Agnico Eagle Mines Ltd. (NYSE:AEM) Q1 2009 Earnings Call April 30, 2009 11:00 AM ET
James D. Nasso - Chairman
Pertti Voutilainen - Director
Tim Haldane - Senior Vice-President, Latin America
Moses Aupaluktuq - MLA from Baker Lake
Sean Boyd - Vice-Chairman and Chief Executive Officer
Eberhard Scherkus - President and Chief Operating Officer
James D. Nasso
Good morning everybody. We're prepared to begin. Ladies and gentlemen, welcome to the Annual and Special Meeting of Shareholders of Agnico-Eagle Mines Limited. My name is Jim Nasso, I'm the Chairman of the Board.
We'd like to follow our customer, reach the various people in the jurisdictions in which we serve in the respective languages and that will be Finnish, Swedish, Spanish, and Autuktuq (ph). So Pertti Voutilainen, director from Finland who will do it in Swedish and Finnish.
James D. Nasso
Thank you Pertti. Tim Haldane in Spanish.
James D. Nasso
Thank you, Tim. And we are honored to have you this morning,, the MLA from Baker Lake, Moses Aupaluktuq and he will do the greeting in autuktuq.
James D. Nasso
Thank you Moses. We will proceed with the formalities which we usually do each year. We'll make them as brief as we possibly can. I think we've dealt this morning and we'll deal with that as we go along. The word-to-word accordance with advice we get from the General Counsel, Mr. Laing, I will begin, in accordance with the by-laws of the Corporation, I will preside as Chairman of this meeting. Mr. Greg Liang, General Counsel, Senior Vice President, Legal and Corporate Secretary of the Corporation will act as Secretary of the meeting.
And with the consent of the meeting, Shirley Yuen and Irene Zelma of Computershare Trust Company of Canada, the Corporation's registrar and transfer agents will act as scrutineers. Shirley, could you please stand, so you will be known where you are -- known to the folks when you pass over the ballots wherever you are.
Okay. There, she is back there. Okay, thank you.
Before we begin the meeting, I would like to introduce the head table, my fellow directors. The head table and my fellow directors. With me at the head table is Sean Boyd, our Chief Executive Officer, Eb Scherkus, President and Chief Operating Officer and Director of the Corporation, not as the Director as well by the way, and Greg Liang, General Counsel Senior Vice President, Legal and Corporate Secretary.
Now, my fellow directors that are sitting at the table here, beginning with -- and would you kindly stand as I call your name, Dr. Lian Becker, Cliff Davis, David Garofalo who is also our Senior Vice President of Finance and Chief Financial Officer and by the way the Chief Financial, the top CFO in all of Canada as was acknowledged by The Caldwell Partners, that large general we had the other day. Congratulations David. And Bernard Kraft longstanding director, Bernard, Marc Legault, (inaudible) and where is Cliff Davis here. We've done, okay.
Also in the front row are other members of senior management, would you kindly stand when your name is called.
Don Allan, Senior Vice President Corporate Development; Alain Blackburn, Senior Vice-President of Exploration, Tim Haldane, Senior Vice President of Latin America; Daniel Racine Senior Vice President of Operations; Jean Robitaille, Senior Vice President of Technical Services; Picklu Datta, Vice-President and Controller, Paul-Henri Girard, Vice-President of Canada, Patrice Gilbert, Vice-President of Human Resources, Louise Grondin, Vice-President of Environment and Sustainable Development, better known as Mother Earth, Ingmar Haga Vice-President of Europe, Marc Legault, Vice-President of Project Development, Claudio Mancuso, Vice-President, Treasurer, David Smith, Vice-President of Investor Relations.
Notice of meeting, I confirm that I have received the sworn affidavit of officer of Computershare Trust Company of Canada, stating that the notice of the meeting, the management proxy circular and the form of proxy have been sent to each shareholder each director and the auditors of Agnico-Eagle.
The affidavit as to such mailing has been signed by Computershare Trust Company of Canada. I direct the Secretary of the meeting to a keep a copy of the affidavit with the minutes of the meeting. With the consent of the meeting, I would dispense with the reading of the notice of the meeting.
Scrutineers report on attendance, the Secretary of the meeting has advised me that we have received the scrutineers' report which indicates the number of shares ordered by proxy against the appointment of auditors. The amendment to the employee share purchase plan and the amendment to the by laws of the Corporation is less than 5% of all the votes that might be cast at this meeting.
Additionally the scrutineers' report indicates that the number of shares was held from voting by proxy for the election of each of the directors standing for election is less than 5% of all the votes that might be cast at the meeting for each director.
Therefore a vote by show hands in these matters would be in order with respect to the amendment to the stock option plan. A ballot will be taken and that is --
The quorum, the scrutineers have also advised me that prior to the debating proxies were received from holders of the sufficient number of shares, to constitute the forum. I therefore declare the meeting to be regularly called and properly constituted for the transaction of business. I directed the firm report of the scrutineers be annexed to the -- of this meeting as scheduled.
The on group report and financial statements. The first item of business is the presentation of the audited financial statements Agnico-Eagle Mines for the year ended December 31 2008.
And the earnings report on these financial statements both of which have been previously sent to the shareholders of the Corporation. If any one haven't received these financial statements, additional copies are available here.
I now place before the meeting the audited financial statements of Agnico-Eagle Mines for the fiscal year ended December 31 2008 and the earnings report on these financial statements. Questions regarding these statements will be entertained at the end of the meeting.
