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Executives

Sean Boyd – President and Chief Executive Officer

Timothy Haldane – Senior Vice President, Latin America

Yvon Sylvestre – Senior Vice President, Operations

Analysts

Stephen Walker – RBC Capital Markets

Steven Butler – Canaccord Genuity

David Haughton – BMO Capital Markets

Joung Park – Morningstar Research

Matthew Van Cleve – John Tumazos Very Independent Research LLC

Barry R. Cooper – CIBC World Markets, Inc.

Greg Barnes – TD Securities

Jeff Wright – Global Hunter Securities LLC

Don MacLean – Paradigm Capital, Inc.

Nazima Walji – CBC Radio

Anita Soni – Credit Suisse

Agnico-Eagle Mines Limited (AEM) Q2 2012 Earnings Call July 26, 2012 11:00 AM ET

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Agnico-Eagle Mines Limited Second Quarter 2012 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. (Operator Instructions) I would like to remind everyone that this conference call is being recorded today, July 26, 2012 at 11:00 a.m. Eastern Time.

I will now turn the conference over to Mr. Sean Boyd, President and CEO. Please go ahead, sir.

Sean Boyd

Thank you, operator, and good morning everyone. Thanks for tuning into our second quarter 2012 conference call. Just like to remind everybody that this presentation and call does include forward looking statements including estimates and forecasts. So please be forewarned, and you’re welcome to read our disclosure and disclaimers in the presentation, which is posted on our website.

But as we look at our second quarter, we continue to build on the momentum that our operations established in the first quarter to the point where we decided that it made sense to increase our forecasted production guidance above the upper end of the previous range, and now at 975,000 ounces.

So our performance in the first half of 2012 sets us up for a solid second half to 2012. That is not a surprise to us, as we came through last year, we did have some challenges, but we did remind our shareholders and the market that we did possess a several world-class quality assets that we were going to continue to move forward, to optimize and to improve on their operations, and that’s what’s occurred in the first half of this year. If we look at our business, our business actually has a lot less risk than it had let’s say a year ago.

We have less operating risk, we have much better predictability at these mines as we’ve gone through a stage of mine building and commissioning and start-up. As a result, we can now focus efforts on efficiencies and optimization.

There is less technical risk in our business now as we’ve gone through the major mine building phase of building five mines over a short period of time. And the growth that we expect to achieve over the next few years will come from those newly built mines that have more predictability and more stability.

We’re now moving in because of the fact that these mines are more mature. We’re now moving into a significant exploration phase at these world-class assets. And we can see some of the early results of that emphasis now on exploration where we’ve had good results across the board. We put out a press release in June, updating the market on several projects, and we continued that update in this press release with an update on the Meliadine project where we continue to extend several zones, and we made a new discovery in the last few months at Normeg.

One of the hallmarks of our company over many years is that, our approach is to maintain a low political risk profile. So we can still provide moderate, low-risk growth without having to increase our political risk profile. It works for us, there’s no desire to change and we actually think from a strategic point of view that political risk is going to become a much more important consideration when looking at gold equity investments in the future in arising gold price environment.

When you put it altogether, essentially what we’ve got is a business that’s generating strong cash flow that allows us to fund an attractive dividend with the potential to increase it, and allows us to continue to invest in exploration and capital investment programs to expand and build on these world-class assets.

Our operating highlights in the quarter. As we said, we saw an exceptional improvement from year-over-year in terms of output at these mines. And that was largely driven by record performances coming out of Mexico. We saw over 63,000 ounces produced in the quarter at cash costs in the mid $300 range. We saw record production driven off of record throughput. At Meadowbank, they produced almost 100,000 ounces in the quarter, and they average 9900 tons a day; that drove solid cash flow and solid earnings.

In the first half of the year, we had record six-month cash flow of almost $400 million, which I think is really what we’ve been after as we went through this mine building phase as to get that cash on cash return, and reinvest a portion of that in the business and return a portion of that back to the shareholders.

At Goldex, we’ll get into a little bit more detail. But the simple word on Goldex is the GE Z zone. Production from there remains suspended indefinitely. But we did announce a new development plan on satellite zones M and E at Goldex. And we expect first production from those satellite zones in 2014. And as we said at the start, based on the solid start to the first half, we’re comfortable increasing our production guidance for the full year now to 975,000 ounces, which we would characterize as solidly achievable.

Looking a little bit more detail at some of the operating retails. We saw a swing in cash cost at LaRonde. The bulk of that increase in quarter-over-quarter cash cost was really driven by reduced byproduct production, and reduced byproduct pricing. We did have some increases on the cost per ton side, but the major difference in the cost per ounce came from byproducts. We’re still in a challenging environment in terms of the transition to the lower mine; I’ll talk about that in an upcoming slide.

But again, we had strong performance coming out of the other mines generating strong cash flow. In fact, if you look at it in balance, our balance taking 2011 first half production without Goldex, taking to five mines year-on-year comparison, our production from the five mines is up 26% from a year earlier. So we can see that, the five mines are performing extremely well.

On the financial results side, I would simply point to the operating cash flow in the quarter almost $200 million for the year. For the first half of the year, a record of almost $400 million, and that was driven by mine operating profit year-to-date of almost $0.5 billion from the five mines. And that compares to $434 million from the first half of 2011, so up significantly. And you can see that it’s balanced among five mines with the key drivers being Meadowbank at 24% of the mine operating profit, and Pinos Altos almost a third of the mine operating profit.

