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EARNINGS CALL TRANSCRIPT
EARNINGS CALL TRANSCRIPT 2017 - Q2
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Executives

Sean Boyd - Vice Chairman & CEO David Smith - SVP, Finance & CFO.

Analysts

Stephen Walker - RBC Capital Markets David Haughton - CIBC Steven Butler - GMP Securities.

Operator

Good morning. My name is Caryll and I will be your conference operator today. At this time, I would like to welcome everyone to the Agnico Eagle Second Quarter Results 2017 Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, we'll have a question-and-answer session.

[Operator instructions] Thank you. Mr. Sean Boyd, you may begin your conference..

Sean Boyd

Thank you, operator and good morning everyone and thank you for joining our second quarter 2017 conference call. We know it's a busy morning. So we appreciate your attention.

We're going to run through our Slide deck and before doing that, I'd just like to let everybody know that they should read the legal description of the forward-looking statements in the document. There is two pages now. We have two in our accounts now so we get two pages of warnings about forward-looking information.

Jumping right into quarter, we had strong operating financial performance. We had an excellent safety performance. Our growth projects continue to advance extremely well. We'll get into the details on that. They're on schedule and they're on budget.

We had some really good exploration results that have extended the non-mineralization at our key development projects and our producing mine. So very good quarter across the Board.

From an operating perspective, the mines continue to perform well in terms of production and cost performance as a result of that and we have increased our full-year production guidance to 1.62 million ounces and we've lowered our total cost guidance to $595 an ounce.

We got very good performance at all of our mines, but of particular note, was the Meadowbank production where we are encountering higher grades than expected and also at Canadian Malartic, which had record mill throughput at good grades, which drove record production at mine.

As we mentioned, our development projects are moving forward very well at Meliadine.

We've got off to a good start in terms of the barge season and the barge delivery, which is a good sign because the objective there this year is to get the key buildings enclosed before the winter sets in so that we can continue working at a solid pace through the winter.

So we're on track to achieve those goals around project in building construction.

At Amaruq, we made good progress there with the road moving forward with the permitting, expecting hearing to start with none of it impact review board in September and we continue to get some very good drill results outside of the non-mineralized outlines in both whale tail and I'll talk a bit about that.

Also at the other projects, very good drilling at Kittila, where we're seeing excellent thicknesses and grade in the Rimpi area also in the Sisar area, which bodes well for that deposit as we look at options to increase the production there. LaRonde we continue to get high grade on the Western side of the deposit at depth.

We'll talk a little bit about that and at Bravo, we recently tied up some surface ground. There is a really strong ability there to extend the mine life at Creston Mascota with some of the drilling work. We'll talk a little bit about that. Just going into some of the detail on the operating results, as we said, very good performance on all fronts.

Contribution as we said of particular note from Meadowbank and we would expect that our grade that we realized in the first half, we have the ability to be pretty close to that in the second half. So that is certainly one of the reasons why we've been able to increase our production guidance over 1.6 million ounces from Meadowbank.

Also Lapa is a contributor to that guidance increase because they will be producing into the third quarter, producing about 10,000 ounces more than what was in our original updated projections of the last quarter. So very strong margins coming from all the operation, which is driving good cash performance.

We can see on our financial highlights, strong cash provided by operating activities, strong operating cash flow per share. So that bodes well for our balance sheet, which is on the next page. Our balance sheet we have net debt of approximately $440 million. We have our CapEx spend will be weighted more to the second half.

We spend $360 million in the first half or anticipating spending about $500 million in the second half, but given the fact that we have cash of $950 million and we're generating very strong cash from operations with increased guidance and lower cost guidance.

We have very strong position to finance not only expenditures through the balance of 2017 but also the expenditures in 2018 and 2019 just on CapEx in the second half of the year, we expect to spend about $60 million more in sustaining capital, which is the reason why the all-in sustaining cost estimate is higher in the second half of the year.

Moving to the projects, LaRonde had a solid first half. We would expect the grades to increase in the second half from the second quarter here. So we're still looking from solid production coming out of LaRonde.

As we mentioned at the start of note, is we're getting very high grades with good thicknesses on the Western side of the deposit at depth and as you know, we are working on studies to develop the lower part of the mine. So these results are certainly very positive for ultimately mining below 3.1 kilometers, which is the plan.

Moving to Canadian Malartic, as we said, we highlighted that operation. We had record mill throughput. We has some softer ore going through the plant in the second quarter. The grades delivered to the plant were good at 1.11 grams per ton. We would expect good great performance also in the second half.

So that performance has resulted in us posting low total cash cost numbers at LaRonde and at Malartic.

