Here’s the entire text of the prepared remarks from Agnico-Eagle Mines’ (ticker: AEM) Q3 2005 conference call. The Q&A is here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections.
Sean Boyd Agnico-Eagle Mines Limited - President & CEO
Ebe Scherkus Agnico-Eagle Mines Limited - EVP and COO
David Garofalo Agnico-Eagle Mines Limited - VP of Finance & CFO
Mark LaGaux Agnico-Eagle Mines Limited
CONFERENCE CALL PARTICIPANTS
David Stein Sprott Securities - Analyst
Chantal Gosselin Haywood Securities - Analyst
Steve Butler Canaccord Capital - Analyst
Don McLean Paradigm Capital - Analyst
Thomas Robert Peterson Analyst - Analyst
Barry Cooper CIBC World markets - Analyst
Michael Van CIBC World Markets - Analyst
Mark Smith Dundee Securities - Analyst
Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Agnico-Eagle Mines Third Quarter 2005 Financial Results Conference Call. At this time all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. Anyone has any difficulties hearing the conference, please press "star" "zero" for operator assistance at anytime. I would like to remind everyone that this conference call is being recorded on Thursday, October 25, 2005, at 11:30 AM Eastern Time.
I will now turn the conference over to Mr. Sean Boyd, President and Chief Executive Officer. Please go ahead Mr. Boyd.
Sean Boyd - Agnico-Eagle Mines Limited - President & CEO
Thank you, operator and good morning, everyone and welcome to our third quarter conference call. For those of you who are following this presentation on the Internet, there are a series of slides which will require you to advance them. We can't advance them here. But I will help you along as we move through the slides.
You can move through the Safe Harbor statements. There are two of them. And move directly to corporate strategy. And what we would like to do is just review where we are. We set out a goal to transform the company from a mine company to a multi-mine growth company. And that transformation continues. We have a plan. We are on target with that plan and will provide detail on that about what we outlined in the release.
Essentially at a minimum, we are looking to triple our gold production and double our gold reserves from our existing projects. This strategy is anchored by a regional focus, as you know, which is centered on LaRonde and that regional focus benefits from operating synergies and tax synergies. And it's a very effective way to go. That will be our anchor. And then we have got a couple of exciting international projects that we will provide you with some details on.
One of our goals and our strategy is to minimize dilution to fund these existing projects, probably mineralized dilution. We have a relatively low number of shares outstanding so we have a tendency not to issue a lot of paper, and that is certainly our plan as we move forward. We want to keep that to a minimum. Another focus of this strategy is to maintain a very low political risk profile. Recently one of our analysts, the analyst -- Research Capital, Barry Allan, did a report ranking various gold companies on their political risk profile and we ranked at the top end of that in terms of having the lowest political risk of any other gold companies.
We are looking at quality projects that will have low production costs, which will be similar to what we are used to having at LaRonde. Our balance sheet, we have got $124 million in cash. We need a conservative balance sheet because we have got aggressive growth plans. Exploration will be a focus of this company. In a sense, we have dramatically, over the last year or so, changed the exploration profile of this company away from the focus on LaRonde. LaRonde had very good exploration results over many, many years, but those exploration results, as you know, were quite a distance from existing infrastructure. By bringing on projects like Suurikuusikko in Finland and our option of Pinnacle Alto, we have introduced a new and exciting element in this company. And that's upside exploration potential and we'll talk about that as we go forward. And always, as a company, we have never sold our gold forward. There is no plans to do so and so we'll give our investors full participation in rising precious metal prices.
Looking at the highlights of the quarter, steady performance at LaRonde and we have moved our growth projects forward. We have strong metal production at LaRonde and those -- that strong metal production and high byproduct prices resulted in very low cash cost of $33 an ounce, which resulted in good strong cash flows. Another big highlight of the quarter was our drilling on Pinos Altos, which continued to return high grade gold intercepts outside of the current resource.
We're also getting very good fitness in conjunction with those high grades. And we have possibly got three separate or shoots developing, all within about a mile on this property. And we'll talk a little bit more about that as we good forward. And our bid for Riddarhyttan was successful in the quarter. We have received tenders including RPs approximate about 97%. There is one final extension takes the bid till November 4, so we should get a little more in terms of shares and then we will immediately begin the process to wrap up the rest of our properties. That puts us in full control over the project, allows us to bring our expertise fully to the project and bring a more determined focus to the product that we believe for Agnico-Eagle.