In terms of financial position, we continued to strengthen our financial position, so I would characterize the financial risk as decreasing, as we run a net free cash flow business going forward. We actually increased our cash position by $90 million in the quarter to $289 million. We did a private placement financing, which closed on Tuesday of this week, $200 million private placement debt, 11 year average maturity with an average blended interest rate of 4.95%.

So a good piece of financing in a difficult market, which I think is a testament to our team and the quality of our business, and we use the proceeds of that private placement to reduce our drawing under our bank credit facility. So a strong financial position going forward, good cash flow, good liquidity and good capacity under almost fully now undrawn bank facility of $1.2 billion.

On our capital expenditure slide, we did make reference in our presentation to a ballpark estimate of CapEx going forward for the next few years of $500 million to $600 million. We should say that, that’s an estimate, it’s not committed capital. In fact, we still need to complete a feasibility or update feasibility studies or complete feasibility studies on La India, the Kittila expansion, Meliadine.

So these still would have to go to the board for approval, but what we wanted to do is just put some estimates out there to demonstrate that we can fund the growth that we plan to come from our internal opportunities. We’ll do that and maintain an active exploration program, and maintain the dividend, and show the ability that we could possibly increase that dividend if it’s warranted.

So again, moderate low risk growth in production funded from the cash flow generated from our existing business.

At LaRonde, we talked about a challenging transition to the lower mine. The mine faces heat, congestion in the lower areas. We have to continue to monitor seismicity. Our tonnage from the lower mine was down about 5% than what we expected to happen. Our cost per ton was about 7% higher than we expected at LaRonde. Despite that, we’re still on track to achieve our goal production guidance at the mine.

When we look at the mine plan last year, this was a mine plan that had the most risk of any of our operations, and we did provide for that increased risk due to the challenge of moving from the upper mine to the lower mine in our guidance.

Lapa, steady performance, roughly 25 plus thousand ounces a quarter, cash cost a little over $600 an ounce. Slightly better than what we were budgeting, our unit cost actually improved a bit from the previous quarter. So good steady performance, and the emphasis is now is on extending the mine life. We approved on extended exploration program underground including some drifting. And we’re hopeful that we can extend the mine life into 2016 based on what we know now, we’re going to continue to explore that property with the (inaudible) extending it even further.

At Kittila, we did have a solid quarter. We had anticipated going into the quarter. We had the planning for a 40-day maintenance shutdown in the autoclave. When we went in, the decision was made that we would do some minor repairs. 18 days, we were down, we would expect to still be down another 20 days or so in the second half of the year, which again is within our plan where we had budgeted to be down about 44 days for maintenance in the autoclave for the full year in 2012.

I think the key thing about Kittila is recoveries remain very good, the grade is good. As a result, the mine operating profit has jumped significantly in the first half of the year. We generated $80 million of mine operating profit, that’s up about 70% from the first half of 2011. So another mine demonstrating better predictability, more stable consistent operations, and now to the point where we’re looking at the expansion by 25%, and that study should be completed before the end of this year. And a lot of that is driven-off of some good exploration results that we continue to get as we move to the north in the deposit under the Rimpi area.

So as we look out to the future at Kittila, we could see something that may parallel what we’ve seen at LaRonde over the last 25 years as a large world-class deposit that undergoes several abstentious over time, that are funded from cash flow generated at the mine, that’s the way we’re looking at it, but there’s still more work to do not only from an exploration point, but also from an engineering point of view, and an economic study point of view to decide exactly how that’s going to unfold over the next several years.

In Mexico, it’s our largest cash flow generator. Again, another very good performance on tonnage, on grade, on costs. The first half mine operating profit at the mine, $149 million, that’s up 49% from where it was in the first half of 2011. As we look forward in that operation, they are working on the La India project, which was acquired last November from Grade Resources.

We’ll have more of a detailed update on the La India project before the end of this quarter, is our expectation and we will able to provide a little bit more clarity on the timeline for La India, and that certainly has the potential to increase the size of our business in Mexico; and build on the successes that we’ve had on Pinos Altos. And this is a perfect example of I think what shareholders were looking for in the Gold business, and certainly what we are looking from in our business is, we paid $80 million for this asset back in 2006.

We spent about $400 million in building the Pinos Altos infrastructure, including Creston Mascota, and we generated in six months this year almost $150 million. So we may have annualized operating profit coming out of this operation of $300 million, so you can see the payback, it’s quite quick. And in fact on Creston Mascota, the satellite don’t pay back, it’s been about a year. So those are the types things we’ll be looking for particularly from that part of our business as go forward.

Meadowbank, we did struggle last year to the point where we had to totally re-look at this and revisit it, and come up with a mind plan that was lower risk and that was focused on delivering cash flows, and was focused on delivering predictability. Essentially what the team was trying to do is, create conditions that were achievable in a difficult environment and a lot of that had to do with minimizing the requirements to move ways, which resulted in us taking margin allowances out of the mine plan and shorten the mine life. We also put a more conservative factor in for dilution and what that’s done is show that we have a mine plan and the first half has shown that we have a mine plan that’s very achievable and that does generate extremely strong cash flows.

And I think the key point to know from Meadowbank is not only is it showing some consistency in its operations, but it has demonstrated its ability to mine and process high volumes. Last year with the addition of the second crushing unit, we demonstrated our ability to hand on crush high volumes, now the new mine plan has shown a stability to provide those tons at the predictable grade to the plant and that’s resulted in some good operating results at the mine.