Going forward, we will expect on drilling to be able to add ounces in the Odyssey part of that property, not just the Odyssey North and South Zones, but also we are going to be drilling the low, the main pit at Canadian Malartic and we'll be working on studies to ultimately determine how we can fit into the mine plan.

As far as the extension and opening up the Barnett part of the deposit, the Québec Government approved the expansion of the deposit and we're working now on just obtaining the Certificates of Authorization from a couple of ministries and the Québec Government and we should receive those shortly and we're doing some small amount of work on the site now, but activity will pick up as we move through the second half of this year and we're reforecasting the spend, the additional $20 million there and what was in our earlier estimate, due to the fact that we secured the approval to proceed with this expansion.

At Goldex, the highlight there was the completion of the Rail-Veyor. It's been commissioned. We've also mined the first block and the first stope in the Goldex 1, deep 1 area and that's about several months ahead of schedule and slightly better than budget. So they’ve done very well there in terms of opening up the lower mine.

We continue to drill the Deep 2 zone and also the South zone and what we see there is an ability to continue to extend that mine life below the deep 1 area and the deep 2 and then the addition of what is a smaller zone, but a higher grade zone in the South Zone area.

At Lapa, as we mentioned, they continue to do an excellent job of optimizing and delivering unexpected cash flow out of that operations. So as we said, they'll produce 10,000 ounces in the quarter, which helps with the increase in the guidance number.

There is also some work going to be done later this year and early into next year, stockpiling some additional tonnage there that we have at Lapa and the plan there is to introduce that at LaRonde when we get the LaRonde Five Zone, which is the old area up and running. So it gives us some flexibility as we ramp up over LaRonde Zone five.

At Meadowbank as we said, we're encountering good grades there. So that's one of the principal reasons why we're comfortable increasing the guidance for the full year. So good solid production and cost performance there. As we've said many times, we've been working hard over the last two years.

The team on site to extend the mine life at Meadowbank, a couple years ago, all the focus was on a production gap or a decline in production for Eco. The teams work really hard at optimizing the mine plan there.

So it looks like we'll be producing right through till the end of 2018 and we're studying the possibility of even mining some material at Meadowbank in the first part of 2019 as part of that transition. So we're still optimizing and updating the transition plans from the Meadowbank deposits to the Amaruq deposits.

As far as Amaruq goes we will have our public hearings. They're scheduled to take place in September on the permit. So that is nicely fitting into our projected timeline. So we would expect to have the permits by the third quarter of 2018 and we still anticipate production from Amaruq Satellite Zone to Meadowbank by the third quarter of 2019.

The road construction at the end of the quarter, 52 kilometers of the total of 64 kilometers, should be done in September, which is slightly ahead of schedule. So that's going well. Of note at Amaruq is certainly the exploration results. We had a significant backlog of assays coming out of the assays offices in Northwestern Québec.

There is a lot of drilling activity in Québec at the moment with a number of players drilling deposit that's caused a bit of a backlog. It's only in the last few weeks we've getting assay results in.

There is still substantial assay results that we're anticipating to see over the next few weeks and as a result of that, we would expect to have other release of drill results in early September, prior to a slight visits to none of it that we're having as we said in early September.

So what we're seeing from the drilling so far in the early results, which has been predominantly infill drilling is that the V Zone we continue to encounter high-grade gold intersections. We're confirming the continuity of the mineralization. That's important, but we're also identifying new areas.

We've identified a new area south of the V Zone pit outline and we also identified a new mineralized area about 200 meters west of the proposed V pit outline and these areas are important indicators that we can expand the V zone mineralization and that will be subject to close follow-up.

So over the next few months at the Whale Tail deposit drilling to date this year has continued to confirm the mineral resource. It's demonstrating good continuity of the mineralization and it's also continue to expand the deposits on the West.

The Whale Tail deposit has now been defined over a strike length of 2.3 kilometers expanding from surface to a depth of over 700 years and it remains open at depth and a long strike. At Meliadine, as we said the construction is going well.

We talked about the barge season getting off to a good start in construction is well advanced both in concrete work in preparation for wrecking the steel that's showing up on-site that the initial barges coming in to the port at raking in the offload area and landing area rank in inlet.

From an engineering perspective, we're about 80% done on detailed engineering. Our mine development slightly ahead of plan. We spent $140 million in the first half of this year. We'll spend about $220 in the second half of 2017 and as we said, the project remains on schedule and on budget.

So we're still focused on opportunities to optimize and improve the project, including things like advancing the Phase 2 open pit development. We're focused on expanding the ore zones outside of what we know is the current mineral resource model. The deposit remains wide open.

