Agnico Eagle Mines Limited (NYSE:AEM) Q1 2016 Earnings Conference Call April 29, 2016 8:30 AM ET
Sean Boyd - CEO
David Smith - SVP, Finance and CFO
Alain Blackburn - SVP, Exploration
Donald G. Allan - SVP, Corporate Development
Bill Gee - CEO of Evolving Gold
Stephen Walker - RBC Capital Markets
David Horton - CIBC
Michael Jalonen - Bank of America Merrill Lynch
Good day, and welcome to the Agnico Eagle Mines Limited First Quarter 2016 Conference Call. Today’s conference is being recorded.
At this time, I would like to turn the conference over to Mr. Sean Boyd. Please go ahead, Mr. Boyd.
Thank you, operator, and good morning everyone, and welcome to our first quarter 2016 conference call, also our annual meeting this morning, so you’re certainly all invited at 11 o’clock at the Sheraton Center. We’ll have all of our key operating, technical and exploration teams on hand with some drill core. So if you’re available in Toronto, you’re more than welcome to come. Also, as we go through the slides here, just like to make everyone aware that we will have forward-looking statements and just to be forewarned and cautious.
Going over the quarterly numbers and the highlights, we continue to make very good progress on several fronts; on production, on cost, on exploration and development and on financial flexibility. Our quarterly production was 411,000 ounces at cash cost of $573, a solid contribution across the board. We’ll get into some of the details in a minute. Of particular note is the continued very good cash generation coming out of our operations in Mexico, very low cost, cost of $364 on a cash basis to produce an ounce of gold.
As a result of the strong performance in the first quarter, we expect to be at the high end of our production guidance for 2016, which is 1.565 million ounces. We’ve had some again good drilling results. The results continue to come at several of our projects, most notably at Amaruq and in our new project in Sweden called Barsele, so we’ll give you some updates on that and that would be of particular attention at our annual meeting where we have our exploration team on hand with some drill core from some of those projects.
And as we indicated, the solid performance in the quarter again helped us to continue the move towards improving our financial flexibility that we’ve been able to do for the last six quarters and we’ve seen a further reduction in our net debt by $89 million in the quarter, and we declared a quarterly dividend of $0.08 per share, so that is now the 34th consecutive year of paying a cash dividend at Agnico.
Looking at some of the sites in a little bit of detail, when we look at the operating margin at LaRonde, LaRonde first time in many, many years has the single largest operating margin of any of the mines. So we can start to see the impact of opening up the lower mine and accessing the better grade material at LaRonde. We see that in the production and the unit costs, which is reflective and moves down to the operating margin where the mine generated almost $50 million this quarter.
A good performance at Goldex as they are exceeding their feasibility study mining rates and development rates and costs, and as we mentioned very good operation performance out of the southern business generating $66 million in operating margin. Our financial position, as we mentioned, our net debt was reduced. It’s now 923 million at the end of March. We made debt payments of 55 million, so good flexibility going forward and a very manageable debt maturity schedule.
As far as earnings go, very similar realized gold price from a year ago quarter, similar production, a little bit more ounces this year, little bit lower costs. Earnings generally the same as is operating cash flow per share.
At LaRonde, as we said, a very strong first quarter and good operating margin. I think the key for us at LaRonde is that we have made major investments over the last several years, which has now put us in a position to access more of a higher grade ore. LaRonde will be a key building block going forward as we start to mine more tons in the lower mine and start to move up towards the average reserve rate at LaRonde of 5.3 grams per ton.
We’re studying, as we’ve mentioned before, of reopening the Bousquet area and that has the potential to add 40,000 to 50,000 ounces a year. So going forward, the LaRonde complex certainly has the potential to produce in excess of 400,000 ounces a year. And I should congratulate the LaRonde team. Next week, they will par [ph] their 5 million ounce, so congratulations to the team.
That’s a remarkable technical achievement when you think that years and years ago, it was only 1 million ounce deposit. It was relatively shallow. They are now developing 3 kilometers underground and getting very good performance. And of note, the reserves or resource, there’s still 5 million more ounces, so more to come and better grades. So LaRonde’s best days are still ahead of them after a long and successful history.