On the financial results for Q3, our earnings were 2.1 million, lower than we had anticipated. The main reason for that is we had roughly a 6 cent negative mark-to-market non-cash loss on a byproduct hedge. Predominantly that relates to a zinc forward position, totaling about 33 million pounds, which is over the next five quarters. So a little over 6 million pounds a quarter, which is about 15% of our overall exposure., but the accounting rule has changed at the beginning of this year. And what those accounting rules did, is determine that this was not an effective hedge for accounting purposes, so that has resulted in some volatility in our earnings. Last year we had a win on accounting, this year we -- this quarter we have a loss on the accounting, but still a very small position of our overall exposure to base metals.
In terms of the cash flow after working capital changes was 11 million. Our cash position rose slightly to 124 million, so still in a very strong financial position. For the nine months, LaRonde is still a very strong cash generator, generating for the company $58 million, potential for over 80 million, cash flow for the full year that contrast with about 60 million in capital expenditures for the full year, which includes now Goldex, which is under construction and Lapa, where a shaft is currently being sunk.
As we indicated, our cash position is 124 million. In addition to that our liquidity includes a bank loan. That bank loan is currently $100 million facility. We have an agreement from a syndicate of banks for increase in that facility by 50 to 150 million. It's just subject to documentation at this time. We also have other financial flexibility in terms of our ability to raise flow through financing to fund both Lapa and Goldex. And that's a very efficient way to raise additional capital for investment purposes on projects in Canada. We were able to sell that stock at a significant premium, generally over 30%. And it does in a way that doesn't disturb the market.
So we have a lot of financial flexibility. We also have the financial capacity to move deeper in the multi-mine building phase and therefore there is no imminent need to raise new equity. In terms of operating results in Q3, this is a very profitable mine. We processed in mine 7,900 tons a day at $52 ton Canadian. We earned revenue on that ton, each ton of approximately $96 Canadian, so a very solid profit margin. The gross profit in nine-months at this mine was over 75 million US dollars. So the metal diversification within the deposit and the strong commodity prices, they essentially act as a natural hedge against increasing input prices. So we are still at $52 a ton Canadian in the quarter and $50 a ton for the nine months in terms of our operating costs in Canadian dollars at the mine.
And on a cash cost basis, because of a strong metal production in commodity prices, we are $33 an ounce for the third quarter. On the nine months, on that side, we averaged over 8,000 tons a day again with strong metal production. Our overall costs of nine months on a cash basis per ton, $50, which is right on budget. And that gave us the cash cost of $66 an ounce, which is very low by any standard in the industry.
In terms of where we stand relative to our peers on cost, we have a slide in the presentation, which shows total production costs and total cash costs. We also demonstrate our average tonnage per day at LaRonde. And I think what this demonstrates is the consistency of operation. Over the last almost two years, we have averaged 8,000 tons a day. Our cash cost to produce an ounce of gold over that roughly last two year period was less than $100 an ounce. So LaRonde, again, a steady, strong performer, great cost structure at 8,000 tons a day, and that is the strong foundation that we will use to move the company forward and grow and build a multi-mine company.
For the full year forecast, 2005 had a tonnage rate of approximately 8,000 tons day, we are looking for approximately 250 ounces of god, 5 million ounces of silver, 17 million pound of copper and about 170 million pounds of zinc. Our mine site costs, we are projecting about $50, which is still in the range, we set at the beginning of the year and that's in Canadian dollars and our cash cost will be below $100 an ounces. So again, solid metal production for the full year of 2005 with low operating cost and that will drive strong cash flows, which could be in the $80 million range for the full year 2005.
As we move forward and taka bout the projects, we have extensive gold growth pipeline. Each of the projects, the regions have mining camp potential, that's what we have looked for as we carefully selected the opportunities that we will move forward and grow the company. These projects were also selected because they are very good match to our technical skill set that we have developed at LaRonde through all their infrastructure.
They area all very large property position. We extensive data bases in the region. They are all open for expansion. And just going back to one of the earlier points, is that, this company will have more of exploration going forward because of the potential of the new projects that we have acquired either by bid or through option, all projects such Lapa and Goldex, Lapa through discovering and Goldex through reactivating an older project. All of the projects are open for potential. So when we look at the whole picture, good solid growth pipeline, focused on gold, low political risk, so we have branched out very carefully smaller projects with lots of upside.
Looking at Goldex, there is an overhead chart of the how the Goldex site, the original head frame, just beyond that we started the site clearing, which is not apparent in this picture and the background is town of Aldour, so you can see very near infrastructure and more importantly, right near a world class labor force that understands and knows underground mining and a world-class contracting group of companies in the region which helps us to move that regional strategy forward. Looking at Goldex, we are already into the building phase. As you know we announced to go ahead on that at the end of July, we are underground because of the existing access. That is allowing us to accelerate the development prior to the installation of the new shaft. So we are doing level development and ventilation work now which gives an advantage and its essentially shortens up the preproduction period for an underground mine for three years. The beauty of Goldex as we said before is its simplicity both from a world body geometry perspective and from the perspective of using existing infrastructure but also from of metallurgical perspective where about from both 65% of the gold will come from gravity and the remainder will be in the form of a concentrate that will be shipped to LaRonde.
