one of the focus to be sure we can increase the results on the V zone. But when looking the western part on the Mammoth Lake, we just started last week drill along the trend and we have two rigs and we had a good – we are thinking that we can find something else based on the past restrictions, based on the past drilling and we are really optimistic that we will find something there. It is a question of time. I mean it is a question of time to build the tonnage and grade.

David Horton

Yeah, it looks the Whale Tale going over to the Mammoth Lake could be the single pit even, is that how you are thinking about it?

Alain Blackburn

Yeah, for now it’s a single pit and if you look in the long section, you can see that the zone is completely open to the east and at depth and along the trends in the west. We need to continue to [indiscernible] to lean Mammoth 1 and Whale Tale, it is not finished. This could be underground composing between Mammoth 1 and Whale Tale.

David Horton

And can you see the potential in the northeastern corner for Whale Tale to link up the R zone, the V zone and I zone just as one larger pit?

Alain Blackburn

Exactly. Last year we drilled few holes between Whale Tale and IVR and one of that hole is economy grade and we try to understand how we can lean the V zone and the Whale Tale to the northeast corner.

David Horton

Okay. And Sean, you had mentioned about road being approved, going slow 2016, the money being spent on the road in 2016, is that part of the Meadowbank sustaining CapEx or is it part of the exploration at Amaruq, whereabouts have you ascribed that expenditure?

Sean Boyd

Yeah, that would be expense, so it’s in exploration.

David Horton

Got it. So that’s why the exploration is up around that 43 million mark.

Sean Boyd

That’s right.

David Horton

Okay, whilst we are still in that part of the world, looking at Meadowbank, very sharp drop off in production in 2018. It looks like the ore body would run around mid-2018. Can you see scope for that ore body vault may be an extension to extend beyond 2018?

Sean Boyd

No, at the moment, no. No, it’s sort of end of Q3 2018.

David Horton

Okay, so it’s a pretty sharp drop off and then you have that high period before Amaruq starts up.

Sean Boyd

But at that point, if everything falls into play, so lot of the Meadowbank employees would be working on the construction et cetera of Amaruq, so there would still be a lot of activity up there using the Meadowbank skill set and team to build the satellite deposit, get everything ready at Amaruq.

David Horton

All right. I will leave it there, thank you very much.

Sean Boyd

Thank you.

Operator

Thank you. And we will move to our next question from John Tumazos of John Tumazos Very Independent Research. Please go ahead.

John Tumazos

Congratulations on everything. It’s interesting how the world turns for the better in a couple of weeks.

Sean Boyd

Thanks, John.

John Tumazos

How do you balance the tight rope, the scenarios make 180 degree turn, where your gold bull shareholders might be impatient that the Amaruq 3.6 million ounces, some juniors would already have a definitive feasibility study done saying that the mills are already there and the tailings and all that. The gold bull shareholders might say, your gold price assumption is US$975 when you superimpose the conservative currency top the 1,100. And then someone financially conservative like a director or maybe even a funky person like me might say your CapEx is 491 without Meliadine going balls out and you’ve got four development projects that are big and good and 13 others that are medium sized intended 20 exploration projects, you don’t have time to talk about. Just tell us how you walk the tight rope. I am sure you are the master of that.

Sean Boyd

Well, I guess that’s a complement. Thank you.

John Tumazos

Certainly it’s a complement, Sean.

Sean Boyd

No, I just – as you were talking I am thinking that’s what we do every day. I think the bottom line is it’s a long term business and that’s what really drives us. And you hit on the point, it’s really ultimately balance and I have been here 30 years, lot of the guys sitting here around the table have been with us for close to that time and certainly been in the industry for that time and we’ve never sort of as you know view this as race, it’s more on how do we just sort of move this thing forward and improve the quality of the business as we do it and continue to make a great place for our people to work and make it place that communities really want us around.

We are still here. 2017 will be our 60th year in business. So in order to work your way through such a challenging business and still be here in a good strong position after 60 years means that you are right, we get the balance, right. And as far as Amaruq goes, the permitting drives everything there and so we could actually have that thing built very quickly given that it’s relatively straightforward and compares to what we've done up there in the past and we have the skill sets right in the region to do it. But really it's the permitting that drives that. So we can’t really accelerate the drilling, we are doing as much as we can given the camp size. We're going to have ten drills going that’s a lot of drill core that has to move south. So, logistically there is not much we can do there.

As far as sort of pressures that come from people that are more financially oriented or more promotional oriented, we tend to – we’re good listeners but if you look at Agnico’s history, we’re not one to follow the crowd. We’re not one to jump at every pitch book whether it's going back to the rage of hedging or to drill because of the sake of drilling. So we're sort of own guise, we sort of just move forward in a pace that’s comfortable for us. We do a lot of thinking, I think one thing we do better than our competitors is we push the strategic thinking down a lot deeper in our company than most of our competitors. We spend a lot of time with our top 100 people talking strategy and getting together and talk strategy, we just had a big strategy session three weeks ago where we had our top 100 people that was a follow-up from the board strategy session in December with senior management and a follow up from another session in October with our top 100 people. So it’s a lot of years of experience, some of its feel but at the end of the day it’s something we’ve got to be comfortable with and it works. So I think the other thing is we kind of have gotten good at knowing what we are good at and knowing what we are not good at. And we sort of stick to that and those are our sort of guide posts what we use as move forward. That’s sort of a I don't know on wind and around the corner and --.

John Tumazos

Thank you, you're hitting all the points. If the gold price where to sustain this wonderful few weeks as we all hope and pray. Would the board -- would your board let your team come back and say well maybe there's a couple more things we can do and add $100 million $200 million to the capital budget?