The amendment of the stock option plan, because of the need for ballots we will on to order of business, that are that set out in the agenda to begin with the amendment to the stock option plan. Therefore the next item of formal business to consider this meeting is the approval of an amendment of the Corporation stock option plan as more fully described on pages 10 and 11.
Both and in this Appendix B to the management proxy circular. May I have an appropriate motion?
Unidentified Company Representative
(inaudible) moving the amendment to the Corporation's stock option plan as set out in Appendix B to the management proxy circular dated March 25, 2009 approved.
James D. Nasso
Is there a secondary of the motion please? It is necessary to vote by ballots unless resolution. And I therefore direct that a ballot be taken. Like all of those its like the relations of those shareholders who have name here as a proxy.
I would ask right distributor shareholders and proxy holders to identify themselves by raising their hands and direct the scrutineers, and entitled to vote. And we'll just take a minute to get a little organized and that we'll carry on.
Shirley could you please distribute the ballots and would you indicate whether you're shareholders or not by raising your hand and she will present with you with a ballet.
And we'll carry on and we'll take the vote later.
Election of Directors, the next item of business is election of directors.
All registered shareholders and proxy holders have been provided with the ballots for use in this motion. You should record your vote in respect of this motion by marking an X or a dot, in the box entitled for the motion or against the motion as the case may be. And by signing and printing your name in the space as indicated on the ballot. Once you have completed your ballot would you kindly hold it in the air for the scrutineers to collect.
While the ballots are being collected and tabulated, we will continue with the formal part of the meeting which and we'll announce the results in a few minutes.
Election of directors is the next item on the agenda. Is the election of directors for the Corporation, articles of the Corporation to provide for minimum of five and maximum of 12 Board of Directors are determined that the total number of directors to be elected at this meeting is 12. I now declare the meeting open for nominations. May I have, nominations please?
Unidentified Company Representative
Mr. Chairman, I would like to nominate as Directors of the Agnico-Eagle Mines Limited, Dr. Leanne Baker, Douglas R. Beaumont, Sean Boyd, Cliff Davis, David Garofalo, Bernard Kraft, Mel Leiderman, James Nasso, Merfyn Roberts, E Scherkus, Howard Stockford, Pertti Voutilainen all these names are in the management proxy circular. I move that they be elected Directors of the Corporation to hold office until the next annual shareholders meeting following this meeting or until there are respective successors are elected or appointed.
James D. Nasso
Thank you. May I have a second motion? Thank you. Are there any further nominations? As there are not further nominations, I declare the nominations closed. The number of nominees is the same as the number of vacant positions available to be filled and I now declare that those persons nominated have been duly elected by acclimation as Directors of Agnico-Eagle Mines Limited.
Under the directors, under the Board of Directors majority, voting policy in an uncontested election directors any nominee that receives a greater number of votes, withheld in votes or election will tender his or her resignation as the Chairman following the meeting.
The scrutineers have advised me the proxies we received from the holders with a sufficient number of shares and each of the nominees for Director received -- receive more votes for and the possible numbers of votes withheld and accordingly none of the directors will be required to tender his or her resignation under the majority voting policy.
Appointment of the Auditors. The next item of business is the appointment of Auditors of Agnico-Eagle Mines for the current year. It is proposed that Ernst & Young, Belgacom, be appointed as the Auditors of the Corporation to hold office until the next annual meeting of shareholders of the Corporation, or until the successors' employment and that under remuneration be fixed by the Board of directors of the Corporation.
May I have an appropriate motion? May I have a second to the motion?
Thank you. You have heard the motion which has been seconded. Is there any discussion?
As a result of discussion, I'll now ask the meeting, if it is ready to vote on the motion. All those in favor, please signify by raising your hand. Are there, if any. Motion taken care of.
Amendments -- the item next item of amendment to the employee share purchase plan. The next item of flow of business to consider at this meeting is the approval of an amendment of the Corporation's employee share purchase plan as more fully described on pages 9 and 10 of the Appendix B the management proxy circular. May I have an appropriate motion please?
Unidentified Company Representative
Employee share purchase plan as set out in appendix B to the management proxy circular dated March 25, 2009 approved.
James D. Nasso
Do I have a second to that motion?
Unidentified Company Representative
I second the motion.
James D. Nasso
Thank you, Howard. You've heard the motion which has been seconded. Is there any discussion? As there is no discussion, now I'll ask the meeting if it is ready to vote on the motion. All those in favor please signify by raising your hand. Votes contrived and both hands for the motion. Amendment to the bylaws, the next item of quorum of business considered at this meeting, a confirmation of an amendment of the Corporation's bylaws as more fully described in pages 11 and 12 and in appendix after the management proxy circular. May I have an appropriate motion?
Unidentified Company Representative
I move that the resolution confirming the amendment to the Corporation's bylaws as set out in appendix after the management proxy circular dated March 25, 2009 confirmed.
James D. Nasso
Do I have a second to that motion? You've heard the motion which has been seconded, is there any discussion? As there's no discussion, I will now ask the meeting if it is ready to vote on the motion. And those in favor, please signify by raising your hand. Contrary if any, I declare the motion carried.
With respect to the ballots conducted earlier (inaudible) that the resolution relating to the amendment to the stock option plan has been duly heard by a majority of the vote cast accordingly.