Now the focus, because we’ve got a new mine plan, we’ve got more predictability is now focused on cost reduction, optimization, efficiencies and those initiatives I think are important because they’ll allow us to start looking at opportunities to extend the mine life and our team will be focused on that as we move forward, as well we continue to drill to the south of the pits and we are not finished there at least from the exploration front there’s certainly are possibilities as we move to the south to maybe add some additional value there.

At Meliadine, we have extended the drill program. In fact, the program was so successful. We basically completed the planned footage by the end of July. And there is still two good months of drilling left. We decided to extend that program and add another $10 million to the drill program. We funded that from cash, but also from reducing our grassroots program by $5 million elsewhere. So it’s a net increase in our budget of $5 million, but directed at a quality asset that continues to grow.

We’ve made new discoveries there. We’ve extended existing zones. And we’re really trying to understand exactly what we have there, what we own, which will drive what we ultimately build here. And we’re really less concerned about the exact start date and more concerned on getting the right mix between underground and open pit as we start that deposit, because of its long life and we expect it to be around for many, many years.

On Goldex, we should say at the start that the GEZ mining of that zone remains suspended, absolutely no marking from the GEZ zone as we move forward. We’ve profiled the stope. We’ve defined the stope. There is no significant void in the stope. The stope is full, but what we’ve done is we went through the last six to eight months is continue to do an assessment an exploration on satellite zones and we’ve decided based on doing an extensive review and risk assessment of satellite zones to move forward and build a new smaller but higher cost mine that still generates very good cash flow and has a good investment return that is above our hurdle rate.

It allows us to leverage off of our skill set. It allows us to maintain the exploration upside and the potential to in fact develop other satellite zones on the deposit. So we’re moving forward on something totally new at Goldex being the M&E zones, and we’ll continue to assess the other satellite zones, which we feel still have a potential going forward, but again anything related to the GEZ zone remain suspended.

I’ll just quickly touch on Meliadine, an exploration before we closed. There is a plan view in the package, which shows the various zones and the locations of the various zones. It’s an extensive property. Its 80 kilometers of coverage of a major belt, we’ve only explored a fraction of that. We are starting in this extra two months, not only to drill some of these recent extensions, but to step out a little bit and follow-up on some targets that have been previously identified. So again, this is another project that has good potential to grow through drilling like Kittila, like our assets in Mexico. And this is just demonstrating that part of the next value creating space at Agnico will involve our exploration team and solid exploration budget.

So I'd like to just close in summary and just state that there's really no change in our strategy, there is not change in our focus. Despite the challenges of last year, we still have already solid business that’s delivering this year. We’re still going to focus on increasing our shareholders exposure on a per share basis to gold production reserves and cash flows. We still have meaningful growth as we move forward. It’s moderate from the rates that we’ve been used to, but its lower risk from a tactical and operating standpoint. We can fund that growth internally.

Our guidance as we said, even though we’ve increased it above the upper-end of the previous range is still solidly achievable both on the production and cost side. Our exploration program we feel will continue to add value through increases in the resource and reserve. And again, the entire philosophy is to run a good solid business that generates net free cash flows without increasing the political risk exposure.

So, operator, I’d be happy to begin the question-and-answer session.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. (Operator Instructions) And our first question comes from the line of Stephen Walker from RBC Capital Markets. Please go ahead.

Stephen Walker – RBC Capital Markets

Thank you, operator, and good morning, Sean. Just a couple of questions, first of all, in Mexico post the election, I think the expectation of the mining industry is for an increase in – excuse me, the application of a new royalty structure given that there is no royalty structure currently in place and then potential for adjustment of the tax rates and so forth. Could you comment, Sean, on what your expectations would be going forward certainly later this year or early next year?

Sean Boyd

Sure, we’ll have, Tim, who runs our business there to give you an update on our thoughts.

Timothy Haldane

Hi. So we get that question a lot and we hear the speculation a lot. And basically, we take care of our business and things that we can control and we recognize that Mexico benefits greatly from the mining sector. It’s one of the most important sectors in our economy. And I think that government also recognizes that they benefit greatly from that sector. So no doubt that discussion goes on. We participate with the Chamber of Mines in Mexico as the industry group that speaks with the government from time to time. I would not be surprised to see something happen, but we don’t know what or when or if something what happen.

Stephen Walker – RBC Capital Markets

Okay. Thank you for that. And maybe, Sean, just at LaRonde, the per ton cost of CAD $97 as you had previously indicated in the first quarter were going to go up from the CAD $84 or the year-over-year CAD $84 that are obviously up. What – do you get a sense that those costs could improve on a per ton basis or CAD $97 or CAD $95 to CAD $100 is a pretty good range going forward, particularly as you incorporate in more of the LaRonde deep gold, higher grade gold material?

Sean Boyd

I’ll let Yvon Sylvestre to answer that Steve.

Yvon Sylvestre

I think we should forecast the CAD $90 for range for going forward for the next two months until we will get through our budget exercise.

Stephen Walker – RBC Capital Markets

I’m sorry. What would you think is a reasonable mining?

Yvon Sylvestre

CAD $90.

Stephen Walker – RBC Capital Markets

And then into 2013, sort of next year is that – is that likely to be sustainable at those levels?

Yvon Sylvestre

We will provide guidance at that time.