At Canadian Malartic, continued steady progress we’re seeing on all of our optimization efforts that’s reflected in good solid production numbers and very good cost performance. Of note was the drilling on Odyssey and we continue to intersect the zone at Odyssey. We would expect to be in a good position to put out a resource on Odyssey before the end of this year.
It has similarities in terms of thicknesses with better grade than Goldex, and the intention when we got involved with our partner Humana with the Canadian Malartic opportunity was certainly we had a sense that the Odyssey could be an important component to that mine and that property going forward. So we’re certainly starting to see that. And as we look at Canadian Malartic, we expect the ounce to continue to rise steadily as we slowly and gradually increase the tonnage going through the plant.
At Goldex, as we said, it’s performing at levels much better than in the feasibility study both on mining rate, the feasibility suggested 6,000 tons a day. It’s closer to 7,000 tons a day now. The development rate is far in excess of the feasibility as is the cost per ton. As we recall, we were estimating a few years back that it would be CA$40 a ton. It’s mid CA$30. We expect to steadily increase output at Goldex, given the fact that we can mine at a higher rate and the fact that we’re developing the lower part of the mine at a faster rate.
And we also have the Akasaba deposit, which is within 30 kilometers which we continue to study. So Goldex will be an important part of our production profile and our growth as we go forward, because it’s low cost growth and it’s an asset that we still will continue to drill and it’s got a sizable resource that we expect to be converting into the mine plan as we move forward.
At Lapa, despite the short life, the team continues to perform well. There is some potential that a few more ounces as we move through the balance of this year, but Lapa as we mine out that area, as we said, it opens up an opportunity for Bousquet at LaRonde because we have excess capacity and will have excess capacity at the LaRonde plant when we stop the direct shipping of ore from Lapa.
At Meadowbank, steady production. We have a few opportunities maybe to extend Meadowbank further towards the end of 2018, maybe at 20,000 ounces or so. All important because it’s cash flow that we don’t currently have in the mine plan, so we continue to focus even though there is three years left or so to try to optimize that asset. But more importantly, we’ve continued a heavy drill program at Amaruq. We continue to get good results.
Good results at Whale Tail where we’re encountering better thicknesses, which is important for the mining rate there. As everybody knows, we have the large mill at Meadowbank, which will be available to us by the end of 2018. So the thicker the deposit is at Whale Tail, higher the mining rate to take advantage of the available capacity at the Meadowbank plant.
We have seen some very good success at the B zone at Amaruq and we’ve moved some of our drills from other parts of the property on to the B zone given what we’re seeing in shallow drilling, higher grade visible gold. We will have some core from the B zone at our annual meeting. But as far as the Amaruq project goes, we’ve begun the construction of the road. We’re using the waste from Meadowbank as the roadbed material, so that is progressing as planned this year.
At Meliadine, we continue to work on the study. Within weeks, certainly by the end of this quarter we should receive the final permit, which is the A Water License. So Meliadine will be fully permitted. We continue to update the study by incorporating subsets of the large resource into our economic studies and we expect all of that work to be completed before the end of this year, which will help us when it comes to allocate capital, and we look at Amaruq and Meliadine as one platform and we will allocate capital based on none of it being one platform that we expect to be around for multi-decades.
At Kittila, a little bit lower grade but higher tonnage at the mine. The deposit, almost 8 million ounces is still open. We are seeing – we’ve got a bit of a backlog in processing drill results at Sisar, so we’ll have more results coming out in the second quarter likely in July on Sisar. We’re looking at ways to incorporate the Sisar into a new mining plan at Kittila along with the upper and lower Rimpi zones, which are slightly thicker and better grades than what we are currently mining. So there’s good potential. The team at Kittila is – because we can process more ore there’s opportunity in the plant. If we can increase the mining rate, then we can do better than the 200,000 ounces that we expect to average over the next five years. So there’s still more growth to come at Kittila.
We’ve been looking for a number of years since we first got involved in Finland over 10 years ago for another opportunity besides Kittila. Although we have a large land package around Kittila and have added to that land package over the last few years, it wasn’t until the last year or so that we were able to find something that we could get excited about, and that’s in Sweden called the Barsele Project.