I declare the resolution carried. Any shareholders interested in the exact number of votes cast in favor of or against the resolution, he or she may obtain particulars after the meeting by contacting the Secretary.
At this point, I would like to terminate the meeting. Is there any further business? If there is, I might ask for a termination. May I have a motion please?
Unidentified Company Representative
I strongly move.
James D. Nasso
May I have a seconder? All those in favor of the resolution, please signify by raising your hand. Contrary? Motion carried. I declare that the formal portion of this meeting is now terminated. Before we move to the presentation of management.
We have something that we've instituted a couple of years ago, and this is the Paul Penna Award and this is the second year, as I said for the posthumously service, Mr. Penna was the founder of Agnico-Eagle Mines.
Without Mr. Penna's great courage and all his efforts, we wouldn't be here today. And this is his honor and he was well noted for his philosophy and concern for the well being of his employees and the betterment of the communities in which we operate. And by the way, that's a large part of our lives -- speak to that later.
The Paul Penna Award is awarded to Agnico-Eagle employees who best exemplifies the philosophies of our founder, Paul Penna. With community involvement dedication and hard work Paul Penna left an enormous impact on the communities he was part of and helped change the lives of many people one person at a time.
This award has been established to ensure that his values continue and play a major part in the identity of Agnico-Eagle as a company as well as allow legacy of Paul -- Mr. Penna who will live long through the positive initiatives laid forward by our employees.
We have this winners of the Second Annual Paul Penna award, they are in alphabetical order. And could you please Allan Morris, and Franswaka Petrucci (ph) better known as Franceso. Where are they?
Thank you. I'll call you forward a minute. Allan Morris has continued proven that he is the true ambassador for the Agnico-Eagle Company culture, and Paul Penna's community spirit. Through his mentorship of our junior geologists his leadership role in health and safety programs as well as his public relations efforts in our property of explorations, Allan maintains active roles in the Spring Peak High School Booster Club and serves as a judge for speech in the big tournaments. He is a member of the Parent Advocacy Group for educational excellence which assists under privileged children with scholarship opportunities for higher education. And he has been pack leader for the Coach of America.
Additionally for the last 30 years, he has held leadership positions in the Geologic Society of Nevada, the chapter, both the secretary and treasury and has continued his participation as a field trip guide for the annual mine tour. He has a long supporter of society of economic geologists, Hickok-Redford Fund which offers study grants for geology students with progress -- with projects in high altitude or high altitude areas and was established to memorialize tragic deaths of two geologic explorers in Alaska Avalanche. Allan has also been a Squadron Commander of the Air search and rescue team with Elco several air patrol, the geographic information systems instructor at Great Basin Junior College.
Allan's generosity extends beyond the geologic community in supporting the activities of his family members. Each year, Allan, his wife Lynn, and his son David bought the family for Christmas providing a meal and gifts for each member of the family, awarded and through the friends and service helping local families organizations. Allan, would you please come forward and
James D. Nasso
The second recipient of this award, France Petrucci, resident of Rwanda, an employee Agnico-Eagle since 2005 is currently the engineering discipline leader in the technical services division based in the Abu Dhabi. Since 200, Francesco has been a member of the resources action parents, established by Ruwa Rwanda who commissioned to set up conferences related to the art of being a parent. Mr. Petrucci gives conferences through Abu Dhabi school district on this topic.
In 2005, Francesco became a member of the Quorum on Soybean (inaudible) and was a key organizing member for its 25th anniversary 2008. According to the President of the Quorum on Soybean (ph) Francesco played a major role in the organization of its 25th anniversary event. He was praised for the fact that he has super motivated, worked very hard and has great people skills.
Francesco is noted for always giving his best in the accomplishment of his work. Francesco is also involved with various school committees and was member of the council of establishment of (inaudible) between the years 2002 and 2005. Francesco was the President of the Rwanda School of Judo.
Francesco is now offering his knowledge to the students of mining technique at the (inaudible) at the request of Agnico-Eagle as there has been a shortage of professors. Both Allan and Francesco fully exemplify the Paul Penna spirit of giving and paying for the less fortunate in their communities in instilling excitement for the industry and has supported in throughout their respective careers, and as supporters on advocacy for education and to expand this. And Francesco would you come forward to accept the reward?
Unidentified Company Representative
Thank you. I will prefer a half an hour speech here but -- just a quick message for Jim here. A few years ago when he came on Board, not long too, was my girlfriend's birthday, and the time he offered her a flower. So thank you very much. Today it's my older son is getting 18 years old. It's going cost you a lot more today I guess.
James D. Nasso
And here comes the best and the interesting part of the meeting. There are some remarks from our fabulous Chief Executive Office, Mr. Boyd.
Greg wants me to do the Safe Harbor.
Greg is up here to keep us out of trouble due to Safe Harbor. We'll get to the Safe Harbor in a minute. Just after this slide. But I wanted to welcome everybody this is -- we were thinking back and before I joined Agnico in 1985 I was an Auditor with Clarks and Gordon who worked on the Eagle account. So this is my 27th Annual Meeting. So time certainly flies, and we see some people that were there as well back 27 years ago. So this company is all about sort of culture, how we treat people and how we go about building mines and that hasn't changed over many, many years and Jim made reference to it of the Paul Penna Award. Paul Penna used to live in this hotel. And this was center of action for his mining endeavors for many, many years.