We've recently resumed exploration drilling, which we haven't done for several years and we're also doing some regional exploration along the favorable geology in that belt. So certainly potential to grow that deposit as we work on building the initial stages of the production platform there. At Kittila, good solid performance there.

We're focused really on how do we optimize the ore body and the infrastructure. We’re focused on increasing of the throughput going to 2 million tons a year that study will be finished towards later this year.

But importantly we're getting a lot of good drilling results that is going to be helpful as we plan the next phase of growth at the Kittila deposit. Recent drilling on the scissor zone is confirmed and extended the mineralization at the top of the zone.

It’s also extended mineralization in the central part of the zone by as much as 300 meters to the north. So good signs there on Sisar which is the third potential source of ore underground.

The Abreu zone which is the main zone we've extended that over 200 meters to the north for that positive for the economics of the deposit and that Rimpi which was always our second source of ore underground and that’s the focus of the development that we've been doing over a number of years in terms of the decline ramp.

The recent drilling has encountered very good grade and very good thickness. So that certainly bodes well for plans to increase the mining rate at that deposit. So as we said 2 million tons a year.

In the Southern business each quarter they continue run a very tight shift good control of costs, good production performance in terms of consistently hitting targets, Pinos Altos tracking solid production in the second half based on what we see in the first half.

We currently are working on looking at satellite zones there to continue to optimize that operation. We’re drilling a zone Cerro Colorado Zone which we think has potential to enhance the mine plan as e move forward there. Creston Mascota we talked about it at the start we’re focused on Bravo area.

The original mine plan had Creston Mascota deposit ending in 2019 based on what we see in the Bravo zone area which is adjacent to Creston Mascota and the fact that we've been able to tidy up some surface rights in the area we would see that there is very good potential now to extend the mine life at Creston Mascota beyond 2019 into the Bravo area.

And ultimately into the Madrono area which also is in the vicinity of Creston Mascota and that was a recent acquisition that we made from the same family that we acquired the Pinos Altos ground from. So good progress there.

La India also we've been able to - our drilling extend the reserve life there at the beginning of this year we see based on drilling further increases in reserve there. There are still a number of opportunities to add ounces and add value and extend the mine life there. We would expect strong production in the second half from La India.

So good solid production there. So before we take questions just a quick summary of where we are. As we said based on the strong start to the year from a production cost standpoint, we've been able to increase production guidance yet again and reduce our cost guidance and that’s driving good strong cash generation which funds the next phase of growth.

As we said our projects also moving ahead very well it keeps on schedule to achieve our production target of 2 million ounces a year by 2020.

We talked about exploration success at a number of sites so we would expect based on what we’re seeing not just from a exploration standpoint outside of non-mineralized zones but also with infill drilling confirming mineralized resources we would expect to see an increase in our reserve base again this year like we saw at the beginning of this year.

So we would expect by the end of this year we should see an increase in reserves and that are key projects like Amaruq we’re seeing high-grade mineralization outside of the Amaruq zone which bodes well for that as a satellite feed source to Meadowbank which drives growth.

The focus though is certainly on execution and delivery both on a quarterly basis, but also in the near-term.

In terms of our 2 million ounce target 2020, but we’re also very focused because of the solid of that plan even as we look out to 2024, our minds are really focused on the pipeline both through exploration and that’s why we’re looking at extending some of these near vicinity sources of mineralization at the Minesites but also early stage M&A to strengthen that pipeline and look at the pipeline and the production profile beyond 2024.

So a nice solid plan well beyond 2020, we maintain 2 million plus ounces till 2024 based on what we’re seeing and we’re confident based on our exploration success and our ability to add values in the pipeline that we can continue to move that production rate out beyond that date. So I'll turn it over to operator to the callers for question..

Operator

[Operator Instructions] And our first question today comes from Stephen Walker from RBC Capital Markets. Please go ahead..

Stephen Walker

Sean just a question on the balance sheet if I might. You've raised 220 million in equity in the first quarter.

You’ve added 300 million in debt here at $1,250 gold better you are at $1,200 gold do you feel that you now have adequate capital and balance street long enough including cash flow from operations to finish the year development program at Amaruq and at Meliadine and I guess begin of development that's anticipated at Kittila.

But a give a sense on your strength to the balance sheet?.

Sean Boyd

Yes, the answer is yes and part of that recent debt deal was to refinance the payment that we made in April of $115 million for the market. From an interest rate perspective and a term perspective, we’re so strong and the demand was so strong.