It has some similarities to Goldex in terms of grades and thicknesses and the large nature of the structure. So we have had a successful start to our drilling program and we believe we connected the central zone and an additional zone there, good thicknesses and good grades, so off to a good start there and we’ll continue that drill program and see how things turn out over the next several quarters.
In the southern business, as we said, the operations are performing extremely well. At Pinos Altos, we’ve commissioned the shaft and the ore handling system is scheduled to be commissioned in the second quarter. So a lot of that investment in the underground infrastructure will position the mine going forward to manage cost in the underground and improve the mining rate in the underground.
At Creston Mascota, good steady production. We’ve recently acquired a new project right between Creston Mascota and Pinos Altos that almost lines directly up between the two mines. We’re excited about that. We’ve known about that for years and years. We’ve just concluded an agreement with the owners of that property and we’ll begin to drill that soon, and that certainly has the potential to be a near surface source of open pit material.
At La India, lots of upside there. Still very good solid production, very good cash cost performance. We’ve been consolidating our land position there over the last couple of years and we’re going to pick up the pace of exploration around mine sites. In fact, the strategy in Mexico now is to increase our exploration by just right around existing mines. As we’ve consolidated land positions, as we’ve gained more surface rights, we’re in a position now to drill some targets that we’ve known about but haven’t been able to drill, and we’re excited about that potential.
At El Barqueno, we continue to drill. We expect to update that resource for the end of the year. We’ve discovered two new areas of mineralization on the project and we’ve gotten some surface rights to tidy up in those areas before we can really talk about it. But it’s still a very prospective area for us with a large drill project, lots of drills going there and we believe that project will continue to grow and there will be open pit, near surface mineralization available to us in mine plan.
So that’s it for the formal part of the call. We’d love to open up the lines operator for questions. We’ve got our full team here, including our exploration group, so we’d be happy to answer any questions.
Thank you. [Operator Instructions]. We will now take our first question from Stephen Walker of RBC Capital Markets. Please go ahead.
Thank you. Good morning, everybody. First on the operations, there was some unscheduled maintenance at Meadowbank with the frontend of the plant by the looks of it are conveying. Can you talk a little bit about whether that’s just a short term or structural problem? And then secondly, materials handling at Pinos as you went underground, a similar question, presumably that’s just a short-term issue.
I’ll talk about Meadowbank first, then we’ll take over the second part of the question. We had a failure on a main shaft on the secondary pressure that took us about eight days to repair. Things are basically back to normal.
As far as Pinos Altos we have had in the past and occurred this quarter as well a little bit of clay getting mixed in with the ore and that causes some upsets in the mill. That was early in the quarter and it’s just the learning curve. Once we figure out how to blend the ore, which we did do, by the end of the quarter things were running quite well.
Great. Thanks for that. And Sean, just to follow up on something that you said on the V zone up at Amaruq. Is this a potential for starter pit material, is this something that could come into a mine plan in 2018 or is it again just better understanding of the geology and the resource potential?
Stephen, it’s Alain. As you know, we did cover Amaruq in [indiscernible] and we move after in 2014 [indiscernible] on that sector and we recognize the V zone as more a flat [indiscernible] going to the south and joins together [indiscernible] we had to drill between B zone and [indiscernible]. We have to drill a lot this summer and to understand better the system because it’s like forward based [indiscernible]. And we were looking higher grade and we have to fill that sector. It’s like a panel of 800 meters by 400 meters but we have to fill the hole to recognize the grade. We can tell you [indiscernible] we saw just a couple of weeks ago like a ring of 1 centimeter large gold, and we have to recognize the real grade on that zone is firstly so early for us and how we will understand [indiscernible].
Even there’s certainly lots of exploration potential but timing will be dictated on permits and we have permitted Whale Tail. That’s the focus is to permit the Whale Tail pit. So we still need to do more drilling on V and then we have to amend the permit. So that would really dictate the timing but we’re certainly excited about it and we’re excited about its location. We’re excited about the fact that it may trend and connect with Whale Tail and we’re excited about the visible gold that we’re encountering. But in terms of timing that’s still a question because of the permitting.