So it's appropriate that we continue to give out an award in honor of Paul's memory and Paul's spirit. And as Jim said, without Paul and his guidance we wouldn't be here. And we will talk about that in a minute when we sort of give you a sense of our strategy and what we are trying to do.
But today we certainly want to talk about strategy, we want to talk about our projects, want to talk about the good things. We want to talk about things that are presenting some challenges for us that we will fix and get over to need to move on.
The major message is that the big picture is very much intact, scope is very intact. And in this industry which the industry is finding it difficult to grow it's really about growth and it's about quality growth which is really what Agnico is all about and we'll continue to be as we move the company forward.
But in our Safe Harbor, about two Safe Harbor. We have got two Safe Harbor statements now. Here's a quote, this quote was from Agnico Eagle's 1999 Annual Report, this quote is more apt today that it even was 10 years ago. But this shows you how we as a Board and as a management team think about gold which translates into how we think about our business. And this quote was in annual report which was basically against hedging and we included another quote on that report from John Hathaway called the quality of hedging and did that turn out to be right.
And so gold hasn't changed, gold is still simple, and it's still money, it's still one of the best portfolio I diversify as out there. It's still one of the best preservers of wealth. You can't print it, gold hasn't changed, people's perception of gold has begun to change. And that's why we are seeing higher prices, and that's why we will continue to beat higher prices.
The dynamics of the market have changed dramatically. People say well, jewelry demand is off, yes it is. Jewelry demand moves and adjusts to different price levels, but when you look at it, investment demand has more than made up for the loss in jewelry demand. In the first quarter of this year we had a record amounts going into the gold ETF.
The gold ETF is only a third of the bar and coin market, which has also seen tremendous growth.
While recently, we've seen The Peoples Bank of China certified gold or announced that they have been -- got buying gold over the last six years. That's critically important as we move forward, because that sends a same signal to investors and the market, but sends the signal rather Central banks sort of the Chinese, feel a need to protect their Central Bank reserves, by positioning themselves in gold and maybe others should look to do the same.
And even with a 76% increase in gold and the Chinese bank's gold position in the last six years, the actual percentage of gold as a percentage of their reserves has gone down to 1.6%. But there is still a lot of room there for the Bank of China to continue to increase their exposure to gold. So there is a whole different dynamic here in the gold space.
At the end of the day, when you look at the financial uncertainty, the economic uncertainty, which is unlikely to go away anytime soon, I think you are well positioned for gold. Whether we get into an inflationary period, whether we struggle here in a deflationary period, our gold is a great insurance policy, always has been, things have not changed. But as we say, the perception has changed.
And you can do a lot worse than be in gold. In fact, if you look at during a period of massive wealth destruction that we saw late last year, gold did its job. It preserved value and it provided liquidity for those people that were holding gold. We firmly believe in gold. We've never ever as you know sold an ounce forward. So our commitment has been true for over many, many years. And we've tried to build our company in a very simple straight forward fashion that match characteristics and the attributes of gold.
And this is also from the 1999 annual report. Things don't change. We are very consistent with how we approach our business, how we look at our business and how we want to do things, as a management team and as a Board. And these are still our goals. It's based on quality and growth. It's not based on being the biggest. It's based on being the best quality, within a good industry.
And I think we have been to achieve that, the current five year program that we have been working on has been transformational. As you know we transformed the company from the originally focused single-asset company to a multi-mine international company.
That hasn't been easy, and we've had our challenges, we had our bumps in the road and we continue to have some challenges but we will get those solved, as we always have. It's a matter of focus, we have the right people, and we will just continue to move the company forward.
The next phase of growth, the next five year plan, we very much look forward to, because we will be running less, we will be thinking more. And that's where we have created our best value, as you look back at our history.
And we wouldn't be... we do things a little bit sort of out of the ordinary for gold companies. The Mogami mine was the... the construction decision was made there when the feasibility study suggested that we needed a lot higher gold price.
All stays well, we can't wait for the gold price. We're going to build it and the gold price will be there. And without that type of vision, we wouldn't be here.
So, it was that vision which led it to ask us for $20 million in 1990, that $20 million found of 8 million ounces. We were drilling holes down to 9000 feet and people say well, what are you doing that for and why we need that information? Well, we want to know, we want to know for planning purposes.
So, that was part of the program that found the extra 8 or 9 million ounces. We've got news for you. We've got a hole underway right now that is targeted an area 4 kilometers below surface.
Alain is directing that program. Again, people say, why you're going to bother? We want to know, some of our best holes are down at 3 kilometers, this deposit likely does not stop. We probably won't be here when we're mining at those levels, the next generation of management will be there and it's a quality asset. So we think a little bit out of the box and that's paid tremendous dividends for us as we move forward, so not a big change in our strategy. We're at the tail end of this transformational five year phase, what that's allowed us to do is dramatically increase output.
At record production in the quarter we will dollar output this year versus last year, we'll double that again in 2010 versus the 2009 level. Our reserves continue to grow, they grow through consistent explorations. We've got a target at the end of 2010 to be at the 20 to 21 million ounce level from the existing projects. We've got definite targets to do that.
What's unique about this reserve base is it's chunky, it's sizeable. It's not spread out all over the world. You don't have 20 deposits, we have 6. And they're wide open. They're surrounded by large land packages. We've got an exploration team working those deposits that have been with us for over 20 years. And they have a tremendous track record. That's a big part of our success.