Sean Boyd

We will go ahead and go through the budget process, Steve, and so we’ll sort of reserve a number until we sort of do that exercise. Essentially, where we are now, we’re producing at the lower mine at around 4,200 tons a day. And so we need to ramp that up steadily over the next two to three years. We’re slightly below our targets in terms of tonnage coming from the lower mines. So that will really dictated by the state of our development as we move through the summer and as we move into 2013, 2014, conditions do improve there as major ventilation works get completed over the next few quarters. We’re just in a difficult period right now. We’re still able to meet our gold production targets. The grade has held up. It gets a little bit more challenging to meet the tonnage targets. We’re off a few percentage points as we indicated.

Stephen Walker – RBC Capital Markets

Thank you very much for that, Sean. Thank you, Tim, and thank you, Yvon.

Operator

Your next question comes from the line of Steve Butler from Canaccord Genuity. Please go ahead.

Steven Butler – Canaccord Genuity

Sean, just a follow-up on Steve’s question. I suppose that the long term throughput assumption for LaRonde is in the range of 6,000 tons per day is sustainable?

Sean Boyd

Yeah, 6,000 tons from the lower mine because as you recall as we’ve been working over the last five years on building the infrastructure and opening up the lower mine. We had plan to have smaller mining blocks and that was to – that was going to result in about 6,000 tons a day versus the 7,000 tons a day from the upper mine.

Steven Butler – Canaccord Genuity

Okay.

Sean Boyd

And we still – there is a possibility depending on conditions that we could do better than 6,000, but we’ll reserve judgments until we get down there and open it up and get some experience.

Steven Butler – Canaccord Genuity

And Sean the grade was a nice surprise at least for me in Meadowbank in Q2. Do you have any comments on grade profile second half, is it going to be closer to 3 grams or closer to 3.5 grams? And throughput, last two quarters, it’s been in the 900 tons per day level. Do you have any view of throughput second half, in order words, what seems to be implicit is that you've assumed a slight reduction in Meadowbank’s cost – Meadowbank production pro forma second half, but of course, we’re working off one consolidated number, but are you – what’s implicit in your guidance I suppose on the Meadowbank’s second half for throughput, specifically?

Sean Boyd

I will just start. I think from a throughput expectation, there is the possibility to do what we’ve been doing in the first half from a throughput perspective. The toughest quarter is generally the first quarter. Grades are a little bit more difficult. But we’ve been saying over the last few months that we do know as we move to the south that we do have pockets within the pits that are higher grade. And we were always excited about the potential that once we’re able to maintain a rate of production above 9,000 tons a day from a mining perspective and then consistently we will be able to process that that we would have some good quarters when those parts of the pits came into the mine plan. So we expect Meadowbank to have a strong year. We’re measured in terms of our guidance and we will just sort of stick to 975 as being solidly achievable and we will leave it at that.

Steven Butler – Canaccord Genuity

Okay. Leave it for me to fudge around mine by mine. Okay, thanks, Sean.

Operator

Your next question comes from the line of David Haughton from BMO Capital Markets. Please go ahead.

David Haughton – BMO Capital Markets

Yes, good morning, Sean, and thanks for hosting the call. Just for clarification on the CapEx of 500 to 600, that is inclusive of the Kittila expansion, La India and Meliadine together with Goldex, so this is just an indication as to where you're heading?

Sean Boyd

Exactly. That’s just a sort of rough estimate to just sort of give some definition around what we could expect over the next few years. But again, not backed up by a completed feasibility studies nor gone to the Board at all.

David Haughton – BMO Capital Markets

All right. And well then a little bit more about what the expectations are then on La India and Meliadine as far as CapEx timing and scope and all that kind of stuff?

Sean Boyd

So, for pieces of that, we will get some clarity on La India this year on that number and we don’t expect that number to be from what we have been talking about since we bought that. We bought it -- the expectations of the junior was about $100 million and our expectations were in the $150 million range. So, I think the $150 million range for that one is comfortable. And on the Kittila expansion, we said sub-$100 million to increase throughput by 25% and I think that’s a good number. So, that’s a small portion of the bracket that we’ve created. The bigger portions would be Meliadine and we're still a ways away from a final feasibility study on that project and that's one we are not really 100% sure on the right mix rate now between underground and open pit, because deposit continues to evolve from an exploration standpoint and you look at some of the recent results around a structure Normeg close to surface, extremely good grades, just developing with some extent as we go deeper. Those are the type of things we need to know more about before we put the pin in an infrastructure and construction program.

David Haughton – BMO Capital Markets

Yeah, given this evolving nature, would you see that that work could be ready next year?

Sean Boyd

Well, we’re saying end of 2013 for a feasibility study, a construction decision some time in ‘14 for a start at some point in 2017. But as we said at the start of the call, unless fuss the Board exactly what quarter it starts, I want to make sure, we get the right mix of underground open pit and my expectation is, that would see subsequent expansions over time based on the type of exploration results we’re getting now and the extent of the land package and the potential of land package.

David Haughton – BMO Capital Markets

Also and that number would be a sustaining CapEx number, what’s your sense of that scale of the sustaining issue?

Sean Boyd

In that sort of $200 million range.

David Haughton – BMO Capital Markets

All right. Now moving over to Goldex and decision to pursue M and E Zones away from the area of influence of the GEZ issues, 1.5 grams seems pretty skinny, and are you confident of those kind of figures given that you are looking at a different kind of mining method what you have or had used the GEZ?