Great. Thank you, Alain and thanks, Sean. Just one last question if I might on currency hedging. You’ve got obviously major projects in Canada, Mexico and in Finland. What are your thoughts on locking in some of the Canadian or some of the currencies here as you go forward to help you lock in returns on these projects, which are obviously impacted significantly by currency moves?
Steve, we do have about 21% of our Canadian dollar exposure for 2016 hedged in the form of costless collars with bottom of that being about 127. As far as protecting those projects further, that’s something we’re very interested in doing. Our policy is to buy depths. We’ll probably do that as those projects develop over the years. It would be nice to be able to make sure that we at least help them on the cost side versus – in the startup phase. So that’s something we’re actively monitoring and looking at doing.
Great. Thank you, David.
That’s it from me.
Your next question will come from the line of David Horton with CIBC. Please go ahead.
Good morning, Sean.
Thank you very much for the call. Just going to Malartic, just wondering the way you’re standing on the permits to extend the throughput beyond 53,000 tons a day on the permitting side and whether you think the mill is capable of sustaining that level or better?
First, the permitting is moving as per schedule. We’re hopefully going to see going into hearings in June. There’s no real surprises on that and the second phase is getting impact up to 55,000 tons per day, although it will be part of that critical permitting process. I think at that stage, we will reach the installed capacity overall [indiscernible].
Okay, sorry guys. It seems to be a very bad line. It’s hard to hear you and it’s breaking up. I’m not sure if it’s me or your end. But just continuing on back to Amaruq, do you think that we have some sort of connection between the Whale Tail and the B zone? Are there a bunch of initial [ph] on kind of veins do you think that could fill in that gap or is it too early to say?
Hi. It’s Bill speaking. So what we see – it appears to be that we have in Whale Tail, it’s more kind of [indiscernible] whereas the V zone is kind of more vein type mineralization with three gold in it. And we do see them either combined or having – let’s say in some cases, we either have only the vein type be it some towards the east whereas in the Whale Tail area, it’s more on the [indiscernible] information type of system. But we see both joining and existing in the same area. And laterally, the V zone system is wide open to the east and this is currently what we are beginning to see how large it is and how we can have a better understanding of the stacking of vein. Because as you mentioned, it’s potentially a small [ph] vein that we need to have [indiscernible] and the resources information.
Okay. And with the recent drilling, it seems to show very good thickness. There are some really spectacular kind of holes. Just wondering – I know it’s pretty early, if that’s shaping your mind as to what kind of mining rate you could have at Amaruq to feed that mill?
Don will take that.
Donald G. Allan
I guess we’re educating on various aspects and the study parts about mostly concentrated is based on the satellite bit. I think some of the satellite bit scenarios that we’re looking at now over a five, six-year period with the current resource could look probably filling in the neighborhood of 9,000 tons per day.
Okay. That’s very promising. The last guidance we had was more like six, so that’s very encouraging.
Donald G. Allan
Right now I think when you remember back, those sort of rough estimates of six were driven off of the resource update midyear last year, and that was one of the resources that was based on being very conservative in terms of the size of the blocks in the model. And when the exploration team drilled on the opposite direction and confirmed better thicknesses, then we were able to incorporate better thicknesses into the model and that’s allowed us to look a higher mining rate than we saw a year ago.
All right. Thank you very much. I’ll leave it there.
[Operator Instructions]. Our next question will come from the line of Michael Jalonen of Bank of America. Please go ahead.
Hi, Sean. Just following up on David’s question, 9,000 tons per day for Amaruq sounds outstanding but begs the question if it’s getting bigger, is a mid-2019 startup still in the cards or do you need more time to find out how big this will get with the additional permitting? I was wondering if things will get stretched out a bit.
The permitting is ongoing. We have had discussions and approach with the ministries that are showing good confidence level on the timing of the permitting process, and at this stage for 2019 everything seems pretty possible and on schedule.
Gentlemen, there are no further questions at this time. I’d like to hand it back over to Mr. Boyd for closing remarks please.
Thank you, operator, and thank you everyone for tuning into the call. For those of you who are in the area, we’d love to see you this morning, 11 o’clock annual meeting Sheraton Center. Thanks, again.
This concludes today’s call. Thank you for your participation. You may now disconnect.
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