Our niches we're pretty good at identifying early stage opportunities that have the potential to grow. And if you look at out acquisitions in Kittila in Mexico at Pinos Altos and Meadowbank, since acquisition the reserves and resources of those projects have grown almost 90%.
And again these deposits are wide open. They will continue to grow as we gain better access, we gain better knowledge and we increase the budgets where team that's had a great record of having them.
Costs are important on a cost per ton basis, we are hitting our targets in Quebec. That's a low cost jurisdiction, that's our foundation, that's our anchor. Our forecast is that we can still as we move forward being the lowest quartile at cash cost in the industry because half of our assets are in that low cost jurisdiction where we've operated.
So that will continue to be our base and our foundation. And then in terms of financial position, we added significantly to our balance sheet late last year as you see in the quarter, our cash flow was $50 million. So when you look at our cash, our available credit, our cash flow, we have what we need to build the current pipeline of project.
Here is the summary of the quarter compared to the quarter in 2008 and the full year estimate. We did downgrade the estimate from 590,000 to now a range of 550 to 575, that was principally based on Kittila. And we will talk about those when we get to the Kittila slide. We feel we can get Kittila sorted out this quarter and to support that range of 550 to 575.
Our cash cost estimate ticks up a bit from 325 to 340 because we are dealing with smaller number of projected ounces. But again LaRonde continues to generate good steady output, Goldex is working fine. A year ago we were standing here and we were stumbling a bit with the hoist system in Goldex that we would fix it, and we fixed it.
There is a mine right now that's generating nearly profits of over 200,000 U.S. deposit that people said would never become a mine. Due to skill of our people and the patience of senior team and our Board we were able to build that mine. So that goes back to Paul and his philosophy. Mines are made, they are not found and Goldex is certainly a good example of that, that's the anchor.
Lapa, we start producing gold and coin gold in the next few days. We've already have the gravity circuit up and running, it's a positive gold, it's visible gold in the core about 80% of the drill holes have visible gold. And we'll see in the slide, we are seeing higher grades. It's early, certainly have to run that through the mill. But the base of production is very solid.
As we said it generates very good cash flows, we're generating roughly 50 million a quarter, 48.8 million. And that will just ramp up as we move forward. Mine's starting each quarter now for the next several quarters.
Financial position, 200 million in cash and we have capacity and our credit facilities to borrow another 130 million. And we have common shares outstanding fully diluted of 170. And so we've been very good over many, many years of trying to keep the count of shares outstanding down while we add quality deposits and expand those deposits and add value through exploration. That formula works very well.
Growth is something that we don't see a lot in this industry. We got lucky in terms of making the right acquisitions at the right time, so we have growth, and we have very dramatic growth in 2009 and 2010. And as you know we are working on additional expansion studies at four of our six projects. We feel the internal opportunity that we can continue to show growth beyond 2010 and 2011, and that's something that the industry has had a challenge in doing.
But we don't need to make acquisition to grow, not that we are not looking. We are built and we are suited to build deposits to have pipeline of deposits. The foundation for the next phase of growth will be the internal growth opportunities. We'll talk a little bit about that as we move forward.
Reserves are our key part of this (ph) and are going steadily over many years and we'll continue to grow to as we grow our wide open deposits. And as we have said in the beginning, one of the key components of this reserve base is the fact that several of them are over 5 million ounces.
We've done a little bit of work, over that last for a while and our IR teams has identified about 41, 5 plus million ounce deposits that are currently in operation. And as we build our deposits and continue to explore, we may be in the fortunate position of owning three or four, five plus million ounce reserve properties that are in production and that would put us in a very enviable position in the industry that is lacking large quality deposits.
We always focus on per share. We try to keep that float down over many years and not only have we been able to provide good growth in reserves per share, because we've grown our reserves almost 14 times while our floats growing about 3 times over in a year period. We're growing our production per share, and that will also translate into growth in cash flow per share.
Big picture is still very much intact, 2010 looking at about 1.2 million ounces. This is just based on the current plan, the current construction plan at the existing deposits. It's not based on any of the studies that we have underway now. In fact, we completed one that's been filed. That's the question of the study, that's a positive rate of return, we have not made a decision on that one yet.
We expect the Goldex study to be done soon and that will show also a positive rate of return. And so we'll have some decisions to make as we move through 2009 and get these studies and on positioning this company to continue that growth trajectory beyond 2010, 2011.
The CapEx spend is behind us, it was fortunate for us that we made a decision to build these deposits back in '05 and '06 because now they're going into production at a much higher gold price. But we were building a big part of this construction and the worksite of this construction peaked, so things like oil or infrastructure cost a lot. And that was certainly reflected in 2008 where we spent almost $900 million.
As we move forward we're seeing a moderate in some of those costs at most of the projects. We saw some cost structures as you saw in the release at Meadowbank due simply to logistics. Meadowbank, you don't see the immediate impact right away of the lower oil price because we had to buy the oil we are using now a year ago and we were paying $1.20 a liter. We're currently purchasing diesel fuel now at prices in the low $0.60 which will start to impact us in the second half of 2009. We'll be looking to lock in oil for a much longer period.
The big CapEx spend is behind us as we build these projects, so net free cash flow will increase. And it will see a dramatic jump next year as our CapEx moves down at 150 million.
Quality, we focus at rather than just size, we have been focused on quality. There is a simple formula for us, we like to own things 100%, we like to move them forward at our pace. We like to drill them aggressively, we like to develop them aggressively. And we can only do that if we feel if we own them 100% but they are also in pro-mining regions.