Sean Boyd

Yeah, it’s been well drilled and maybe I’ll let the technical guys just provide a little bit more color on that.

David Haughton – BMO Capital Markets

Thank you.

Sean Boyd

We’re very comfortable with the block model that the – and the drilling has been done to define the blocks plus the mining method will satisfy dilution and mining recovery which are critical in getting that grid after the flat at the design rate. So we are comfortable within them.

David Haughton – BMO Capital Markets

And you’re comfortable also with the mining costs?

Sean Boyd

Yes, we are. Yes.

David Haughton – BMO Capital Markets

All right. And talking about LaRonde transition to that 6,000 tons a day, what kind of timeline would you expect to go from your 7,000 or 6,500 tons a day down to the 6000 if that’s where it is to be mined out?

Sean Boyd

Well, the full transition to the lower mine will be late 2014 into 2015 when we’re drawing the 100% of the tonnage likely from the lower mine. So it’s an transition over the next 2.5 years, but I think we can see the grade profile, it was 1.8 last year. We’re comfortably over two this year. We expect that to increase next year as we mine that deposit. So I think that’s the key, is the grade and the tonnage although it is challenging, it’s not far off our expectations. And we’re still meeting our sort of gold production guidance targets.

David Haughton – BMO Capital Markets

Okay. Thank you very much for hosting the call, Sean.

Sean Boyd

Thank you.

Operator

Your next question comes from Joung Park from Morningstar. Please go ahead.

Joung Park – Morningstar Research

Hey guys, thanks for taking my call and congrats on good second quarter.

Sean Boyd

Thank you.

Joung Park – Morningstar Research

Just wanted to know what was the main drivers behind the sequential decrease in the mine site costs at Meadowbank? Is that mostly from lower fuel and oil costs?

Sean Boyd

No, the main driver was the ounce output. So they maintained a strong volume of ores through the plant at better grades. So simply the fact that the dominator was bigger and that helped to drive the unit cost, the cash cost to produce an ounce of gold down. The cost per ton performance remained steady, so they’ve been able to maintain some of those costs on a cost per ton basis, but to get it from 1000 which were – that’s where it was roughly in Q1 down to 800, it was really a function of producing more ounces.

Joung Park – Morningstar Research

I guess, I was referring more to the cost per ton rather than per ounce.

Sean Boyd

The cost per ton wasn’t a huge change quarter-on-quarter. We expect to see that in that sort of $90 a ton range, so we are pretty close to our expectation. I think one of the things that we indicated earlier on the call, which I think is important going forward is that the mine has gotten to the point where its running consistently with no significant issues and now the efforts are focused on efficiencies and cost reductions. They’ve got about a 10 to 12 point action plan to improve the cost performance there which they are working on and we think that is important because it also potentially has implications for being able to extend the mine life if we can make some improvements on the cost structure.

But, you indicated one point energy and oil that’s certainly makes a big difference up there. And if we continue to see weakness in the oil prices that would benefit that property.

Joung Park – Morningstar Research

Okay. Thanks for that. And then at Goldex, it’s great that you guys can access the M and E zones. Just wondering are you guys doing any work on accessing the D zone and if you guys want to produce some more from there, what kind of major works which you have to do?

Sean Boyd

Well, the D zone is, has been also part of the exploration program like the M and the E zone and has been over the last little while. That’s one where haven’t come to any conclusion Jeff. We still need to do more drilling on that. And we won’t be able to update or provide any definitive update on the D zone or the potential of the D zone until we complete the exploration work and finish the economic analysis.

Joung Park – Morningstar Research

Okay, understood. And my final question is on, you guys won’t be spending as much on CapEx with some of peers just based on your guidance. And you guys are probably generating meaningful free cash flow as long as gold prices remain at current levels. So what are you planning to do with the cash that’s going to be building up on the balance sheet?

Sean Boyd

Well, we have a 30-year track record of paying a dividend, so that’s sort of a core part of our strategy. But we do feel we have very attractive solid investment opportunities within our existing portfolio of assets. Several of them are new. We haven’t fully defined them from an exploration standpoint. We expect several of them will continue to grow. So we will be looking to reinvest back in our business and we’ll also be looking to improve our financial flexibility and strength as we go forward like we have done over the last two quarters.

Joung Park – Morningstar Research

Okay. Thanks so much for taking the questions.

Operator

Your next question comes from the line of Matthew Van Cleve from John Tumazos Very Independent Research LLC. Please go ahead.

Matthew Van Cleve – John Tumazos Very Independent Research LLC

Thanks very much for taking my call. My question is regarding the June 26 exploration release which was out for Meliadine and Kittila in Mexico. But not quantified in terms of ounces. Are you now more confident that year-end 2012 reserves will be an increase over 2011 by about 2 or 4 million ounces?

Sean Boyd

No, we’re not going to be able to give estimates of what we think at this point will be able to increase the reserves by that calculation is done annually. We announced the results of that work, generally, in February. So that will be when we put out the updated numbers. I think all we can take from the exploration update that came out in June and the smaller update, which came out in this release is that we continue to see a potential to grow, some of our existing deposits. We continue to actively drill them while we are in the mine building phase, we were more focused on that and now we’ve switch gears a bit and now we are sort of reemphasizing exploration at these wide open large deposits. So we expect them to continue to grow but its way too early in the year to be able to quantify what the growth could be.