So we are trying to use the operating synergies with LaRonde, which are, these are critical and it allows us to keep our CapEx and OpEx down. We have a trend in the industry as these things are rising in a very high rate. We also have the advantage of having an experienced team already in place at Goldex, and the nucleus of that team is essentially from LaRonde where there is a lot of bench strength and it has been a seamless transition as we've extracted some key people at LaRonde and move from the Goldex. So it's often running very well.
Just some of the parameters of Goldex. Its got $1.6 million ounces of reserves on 22 million tones are still open. Our base case was done at 400 gold an exchange rate of 1.3. That base case gives us a rate of return of 15% after-tax. Even at $300 gold, this project makes money. Our capital cost was $135 million, US. Our Minesite operating costs are estimated to be $17 Canadian. That is against to have a gold value of about $35 Canadian. So there's a solid operating margin on this project. And that's why it can make money even at lower gold prices.
We're looking at start up in the second half of 2008. What I should mention for those of you on the Internet, if you want to look at an animation, click on the download video notation on the slide and you will see an animation of Goldex. We are estimating average annual of a 170,000 ounces at a cash cost of about $200 an ounce. Our CapEx, to build it which will include all of the development, its seems to be fully developed in this phase $85 an ounce. So all in $285 an ounce. We own it 100%. There is no royalties on it. So very low by industry standards in terms of total cost.
Moving to Lapa. Lapa is close to LaRonde seven miles east of LaRonde also benefiting from the synergies at LaRonde because we invision shipping the ore from Lapa to LaRonde. It's got a reserve of 1.2 million ounces combined reserves of about 400,000 ounces its still open. The shaft is now down to 1,600 feet so we're averaging now about 10 feet per day, so we're getting extremely good performance in the shaft. Over the last month or so we cut out a drill station which will allow us to start definition drilling of this deposit in December, so we will provide drilling updates as we going into the New Year, which I think will be important here. And if we decide that we can build a mine here we'll have our feasibility done, and that will give us the indication by the end of 2006.
And we will make a decision to proceed to Phase II that would contemplate about an additional $80 million to put it into production at a rate of about 15,00 tones a day. A 125,000 ounces at a cost of $200 an ounce and start up in the later part of 2008 as well. Similar to Goldex.
LaRonde 2, a very long life gold reserves with good NSR values below the bottom of the existing infrastructure as you know we've spent a lot of time working on the best way to go after this material, so that we can extend the mine life of LaRonde generate a good way to return for our shareholders. We decided that the best approach is to use as much of the existing infrastructures we can. That means that the best option is a winze. We selected winze we've outlined roughly the location. The winze will also include a - that program also includes a decline ramp to get into the ore zone. We're envisioning an operation of about 5,000 to 6000 tonnes a day using the existing income structure. What that allows us to do is give us a much shorter lead time lower progress (ph) because we are using basically proven technology at the deposit.
And because of the gold grades that we're encountering in the deeper part of 20 North LaRonde mineralization, LaRonde 2 has the potential for steady state gold production of over 300,000 ounces per year. Moving on to Pinos Altos, where we have had some very good drill results. What attracted us here in the first place was its location. Northern Mexico was a place we looked at for three or four years and looked at various opportunities, good place to be building mines.
Some of our peer companies have had success there recently, has done a good job building mines. Pinos Altos property is very near infrastructure. It has an existing resources, which was attracted to us now of gold but of silver. The combined gold reserves of 1.2 million ounces in the silver resources over 25 million ounces. But more than that we were intrigued and impressed by the geological potential at this deposit. Our geologist were very high on this project and the ability to find more gold and outline more gold, and that is why we structured it as an option agreement and set the price before getting on the property and putting our drill program to work. As you know its under option with Pinos.
The option executively (ph) is mid February we had an ability to extend that by two months, which we did. We agreed mutually to do that, what that allows us to do is complete our deep drilling. We had technical difficulties getting some of our deep holes in on Santo Niño zone for that two month extension will allow us to get those holes in. What is new is, we are in the process of doing the scoping study here on the back of all of the drilling, which will include a new resource estimate in the New Year. What is very encouraging about this project is the fact that we are identifying mineralization we continue to identify mineralization outside of the existing resource outline.