In regions where there is a permitting regime that you can understand and that you can work with permitting regime and with the local population and get their support and move these projects forward. And in many cases and if you look at something like Meadowbank two years ago they were just tens on sight. And right now we've got in terms of people and contractors there are -- in the summer over 600 people, a heavy construction period. So it's been a dramatic change and you can't do that unless you are in a region that is supportive of mining. We see that in all the regions we are in. now we put some notations up on the slide above the phrase of institute rankings for these jurisdictions and again number one is Quebec.
So we are blessed to have half of our asset in the number one ranked mining jurisdictions in the world in terms of mineral policy.
Move on, it's the anchor, it continues to perform extremely well, quarter-after-quarter-after-quarter. The mine manager Christian Provencher is here and he has done an amazing job of keeping this engine going. And he is keeping it going while a lot of his good people are being extracted taken to our other projects. So it's not been an easy job and it's a testament to the quality of the team there and the quality of the assets.
It generates great production at very good cash cost, it's meeting its target, it's going deeper. And that's not easy to do. And that project is on schedule. It's on budget. We'll finish the shaft sinking this year. And we'll start to produce oil there beginning in 2011.
So again, people said several years ago, you're never going to be able to mine at those depths. Well, we're almost there. We've got great ground conditions, not seeing any issues with respect to dilution. And that will be a flagship for us for many, many years, until 5 million ounces of reserves there, we mined 4 million. There's another million in reserves, this is a world class deposit that we'll likely mine at the end of the day over 10 million ounces. And as we mentioned earlier we currently are drilling a hole that's targeted to hit 4 kilometers below surface, along that.
Goldex, again a great story. We had an investment in it since 1971, took us 37 years to get it into production, producing that for design rates, making us good solid money. Reserve base continues to grow, we replaced reserves last year, we're continuing to drill at the field that we can continue to grow the rates. But there is another 900,000 ounces of selling reserves, so that will believe a long-life mine for us. And just on the western edge of the town of Eldore we are looking to expand this. We have a study which would see the minimum, a ton inch rise from about 6900 tons a day to over 8000 tons a day.
And hopefully we can do better. I think the experience of our people on the processing side is always to build facilities that allow us to increase the headroom for a little investment as we go forward. So I think this will certainly be easy.
Eastpoint (ph), we've got a longer commissioning period, now we've extended it into the second quarter. As you know in reading the press release, we've had some challenges on the metallurgy side. What that is, it's just an issue of trying get the parameters right. And there is no activation of the carbon before it goes in to the auto plate. So this is happening in the auto plate.
During our test work, we were getting recoveries of 89%. There were suggestions that you could have this issue, as a result we did build a flotation circuit which is in place. We did build some flexibility into the auto plate where we can adjust the acid and the oxygen parameters on a very wide range, that will allow us to get the right mix. And that's what we are working on right now.
We've got some of the top people in the business working on that, and we will get this fixed. Just hold on, and this will be a very big deposit, this will be a steady producer of ours for many, many years to come.
Adjusted mine life here, based on reserve and resource would be above 40 years. And this continues to grow, we've drilled it down to 1100 meters. It's wide open, we have got some recent intersections that suggest the deposit will get bigger.
This one will be slightly our biggest deposits and a strong contributor. We've got most of our... the single largest exploration budget is at this property, where we're spending 60 million out of a total budget of a little over 50 million in 2009. We've got 9 drills drilling on it.
A little bit on the commission side. Mechanically, a big part of our challenge was getting everything mechanically working so that we could start work on the metallurgical side and commission pressure oxidation circuit. So we got behind a little bit on construction, that the issues on the freezing ores. So we couldn't get up to steady tonnage there, we start to fine tune the metallurgical side.
So Jean Robitaille and his team we weren't able to get out at early enough, so that we could get things sorted out in Q1. We will get it sorted out in Q2, we have identified the issues. We have identified the potential solutions, those are being systematically done, as we speak step-by-step. We've already had some indications that things are getting better there right now.
We fully anticipate that we will be up to design capacity over the life of that mine through recovery rate which was in the feasibility of minimum of each.
Lapa, we talked about this, picture of the gravity circuit, that one is on schedule. In fact, in our production profile, we weren't anticipating any ounces of supply. So we'll be pouring gold there over the next few days, certainly early next week is the target.
We're seeing, as we've said in the press release higher grades, we're seeing grades in the first three stop. So we expect a little over 8 grams, we're getting a little over 12 grams. That's early, we still have to confirm that by putting things through the mill. But that deposit is being characterized by having very high grade intercepts within part of the deposits.
So there may be positive-negative effect. We don't know until we get a couple of quarters of milling of the ore underway. We continue to explore it, but we have to go deeper there, but we've had some results that we announced, and was announced by a junior maritime on the maritime property Midland Exploration. And that's just down the trend as you move towards Malartic and we are getting some interesting results.
So there is still a lot of explorations on that trend, along that highway between LaRonde and Eldore. Altos is on schedule for production expected in the third quarter. That deposit had a significant growth in reserves last year. As a result we are looking at a couple things there. We are looking at a potential expansion by building a satellite deposit at Chistian Mascado (ph), the study is done, deposit of study. So we will be considering that as we move forward in 2009. As we drill around the main center and new structure, we are getting good results near surface.