Matthew Van Cleve – John Tumazos Very Independent Research LLC

Okay. Thank you very much for taking my question.

Operator

Your next question comes from the line of Barry Cooper from CIBC. Please go ahead.

Barry R. Cooper – CIBC World Markets, Inc.

Yes, good day, everyone. Sean just wondering you gave an indication of 15% hurdle rate, obviously that’s applicable to Goldex there, but I’m assuming that’s a corporate wide number. Just how do you look at the acquisition costs when determining that 15% hurdle rate?

Sean Boyd

Well, it’s baked into an analysis of where we think the reserve and resource can grow to. So we do a base case model and then we do an upside case model based on our estimates of reserve and resource growth. And in all instances except for Meadowbank, we have achieved 15% hurdle rate including the acquisition costs as these deposits have grown. But Meadowbank was the exception, we really didn’t find any other meaningful ounces there, as a result we had to write-off.

Barry R. Cooper – CIBC World Markets, Inc.

Right. Okay. Then so looking at Meliadine for an example because that’s one of the larger, more recent ones that you’ve done with the $600 million acquisition price plus, I guess its been a couple 100 million since you bought it and there’s probably another better part of the 1 billion between now and when it actually gets billed. So you would anticipate 15% rate of return on an after-tax basis on that 1.5 billion.

Sean Boyd

That is the target and I think that’s why our comments about timing being less important than what it is we build and how we build it and how we spread capital out over time and look at it from a phased expansion perspective. And some of the recent drilling has shown some attractive near surface mineralization, which was not contemplated at all in any sort of rough plan or draft or initial feasibility.

So things are changing quite quickly and for us it made sense to lay out a very large drill program this year, which we did of 115,000 meters, which was on the back of 105,000 meters last year. About 115,000 meters will be extended another two months with that supplemental $10 million budget we would expect a similar type of program next year.

So its changing, but I think what’s important is we continue to get higher grade intercepts. And we continue to get some near surface mineralization and have the potential to work into a mine plan in the early part of the mine life so we need to understand those.

Barry R. Cooper – CIBC World Markets, Inc.

Right. I thought I need to understand them too because when I looked at the drilling there, it almost seems like all of the holes are hitting the zone almost perfectly perpendicular based on the true width estimates versus the core length, which is not unusual or is not that common particularly, when you get drilling at depth. But I also see that some of them you’ve got an estimated true width that exceeds the actual core length, which by all classes that I ever went to is impossible. So I’m just wondering, how are these estimated through its being judged, are they being judged off of core angles or something else?

Sean Boyd

Well, just the exploration guys are just looking at that. I am not sure.

Barry R. Cooper – CIBC World Markets, Inc.

If you look at the S Zone and you look at the first two exploration hole, it goes for instance from 80 meter to 83.7 meters which is 3.7 meters, but the estimated true width is 4.2?

Sean Boyd

Yeah. Our exploration guys are going to answer that.

Timothy Haldane

Maybe there is a quick list over here and a calculation but basically what we see over there the deposit is fairly predicable. They are paying at about 65 degree to the north and then we were drilling it usually with control, and we have a very good control on drilled aviation and usually we get into them fairly perpendicular. And, but on some of them like on S Zone, I think there maybe one glacial over there, but basically it’s pretty much true width if it’s not totaled through it. But it cannot exceed. You are right. It’s a mistake in the press release.

Barry R. Cooper – CIBC World Markets, Inc.

Yeah, okay. You just may check that because I don’t know whether the other ones are all perhaps slightly off there as well, but that maybe something to check. Okay. That’s all my questions. Thanks.

Operator

Your next question comes from the line of Greg Barnes from TD Securities. Please go ahead.

Greg Barnes – TD Securities

Yes, thank you. Sean, at LaRonde, you’ve mentioned the challenging mining conditions currently, seismicity what kind of seismicity issues are you monitoring phases?

Sean Boyd

Yes. It was hard to catch that but I think you made reference Greg to mining conditions and seismicity at depth?

Greg Barnes – TD Securities

At LaRonde. Yeah.

Sean Boyd

LaRonde. I’ll let Yvon handle that.

Yvon Sylvestre

I think the challenges so far is been getting through the ramp up in the current pyramid. And it’s very quick progression production wise and the pyramid that we’re mining now. We will be opening a new pyramid – we’re actually drilling in there and scopes in the new pyramid as we speak now and that pyramid will come in to play in the third quarter. So that will add more flexibility. I think development wise there is been some areas where productivity is been impacted by heat not necessarily by – some of the areas and the ventilation system that we need to put into place. So these systems are being put into place most likely in the third quarter. And then finally we’ll have a final cooling plant next year. So as we get the final cooling plant in the next year, I think the flexibility will be far greater underground in getting to the deepwater.

Greg Barnes – TD Securities

And what about the seismicity? What issues have you been facing?

Sean Boyd

We’re monitoring the events like we’ve monitored from the past. There is no real issues at this stage and we’re mining at depth and we’re just being cautious about it and we’re just highlighting that as a risk as part of the mining scheme.

Greg Barnes – TD Securities

Thank you. And just switching to Goldex, I think you’ve completed the review of the Crown Pillar and what happened around the GEZ zone. Sean, what are the conclusions, did it moved or not moved?

