Agnico Eagle Mines Limited (AEM) Earnings Call Transcript & Summary

Well, afternoon everyone, and good evening in Europe and overseas. This is Mike Jalonen of Bank of America Securities with our next company, Agnico Eagle Mines. Very pleased to have Sean Boyd, Deputy Chairman and CEO from Agnico. We're going to conduct a fireside chat. So if you have any questions, please feel free to send them in. And Sean, I'll start off with a big picture question.

First of all, you're -- of all the CEOs at our conference, you are the longest-serving CEO of any company. And so you've done -- and obviously, Agnico, you can see all the things that have been done right over the years. Just wondering what the corporate strategy of Agnico is going forward? Thanks.

Thank you, Mike, and thank you for those joining the call today. From a strategic perspective, there is not much that really needs to be changed. As Mike said, we've been at this for a long time at Agnico, over 6 decades in business. So we have an effective strategy. It's well matched to our skill set, well matched to our opportunity set. It's really centered around creating that per share value. So again, no change in the general approach. But specifically for this year, we really break it down into 3 parts from a strategy standpoint. Q1, we had some work to do on 3 assets. That's largely been done. Q2 is really to manage through the virus. And we're in the process of restarting and ramping up most of our operations. We were impacted more than others. And the second half of the year is just to come back strong, produce those ounces that we produced in the fourth quarter of 2019 and generate a lot of free cash flow. So that's really the focus in 2020. But longer term, it's really to stick with a strategy that's per share focus, as we said. But as we see gold prices at these levels, we just want to reemphasize that all the more reason to stay very disciplined and focused on free cash flow generation.

Okay. Maybe we could just as a segue, just talk about Agnico's capital allocation strategy. The dividend was increased this year quite sizably. Just wondering how that fits in with debt reduction, funding the project pipeline, of which you have a lot of projects we can talk about later. Thanks.

Well, it's really -- and it always has been about a balance, although the dividend has clearly been a priority for us. We've paid one for 37 consecutive years. And as you said, we did increase it earlier this year. We had actually increased it in each of the last 6 years, which I think was important given that, for the most part during that period, gold prices were roughly flat at around $1,200. And we were in the largest CapEx build phase of our 60-plus year history. So even while building out the pipeline, we were still focused on increasing the dividend. So going forward, we see this as potentially having similarities to the gold space back in the late '70s, 1980, when the gold prices ran very quickly to a high level, and the companies were just amassing massive amounts of cash. And it was shortly after that, that Agnico instituted its first dividend. So the focus will be on the pipeline, but we're not planning or have no desire to build everything at once. This is still -- even if gold is at $2,000, we're not speeding up the pipeline. It will be really focused on a relative ranking of those opportunities, stage them, work at a measured pace. While we're doing that, we can still generate free cash flow, put some of that into the dividend, but also improve our financial flexibility.

Okay. Just maybe I could touch on COVID. Agnico did reintroduce your -- in the Q1 results, your 2020 production forecast. Just wondering maybe you can give a progress report where the assets are that were on care and maintenance, how they're ramping back up? And what's left to do there?

Sure. So as we have been saying, we were impacted probably more than most of our 8 operating mines. 7 were impacted, most of them reduced and suspended in terms of operations. So that certainly had an impact on our guidance. And we put out a fairly wide range, and that was essentially to deal with the uncertainty around when we could start ramping back up. So we have more clarity on that now. We had the Quebec government decide that mining was a priority industry, and it allowed mining to start back on April 15. So we have almost had a month back in Quebec. And essentially, all the mines are 95%, almost 100% of the way back, and that was by design. The important thing for us was to have our employees comfortable about coming back, have their families comfortable. So they had to be comfortable with the procedures that we put in place to protect them and their well-being. And a lot of those procedures were worked through with the health authorities in Quebec. So good response. We recall people back on a voluntary basis. We got 90% acceptance. It's now up to 95% in Quebec, and that's allowed us to ramp up those operations. On the back of that, we continue to ramp-up in Nunavut. Our Nunavut operations were impacted as we sent our Inuit-based, Nunavut-based workforce home so we could isolate the operations from the communities. They are still at home, but we have been able to ramp those operations back up and focus really on some of the key things that needed to be done there. At Amaruq, catch up on the backlog and maintenance, continue opening up the pit at Meliadine. We were positioned ahead of COVID and its impacts with the replaced repairs on the crushing system. So we were running at 4,000 tonnes a day ahead of COVID. So things have ramped up nicely in the Canadian operations. In Mexico, we've just heard that we will be able to open up next week. So that's ahead of the general opening up in Mexico, and that was a lot to do with the fact that we operate in an area with very little impact on the virus. And again, we've enhanced our screening procedures. One other thing I'd just like to point out on COVID is we -- our team had some really good foresight in getting a hold of an ability to test employees very early on. So we've been testing employees in Finland and in Nunavut for several weeks now, and that was just another area of screening to ensure that we weren't bringing the virus into those northern communities. We have plans that, by the end of the month, we hope to have a mobile testing equipment available to us in Quebec, and that will allow us to test the employees prior to boarding the planes to go to Nunavut. So we've been expanding that because it's worked very effectively in ensuring that we keep COVID out of our operations.