So it's early but that one certainly is pointing to the possibility of being able to expand output at some point down the road along that main mine horizon, Again we are actively drilling that, we've we got a topnotch team there in Mexico that has a lot of experience building mines in Mexico. And they've kept that project on time on budget.
In terms of exploration focus, it is also a major focus for us. We got a very large land package there and we are just getting access, increasing knowledge to new areas, building roads, getting permits to go into new areas. And we think this one is going to down the road.
At Meadowbank it's a large gold deposit. It's the one that will also continue to grow. We had some issues in the quarter on CapEx increasing, it increased on the construction side $60 million U.S. a lot of that is from really logistics and moving people. We're having to move more people more equipment, it's more costly to do that.
Things are getting easier as we go forward in terms of having an airstrip in place. But there is still some logistics and these are some of the challenges in dealing with the ports in the area. We certainly need some improvement, we've got some solutions for those.
But we feel here that even with the increase in CapEx the IRR is still better than the IRR we made, we had when we made the production decision here. And with a land package of over 40,000 hectares, we feel that this one will be a five high plus million ounce of deposit on reserves. And it does have the potential to grow. So we're looking at expansion potential here on the 8500 tons up to 10,000 tons and that study will be done in the third quarter.
So in terms of upcoming news it really revolves around these expansion studies, as we said Pinos Altos is also done, Goldex is almost done. Those are being done internally by our technical service group and that the results on the first two are positive.
Meadowbank, the expectation is that we can increase that throughput there, and generate a high rate of return on the incremental investment, the biggest expansion opportunity that was in Finland. And that would require a large mine shafts. So that's a program that could take four to five years versus the other two, other three programs could take two years from production decision.
So that's the news that will be coming out as we continue to build the projects, we'll be looking at potential expansion.
So if you look at what we've been able to do in the transformational phase of growing the company. We've not just grown to be bigger, but we've grown to be better, better quality possibly to continue that growth. And if you look at the period from 2003, where we were heavily reliant on LaRonde as the single asset and we had some issues there and we paid for it. And we knew at that point that we had to get busy and start to diversify the revenue stream.
Our share price is up over that five year period, 300%. We not have been able to grow the company, we've been able to grow in a way that's generated sequential value for our shareholders.
And so the next five year phase as we say to ourselves, we can continue to add significant value and not have to run as hard as we've been running over the last four to five years. We can pull back a bit, we can think.
We can get into the situation where we were back in the early 90s. Once we built LaRonde, and we built what we thought was a million, 1.5 ounce deposit, it's going to turn out to be.
We're not saying that these are -- the deposits are going to grow that dramatically, but they are all wide open. They all haven't been fully delineated. We own them a 100%. They are surrounded by large land packages.
Once we can get to the point, very shortly when they are all built, we will then sit back with all that 20 plus years of experience, look at how we can optimize them, look how we can maximize the assets by growing the reserve base and then building additional infrastructure, increase output. That will allow us to increase cash flow.
One of the things we always have loved to do is pay dividend. Hope to increase that as we go forward, and we have a great track record of doing that, 27 years is not easy to do it in any business, harder to do in a gold business. So we'd love to continue to do that, do that as we move forward.
So I'm going to turn it over to Jim, and he's got a couple of comments on corporate social responsibility side and then we'll be happy to take questions. I think Ebe's just jumping a bit there to hear some of the questions. Those of you who are listening in, obviously you can't ask questions. Hopefully all of your questions will be asked here in the hall. If they're not, please give us a call after the meeting and we'll be glad to help answer your questions. Thank you very much.
James D. Nasso
Thanks very much Sean. Are there any questions? Hassle has the microphone, just raise your hand and he will provide you with microphone, there you go. Hassle, there is a gentleman here.
Hi, my name is Paul Durant. I had -- went to the Barrack meeting yesterday and their production fell each year '06, '07, '08 and yours will double in '09 and '10. How soon is your bigger mine than them?
We're bigger and executed right now.
Whole question, want to a bigger than -- we are in good niche or perfect niche, I think it is going steadily I think that's one of the challenges when you get too big in this industry. Nature has just not left enough good deposits out there. We continue to grow 5 to 8 million ounce annual production of gold. So, we're fortunate to be in the right position. Our focus has never been to get caught up in a race that's always been focused on -- work within our skill set, our abilities, focus more.
Okay. Just one more quick question and then I'll pass the mic. I see that the cash cost per ounce has gone up from the negative number up to quite high. What percent of that increase is due to collapsing zinc, copper and the other metal prices? I'm sure a component of that is in there, in the new price?
I'll just make a comment maybe Ebe wants to make a comment. I would say almost all of it, because if you look at our cost per ton performance at LaRonde, it's been very steady, we are right on target, increased a little bit each year due to leases and pitch rates (ph) but cost performance on (inaudible)... so really on a per ounce basis, getting the impact of foreign exchange and things, those two key variables is biggest difference.
Okay. Zinc, copper and nickel, all three, you don't have any nickel, do you?
No, we don't. We were online and also the Goldex line, when those line operate at 7200 tons and achieve their cost targets of $25 a ton at Goldex and $72 a ton at LaRonde. They both make a lot of money for us. And LaRonde is proving for the last six years. It has been a consistent performer. And as Sean mentioned earlier, last year this time we were in the commissioning phase and then 10 months later Goldex is now running at steady state and that's also what we expect to happen at our other operations.
Any other questions?
The question is short and simple. Are you planning to have a stock split on the road?
Our plans for stock split. Any thing else, any one else?