We put a little bit more flexibility into the balance sheet and we're in good shape even if as we look out at potential to expand at Kittila and cover the capital as required of that - for that project..

Stephen Walker

And just in a similar line of questioning, Sean either you or Ammar, just the hedging that was done in the currency, three principal currencies. You obviously filled in some of the - about a third of the required CAD, peso and euro this year.

Can you talk a little bit about what the longer-term strategy will be as far as hedging currencies into the remainder of this year and 2018?.

Sean Boyd

Dave, Smith is on the line, he can help you with that. I don’t think the strategy changes here. We’re opportunistic as we move forward when we certainly look for opportunities to add to that position. But Dave, I know you are on the line here..

David Smith

We're actually hedged about 20% on our CAD exposure already for 2018. We've got some euro, some peso and some diesel done into 2018 as well. So, we feel very confident that we’re in a good position to deliver on what we said we’re going to do especially in terms of the cost profile and the CapEx.

So, it’s not something that we’re particularly worried about, but we’re absolutely monitoring the situation and hopefully we’ll get the opportunity to enhance those positions as time goes by..

Operator

[Operator Instructions] Our next question comes from David Haughton from CIBC. Please go ahead..

David Haughton

Got questions on three assets if you don't mind.

Firstly at Meadowbank, nice to see the grades coming through, and I am just wondering are those grades beyond what you modeled in the reserve or is it just a matter of sequencing of what you already have?.

Sean Boyd

I think, there is some uncertainty when we did the budget with some of the grade in the port V Zone. It’s turning out as planned and what’s been surprise here is that the - we’re getting more tonnage in that area. So it’s facility that better mine and grade sequence in the third quarter..

David Haughton

And I guess the consequence of that is as Sean had mentioned.

It looks like you will be mining into 2019 and that gap is closing?.

Sean Boyd

Well, positive reconciliation, and the times is opening a window for us, the process for the tonnage into the brand and minimize the gap..

David Haughton

Over to Kittila, if you don’t mind. Sustained throughput continues to be above the 4,500 tons a day which at one stage seemed so far away to achieve. You are now doing that easily.

What should we be thinking about for the balance of the year?.

Sean Boyd

I think you will be running at the same rate, roughly for the rest of the year. Again, as we continue to work on the studies in the line project towards 2 million tons per year. We are sort of continually engineering, but we also did some derisking work in the quarter and processed bit more tonnage with the plant that, what would be future capacity.

So you’re seeing some of that impact during the third quarter. But as far as the mine is concerned and the mill is concerned for the rest of the year, we pretty see what the production was in the first half of the year..

David Haughton

Okay. I will touch that through for the balance of the year then. Finally, over to your satellite project at Goldex. I am struggling with the pronunciation of it, Akasaba. Wonder if you could give us some idea about the parameters that you got there because there is a combination of gold and copper.

So wondering what your thinking is as to how that might get developed?.

Sean Boyd

We are running it with the some delays with the permitting with both the provincial and federal authorities. Probably that are going to extend towards the year. We’re also looking how we’re going to be adapting the ramp up of that project.

But presently we're thinking about mining over a four or five year period and introducing about 2,000 tons a day in the current plant. We are essentially adding about 20,000, 25,000 ounces per year, and basically bringing in copper credits that will reduce the overall cash cost..

David Haughton

So, just trying to answer that, conventional floatation then taking that corner over to LaRonde for processing?.

Sean Boyd

Correct, and as the permitting delays evolve we will probably look at the sequencing rate of the Deep 1 versus [indiscernible] later as we got that flexibility now if you to do that and maintain guidance going forward..

Operator

[Operator Instructions] Our next question comes from Steven Butler from GMP Securities. Please go ahead..

Steven Butler

Well guys, your latest and greatest invention might be in Rail-Veyor, not your invention, excuse me. But is that now operationally, set us operational expecting the third quarter.

I guess we may see that in early September, when we’re at say towards at operating yet?.

Sean Boyd

That's correct. You’ll see the system and operation. We commissioned the six trains with ore back in June. So things are progressing very well. Presently we mind the first half which was essentially attract, while we were commissioning the exercise.

But as we continue the development in the model portion of the mine and the future strokes are mined out, we’re going to be bringing the new order through the new system..

Operator

We have no further questions in queue at this time. I’ll turn the call back to Mr. Boyd, for closing remarks..

Sean Boyd

Thank you, Operator, and thank you everyone for tuning in and participating in our Q2 2017 conference call. Hope to see a number of you on our marketing and possibly on our site visit to Quebec and Nunavut in September. Thanks again. .

Operator

This concludes today's conference call. You may now disconnect..

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