Sean Boyd

The conclusion is that we should not go back and mine there. The conclusion is it’s full. The conclusion is we made the right decision and the right time. We don’t want to sort of get into a characterization of what happened. There are several litigation issues out there for us. So I think we came up with the right process, with a full assessment using some world experts and they concluded that we should continue to suspend operations in the GEZ zone, and one of the reasons, one of the examples of why that makes sense is since that has happened we basically had essentially no significant subsidence. So I think that tells us it’s full, its stable and we should leave it alone.

Greg Barnes – TD Securities

When you say it’s full Sean does that mean the rock have fallen into the void in the GEZ zone?

Sean Boyd

Well, we put a camera in and the camera shows that its full of broken muck and maybe I’ll just turn it over to the technical group and they can sort of characterize, what’s in there, but our sense is, is that just the ore and that we didn’t have any significant caving because we didn’t have a significant void there. So, no the operator and guys are signaling they don’t have anything to add.

Greg Barnes – TD Securities

Okay, fine. Thank you.

Sean Boyd

Thanks.

Operator

Your next question comes from the line of (inaudible). Please go ahead.

Unidentified Analyst

Actually my question was on seismicity and it’s been answered. Thank you, gentlemen.

Sean Boyd

Thank you.

Operator

Your next question comes from the line of Anita Soni from Credit Suisse. Please go ahead. Ms. Soni, your line is live. You can go ahead with your question. Your next question will come from the line of Jeff Wright. Please go ahead.

Jeff Wright – Global Hunter Securities LLC

Thanks, Sean for taking the question. I had two quick ones. One on Meadowbank, could you kind of go over the cost assumptions there and you think the $800 an ounce range is sustainable or possibly able to go lower with lower fuel costs in the second half of the year.

Sean Boyd

We’re really not sort of making a call on sort of quarter-by-quarter basis from a cost perspective by mine. We’re really focused there on just maintaining the tonnage level, at above 9,000 tons a day. Our expectations on grade continue to be good. Based on our experience in the first half, so it has the potential to translate into a strong second half, which would mean lower unit costs. But we’re not going to make any sort of calls or predictions on exactly where those numbers will be.

Jeff Wright – Global Hunter Securities LLC

Okay. And second question on Meliadine looking at development there. I know you’re permitting, can you give us a sense of what stage of the permitting we’re in and how long you think the permits timeline will take for that project.

Sean Boyd

The expectations are the roads been permitted. The permitting process will take likely in the 2014 and its one that’s consistent with the process that we went through at Meadowbank. So that’s our expectation, but that drives the timeline. We don’t control that 100%, it’s controlled by the regulatory authorities, but it’s the same people and body’s that we dealt with from Meadowbank. So we have good open dialogs. They understand what we’re doing. There is a lot of clarity there. So we don’t anticipate any major issues there.

Jeff Wright – Global Hunter Securities LLC

Okay. Fantastic. Then lastly, you mentioned there is additional 20 days of planned maintenance in Finland. Do you think that that could be shortened or elongated or do you think – what’s your thoughts on that 20 days, is that equally spaced out in both quarters.

Sean Boyd

Yeah, we’re sort of looking at 10 in the third quarter and 10 days in the fourth quarter and what we see in the third quarter when we go in and do the maintenance will determine what will ultimately happen in the fourth quarter.

Jeff Wright – Global Hunter Securities LLC

Okay. Thank you very much.

Sean Boyd

Thank you.

Operator

Your next question comes from the line of Don MacLean from Paradigm Capital. Please go ahead.

Don MacLean – Paradigm Capital, Inc.

Guys thank you and a good quarter. Just a couple of things on the Goldex. Do you have any of sense this D Zone mining method that might be applicable there?

Sean Boyd

Now, I’ll just let the technical guys answer that, Don.

Timothy Haldane

The mining method that will be applied to, it will be very similar to what we’re implementing now with this new developments and the M and E zone. So there will be a long haul stopping with base backed up that would most likely be the approach that we will take.

Don MacLean – Paradigm Capital, Inc.

Okay, great. And notionally similar kind of mining costs. Anything particularly different that stands out?

Timothy Haldane

Similar range I guess you can could that. And I think the issue that still needs to be resolved as we better understand the resources, the access to this zone and how important the zone could be with (inaudible).

Don MacLean – Paradigm Capital, Inc.

Great. And, Sean, can you just update us on how much was spent to stabilize things at Goldex?

Sean Boyd

Well, we did make a provision late last year, when we decided to spend operations of about $45 million. And that was for remediation and assessment and monitoring work, so we would have spent pretty much all of that.

Don MacLean – Paradigm Capital, Inc.

Great. On to Meadowbank, any change in the views about the dilution there and that was one of the things that was floating variable for sometime and then there was an assumption made, how do we look now?

Sean Boyd

I don’t think there is any changes in the way we approach it, as we better understand it. I think the geology is probably less challenging going forward. So, I guess, the lessons learned in the past two years will help us in maintaining better control and dilution and then better control on mining recovery in a bit, so. But I think the last year’s efforts were a lot of it were dealing with very flat zone and very geologically challenging basis to mine. So, I think, we’re going to see a little less than that as we go forward.

Don MacLean – Paradigm Capital, Inc.

So an improvement in the dilution?

Sean Boyd

Yeah, and part of the action plan on great control has been – actually getting the results those actually getting and through all the technical aspect that had significant improvements in size.

Don MacLean – Paradigm Capital, Inc.

Do you kind of quantify that, how that went in this, most recent quarter compared to say your budget?