Okay, I guess that closes the floor to questions. As Sean mentioned I just want to speak briefly and it won't be long to share some of our experiences, we as a Board have had when we founded the various regions. We're great mine builders, or mine finders, mine builders and great mine operators. And is that, we've dealt with numbers for so many days now. I want to touch on the human side of what we see and what we do. And I'll set a few examples.
In Mexico, we have approximately 1800 people on site, maybe as many as 1100 and 60% of those employees come from the founding people. They are heroes that are presently there. We make our strong efforts to hire people that are in the particular jurisdiction which we work.
I ask Tim Haldane, we've heard from earlier, our Senior Vice President of Latin America, said Tim, when I get down, I would like to take a trip with one of those large mining trucks having been on old construction worker, I would like to take it to a tour, all these 100 ton mine truck. So I met the boss, and I met the driver. And the driver was a young lady, even the truck loader, the young lady from Mexico, who by the way, ladies are better drivers than men, because they are easier on the equipment.
But at any way, in our conversation, here is the single mother of 4, 32 years old, never really had a job and she had children from 16 to age 6. And now she has a steady job. She's in the throes of building a house for her family and this is some of the things we see.
Right down at the camp we built, we use local help. We built a beautiful camp. We visited their guesthouse, they make the bricks by hand, they harvest the wood. And the only thing... and the local blacksmith takes the hinges and it's a beautiful guest house and I think it comes out about $37 U.S a square foot.
So that's the kind of things that we enjoy seeing in the course the local people enjoy being participants and we afford them opportunities where there are breadth of opportunities. And as our intention is to empower them in any way we can, from providing educational opportunities, we have contributed to the school, we have our exams of all we kids... we provide glasses and it goes from jurisdiction to jurisdiction.
The one I really liked, and I may have with this, what is known about and for us Canadians, I had to read a little about it, when we first got there. And I hope I have my fax right moses, I hope that... it represents and not many Canadians know about this wonderful region, and the wonderful people that are there.
It represents a third of land mass of Canada. Baker Lake coincidently is the geographical center of Canada, and the people that we have been countered in that region, they're just lovely, they're historic, they apply a dignity and they've been very supportive of our efforts.
For one, in that case and this is part I read and I hope I have right. They don't have tribes and they don't have chiefs, but the elders play a large part in that community, they're respected and listened to. And that plays a little part of my tale here.
We built a road from Baker Lake to the mine sites, about 110 kilometers over the Tundra, quite an effort, at quite a cost.
So we were going to officially open the road and our local minister... their local minister went out and invited all the folks. We emptied the old folks on out, we provided buses and up they came. And Ebe was with me, where's the picture? I'd like to show that. It's not here. Anyway, there's a slide of us on the bridge, in the Tundra. I mean it was a beautiful day, it was in June. The air was fresh. It was so fresh again chill, and you can see forever.
They all came these beautiful people and they were dressed in their traditional gear. They had their furs and different colorful things, and we arrived at the bridge, and the prime of the region was there. The representative from that we signed the water agreement with later, the Mayor was there, Ebe and myself.
Well, there is a picture on the screen there, you'd see the four or five that was there. So and I must say that every meeting we attend, whether it's an event of municipal council in Baker Lake there are six churches, and it's a dry place as well I should mention. But every meeting we attend I was very impressed, we opened with a prayer and when we closed the meeting, we closed it with a prayer.
And that particular day, we are standing there and I believe the CBC were there with camera and they opened, they protected their event with a prayer and a hymn. And that have grown to a company singing this hymn, in the Lapa circuit. It was really the raise the hair in the my back of my neck it was still moving, but we spoke and that's where my life changed.
Then we will remember that but I was introduced as an elder. And from that point on, I come back here to this city and I'm just another old guy but up there they respect you and they pay a heed. Because after a dinner, that we had a dinner later we had a great feast later and the Première who stood beside me normally we get up and he said dinner is being served and I said Mr. Première please, he said Oh no ! Elders first will have.
Anyway we went through in the process, we cut the ribbon and then we crossed the bridge, and once again another hymn, I felt like I was in a movie. It was absolutely it was one of the highlights. It was the day I will remember the rest of my life. I was deeply moved and deeply touched, but that's the kind of things you see and wherever we go whether it's actually -- or whether because of the opportunities we provide, we wind up creating the beginning of a middle class and people with the economic benefits wind up doing the things we do here.
And the last example is the milk, with the economics being changed in that community, all of a sudden Northern store, the man that runs the store that even milk section is empty. People were buying milk for the children and it's very expensive that might be -- and I am going to remember $8 or $9 per liter of milk, it's very expensive. So the milk section is empty, but there is another side of the coin, they even love their children just as much as we do or any body else does. And you see a similarity wherever we travel was the same all over world and they have acknowledged her efforts, they acknowledge the good things we try to do. Now the laptop, computers we provided to the high school, who are learning engineering, they are visiting our mine, we would like to turn out some people that are of a professional category that's our goal. It's not going to happen overnight but it will take time but we are not going to stop working towards that goal.
That's all I have to say and hopefully we leave some things of permanence in these areas where we serve. It will be there for in some places for 40, 50 years because we have been in business here for 50 years.
With that I would like to invite everyone to luncheon. It's a pleasure and we thank you all for coming. It's always a nice thing to see people interested in the things we do and our investors as what we thank them for the confidence they have in us. Lunch is served next door and thank you for coming.
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