The latest polls are showing some high grade precious metal values over good thicknesses. There are still six drills and operation of the properties, so we have got a very active drill program going. But what we appear to have here is essentially three separate ore shoots that have been identified at this stage is still early. As we said we are seeing good grades and thicknesses. The distance from one end to the other on the three structures is about a mile, but what the reason drilling has done is given us more information on the outside of the resource area - outside of the Santo Niño zone in both Cerro Colorado, and the overall deliver area. Most importantly on Cerro Colorado 1200 feet below surface in whole '05 - 52 which is on along the two node in the slide presentation. We got a drill result of 0.47 gold and 9 ounces of silver over a true thickness of sickness that's a thickness of 46 feet. And that is -- that area was not in the resource outline. Other drilling suggests that mineralization may exist between Cerro Colorado and Santo Nino.
So, part of the program that's going out until very early -- very early in the year is designed to see whether those two structures are in fact joining out -- joining up. We're also drilling to extend the Santo Nino mineralization at debt. We had some recent drilling that indicates that it's happening, but more holes will be put in over the next couple of months and Oberon de Weber, which is another satellite zone. It's early, but recent drilling indicates that there is the potential for a possible second open pit there. So, there is more news to come here, and it's a project that our geologists are very excited about. In Finland, as we indicated, our bid was successful acquiring the Suurikuusikko property through the acquisition of Riddarhyttan. We are very close. Once the November 4h final big period extension is terminated, we will move quickly to the list the shares of Riddarhytta and roll in the rest of the company. We're expecting to get that done in the first half of 2006. But now, we have full control over the project and we're actively drilling it. There is a longitudinal slide presentation. As you know, there's a geological resource combined of over 3 million ounces. We're in the process of upgrading that and bringing it up to 43-101 standards. We also continue to drill it, so the program has continued during the bid process. And what we like about it is that it hasn't been well drilled. There is about a 15-kilometer strike length, a build of about 4 kilometers. There is still a lot of opening at intersections within that four kilometer area that has not been followed up. So, that's a major part of the program going forward. We do have a feasibility study underway. Our objective is to continue to convert the gold resource to reserve as part of that feasibility work. The feasibility contemplates about a million ton per year treatment plant. We selected the pressure oxidation process, so that's part of our work is a pilot testing of that, which is ongoing right now. We are recalculating our reserves as we set to 43-101 standards. This bankable feasibility is expected in the first quarter of 2006. And it does have the potential to have production in the first half of 2008. So, we'll be providing more news in the next two or three months on that project. But, again, it's one where we got into the situation at an attractive purchase price.
We feel we can build a mine there, but that's also a got an awful lot of exploration potential. And it positions ourselves in what we consider to be a very good part of the world for mining and for exploration. What we wanted to do is provide you now with a timeline and itemized upcoming news for the company just to give you a sense where we are headed with these projects. And the Company -- in December, we will approve our 2006 operating budget. That's the same time when we generally review our dividend. We have paid a dividend for 25 years or so. So our expectation is that that will continue. In January, we will have six drills going at Pinos Altos and five drills going at Suurikuusikko. We expect to have an exploration update on both of those projects in January.
In February, we have our year-end results as well as a project update on Pinos and a purchase decision prior to mid-February. And at that time, we will also have by third week in February a full update on all of our reserve and resources for the projects. In March, we will have completed a third party review of a LaRonde II feasibility. That feasibility will be completed internally here by end of this year, and we'll have one quarter to have a third party review it. In April of '06, we'll have our first quarter results and a Lapa exploration update based on the drilling, which starts in December. And in May, we'll have our Suurikuusikko bankable feasibility study, reviewed also by a third party. So, we'll have the results of that available to the market.
In summarizing, when we look at our story, we feel we are in the very early stages of our growth story. As a result, we feel there is good potential in here to increase our valuation multiple as we move the story forward. This story will be -- a foundation of this story as we move forward will be LaRonde, which will generate solid annual earnings and cash flows.
Our five growth projects are expected to significantly increase our gold production. As we said, we've got a minimum goal of 750,000 ounces from our existing projects. We feel that we can double our reserves, which I think is an important indicator in this market because that would put us effectively at the top of the mid-tier range in terms of reserves and good quality reserves in low political risk regions. And also, we have the fewest number of shares outstanding - among the fewest number of shares outstanding, as we build this. As we move it forward and build our mines, I think what will sustain the story and fuel the growth story is our low operating cost at LaRonde, our strong cash flow and earnings and also the new element we talked about with the exploration focus and exploration news on projects like Pinos Altos and Suurikuusikko.
So, operator, that's our presentation, and we'll be happy to take calls.
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- Source: Agnico-Eagle Mines web site.
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