Sean Boyd

I don’t have that reconciliation with me at this stage, so we could provide that if you needed.

Don MacLean – Paradigm Capital, Inc.

Okay. Well, thanks for the color. That helps in itself. And then lastly, maybe on the Meliadine, a bit more color on, where are you going to spend the extra $2 million, Sean?

Sean Boyd

Yeah, it’s 10 million, I’ll let the expert…

Don MacLean – Paradigm Capital, Inc.

Sorry, 10.

Sean Boyd

To give you the sense of where the focus is?

Timothy Haldane

Well, if you look at the map – Don, if you look at the map on the – within the press release, we will be mostly following up on the Normeg discovery, which is in the western extension of Wesmeg where we hit most of these high-grade near surface into separately and also on the mostly in the F Zone and pump deposit where also we got good high grade and with over good width near surface. So to focus and to extend the resources on these three deposits.

Don MacLean – Paradigm Capital, Inc.

Excellent. Thanks very much guys. Good luck. Good hunting.

Sean Boyd

Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Nazima Walji from CBC Radio. Please go ahead.

Nazima Walji – CBC Radio

Hi, I have a couple of quick questions. I was if curious to know what are the chances, you look to extend the life of the Meadowbank mines?

Sean Boyd

I didn’t hear that? We just got a new mine plan there. We’ve seen how it’s performed for two quarters. So we’ll be working on that over the next six to 12 months. We do have some flexibility that was built into the new plan to allow us to extend it a couple of years so we’re not in a position to sort of characterize what the chances are at this point.

Nazima Walji – CBC Radio

What will be the determining factors?

Sean Boyd

Economics, return on the…

Nazima Walji – CBC Radio

And how does it look going forward then?

Sean Boyd

Well, we can’t characterize that potential extension of the mine life. All we do know is that the current mine life we’ve had two solid quarters generating solid cash flow has achieved and exceeded our expectations. So we’re just continuing on with the existing plan for the moment.

Nazima Walji – CBC Radio

Part of plan was to shorten the life, so that’s why I’m a bit surprised that you’ve decided to possibly extend it.

Sean Boyd

I didn’t hear that.

Nazima Walji – CBC Radio

So from what I understand part of it was to shorten the life of the mine, and it was shortened by a few years. And I’m curious to know how the new results factor into this decision you’re going to make.

Sean Boyd

The decision last year was to create a lower risk mine plan to address some of the challenges we were having with waste development and costs. That’s the plan that was implemented to start this year. That plan has worked extremely well and for now we’ll continue on with this plan until we get information that tells us that maybe we should modify the plan.

Nazima Walji – CBC Radio

Okay. And lastly, what’s been the biggest challenge to operating the Meadowbank’s mine?

Sean Boyd

It’s a remote location, so logistics is a challenge. It’s a higher cost environment. So that all plays into sort of the economics of where we should be investing and where do we get the satisfactory returns. But we’re seeing the results of putting in additional crushing capacity. We’re seeing some of the positive impacts of the new mine plan and those are helping to mitigate some of the structural challenges relating to costs that are driven by location.

Nazima Walji – CBC Radio

Thank you very much.

Operator

Gentlemen, there are no further questions at this time. Please continue.

Sean Boyd

Okay. Well, thank you operator. Well, I think there’s a couple more questions, we are seeing on the screen. One more?

Operator

Okay. We have our next question from Anita Soni. Please go ahead.

Anita Soni – Credit Suisse

Hi, I’m sorry, this has been asked and congratulations on a good quarter. I was just wondering the grades that you are mining at Meliadine, I’m sorry, at Meadowbank right now. Are we going to continue to see sort of mid-threes for next few quarters or should we kind of revert to in your guidance?

Sean Boyd

Yes. It’s hard to say Anita, we did respond earlier. We are not going to be able to categorize Meadowbank’s grades on a quarter-by-quarter basis going forward.

Anita Soni – Credit Suisse

Okay.

Sean Boyd

I think there has been a couple of answers to questions today, which commented on the dilution, which has been what we thought it was going to be, so that’s favorable. The mining rate is favorable. All we can say is we do know that as we move to the south, they are all pockets of higher grade mineralization.

Anita Soni – Credit Suisse

Okay.

Sean Boyd

So we’re actually – Meadowbank as we move forward for the next few years.

Anita Soni – Credit Suisse

Okay. And then I guess just my question was just regard to LaRonde byproduct. I thought that as you got into the deeper gold grades, you actually had copper occurring with that as well. So I guess, it was a little bit surprised by the copper trending down and the zinc holding in as well as it did. So I am just wondering sort of the byproduct grades what do those look like on the zinc and on the copper side and for the rest of the year?

Sean Boyd

You’re correct in saying that the zinc values are going down and coppers are staying essentially flat, but the value of the copper credits greatly outweigh the zinc credit greatly offset the copper credits.

Anita Soni – Credit Suisse

Okay. All right, so I was just wondering the rate of decline on the zinc, should we be still focused on the original guidance for the year or – and for the copper?

Sean Boyd

Correct. Yeah.

Anita Soni – Credit Suisse

Okay. That’s it for my questions. Thanks.

Operator

Gentlemen. There are no further questions at this time.

Sean Boyd

Okay. Thank you, everyone for tuning in and participating in our Q2 2012 conference call. Look forward to updating you in October on our third quarter. Thank you.

Operator

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.

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