Sean Boyd

Well, that's hard to do as well because the biggest single chunk would be Nunavut and it’s all a function of the barge season. So our planning had to be done on the barge season for this year so that barge season and the planning around it, we can all of a sudden scramble and significantly increase the capital which could be maybe surface construction. So there are some constraints in that part of our business which is the biggest single capital component. So logistics really weigh heavily on that and we go to have a lot of foresight. So that's one area where you can't just throw a lot more dollars on just as the gold price has gone up.

But I think what you know where we may see additional investment would be on the exploration front and that's just driven off of results. So we'll be monitoring that very closely and that’s a way that we think and if you look at the team led by Alain Blackburn and Guy Gosselin, they’ve got a really good track record. So we’re all ears when they talk, so if they continue to get good results and need more budget to grow that resource and allow us plan better then we will support that.

Operator

Thank you. I will move to our next question from the line of Scott Macdonald of Scotiabank. Please go ahead.

Scott Macdonald

Good morning guys, congratulations on a great quarter. Just a couple of questions on the new resource numbers at Sisar and El Barqueno. Just starting with Sisar, I guess we are pleasantly surprised to see a new resource there. May be you could give us a bit of color on how you're able to get this resource out so quickly. And then what the drilling plan is for this year and when we might see updated resource?

Alain Blackburn

Yes, Alain speaking. I’m pleased you are surprised and when you looking the resource that we released its 650,000 ounces, close to 6 gram. And when we drill in the ramp last year and we had 12 new holes but one we did a compilation, we saw that above the ramp that we have previous hole they are closer to the main zone. That changed a little bit the interpretation and we had two holes coming from previous years because the interpretation change. Why? Because above the ramp that zone, the two zone, the main zone, the three zone and the Sisar Zone are closer. And going down the distance between the two zone are larger and while we bring close to 22 holes at 24 holes, that 24 holes brings the new resources.

Scott Macdonald

Could you give us any color on the drilling plan for this year and when we’ll get a new resource?

Alain Blackburn

On Sisar?

Scott Macdonald

Sisar, yeah.

Alain Blackburn

We have three to four rigs in the ramp and the new resource would be at the end of this year. That’s on target that new resource is just about 1.4 kilometer and we have a hole there already that 1.9 and we have to drill between – also between 1.4 and 1.9 kilometer and take time to drill that hole, it is a long hole.

Scott Macdonald

Great, great and then I guess similar question on El Barqueno? So, it said in the release you’ve got 11,000 meters of drilling that we’re not incorporated into the resource. When might we expect to get that incorporated into a new number would that also be just at the end of the next year?

Alain Blackburn

At the end of next year, you’re right.

Scott Macdonald

And I think we were maybe expecting the grade might be a little higher at El Barqueno, are you able to speak to that at all? How that results compare to your expectation?

Alain Blackburn

Yeah, I can understand based on the previous release where you saw gram [ph] hole that we released. And I'm guessing the execution could be higher that a gram that we release but when we're doing a resource calculation we apply the mining method [indiscernible] anyways we imply the mining method. In that case it is open pit. And what we decide is to apply the [indiscernible] and when we put grade at 22 that everything is above 0.22 is incorporated in the resource that brings down the average rate. But don't expect if we can get two gram when we put the 0.22 at operating. That is the part of the math. If you put higher upgrade, your grade would be much higher than 1 gram.

Scott Macdonald

Okay great, thanks for clarifying.

Operator

Thank you. And we'll move to our next question from Mike Parkin of Desjardins. Please go ahead.

Mike Parkin

With regards to the Canadian Malartic and the Barnat Extension, I see there that the permits are continuing to ban from schedule. I was just wondering when you would think that could start to contribute to the overall ore mix into the mill?

Sean Boyd

It is based on permitting schedule that late 2018 and 2019 so that's a rough schedule we have there.

Mike Parkin

So is 2018 guidance does that factor in the assumption of Barnat or is that upside to those numbers?

Sean Boyd

That doesn't factor that in.

Mike Parkin

That's it from me thanks guys.

Operator

Thank you. And we'll move to our next question from the line of Sid Subramani from Veritas Investment Research. Please go ahead. Your line is now open, please go ahead.

Sid Subramani

Just to want to understand if there was an impairment done and the rationale behind using a lower price exposure that fit into the older pipe gold for the impairment?

Sean Boyd

Could you repeat the end of that, you're voice is very faint on our microphone.

Sid Subramani

Oh yeah sure. I just want to understand the rationale behind lowering the gold price for the reserves and I think speaking to the higher price point of 40 for the impairment testing that you’ve done at the end of last year?

Sean Boyd

So when we do our reserve calculation we definitely try and come up with something quite conservative but the audit firms do their evaluation for the impairment testing they’re looking at longer term kind of street average pricing to do their testing.

Operator

Thank you. [Operator Instructions] There are no further questions at this time – oh, we do have a question from John Van Dusen of CBC News. Please go ahead. Your line is open please go ahead.

John Van Dusen

Hi there, could you hear me?

Sean Boyd

Yes we can.

John Van Dusen

Just wondering if you could talk a little bit about what these slowdown at Meadowbank will mean for the workforce up there?

Sean Boyd

It's not a slowdown at Meadowbank, in fact at Meadowbank we've laid out three year production profile. And we’ve continued to maintain a strong investment at the Amaruq satellite deposit which would based on our timeline come into production in 2019, which would benefit the Meadowbank workforce.

John Van Dusen

And you mentioned that some of the workforce would be used for the construction?

Sean Boyd

That's correct. I think that’s it. Thank you everyone for tuning into our fourth-quarter conference call and look forward to seeing everybody. We are out visiting a number of our shareholders and hopefully potential investors over the next few weeks, so look forward to seeing everybody. Thank you.

Operator

Thank you. Ladies and gentlemen this does conclude your 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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