Yes. Last -- about a week ago or so on the Kirkland Lake call, Tony Makuch, as you know, operates on the other side of the border in the Abitibi, and he was talking about how protocols of the COVID would lead to a new normal for mining operations. Is Agnico finding that out with the introduction of COVID protocols, how the volumes -- sorry?

Yes. Sorry, Mike, I would agree with that. And I think that for the next several months, anyways, I think nobody really knows for sure given the uncertainty around the virus. But I think extra screening, additional hygiene measures, certainly, physical distancing are important. As we've been saying, the mines generally lend themselves to good physical distancing, except at certain pinch points. I think that's where testing can help and also additional face protection can also help. So I think we'll have these for a while. The potential offset is that, at least from our perspective and maybe others have seen this, is we were reducing effectively almost all of our mines in terms of headcount at once. And so with this gradual reintroduction of the workforce, I think we're finding we can do more with somewhat less. And so we're still trying to understand the magnitude of that as we ramp up. So we think we should have an offset there. But as well, I think a lot of these additional protocols, we'll get much more efficient in applying them, I think, which will also help going forward.

Okay. Well, that's good news. You touched on Q1, you had some issues there, but they are being resolved like Meliadine, the crusher apron feeder has been repaired. And so will Meliadine get back up to that -- when we'll get back up to that 4,000 tonnes a day? Or is that more -- a processing rate, I mean. Or is that more impacted by the local workforce staying home right now?

No, we're at 4,000 tonnes a day. We're using 1,000 stockpile and 3,000 from the mine, because we're ramping up mining activities. So we know the plant can do more than 4,000 tonnes a day. As we move forward, the focus in Q2 has really been catching up on sort of pace backfill and building up a drilled off inventory and a stockpiled inventory, which we are doing. As we move into the second half of the year, we have additional ore sources, which will help us to maintain 4,000, but go to 4,600 in the fourth quarter of 2020. And those additional sources of ore will be open pit as we work on Meliadine Phase 2, but also from a third mining horizon in the underground mine. We're pumping that area now. I think as you know, that's an area that's higher grade than the 2 existing or current underground platforms. So that will certainly help with the performance of the mine in the second half of the year.

Okay. And then just turning to LaRonde. Again, Q1 results, you noted that infrastructure upgrades related to upgrading the ground support, the West mine at LaRonde were completed. What does that mean for LaRonde's production going forward? Certainly this has seemed to go quicker than expected.

Well, we had some planned work to do. And as we said, that was done prior to the impact of COVID. In fact, we're in the West mine area prior to the suspension of activities. We're preparing stopes for extraction, doing development work. We've actually extracted the first stope from the West mine and that should be in the mill over the next few days. So the question around the West mine area, although we did slow the rate of mining, we do have the potential to see more gold coming out of that section than is in the block model because we do get a definite upgrade anywhere from 30% to 50% that's not in our numbers. So I think that as we go into the second half of the year, as we begin to open up the West mine area more, I think we're likely going to see the type of positive reconciliation that we saw in the fourth quarter in November, we realized over 7 grams per tonne. So there's good potential there to see there was certainly an upgrade in the contained gold in that West mine area.

Okay. And maybe just going to Canadian Malartic. Obviously, the Odyssey project, East Gouldie have excellent potential to become multimillion ounce bulk tonnage underground mines for the Canadian Malartic mill. Just wondering how you see that whole situation evolving. Certainly your partner is very excited about the whole situation and just wonder what Agnico thinks.

Well, I think that if you recall back in 2014, when we sort of jumped into the hostile bid for Cisco, we certainly were saying that one of the reasons we were engaged was because we felt there was potential for an underground scenario there, although there wasn't much drilling done. The Odyssey and East Malartic component of a potential underground are marginal, lower grade. The East Gouldie has potentially changed everything because you have the potential for decent volume at higher grades, which can actually skate it all on side. We like the East Gouldie results we're getting. Although it's early, they're very good. The drill spacing is still too wide. It's 150-meter spacing. We need to tighten that up over the next 18 months. And our guys are saying we probably should get to around 75-meter spacing. We're just trying to understand the continuity. And this is particularly important in East Gouldie because that really drives most of the economics. So we still need to get a feel for the continuity in the grade because the East Gouldie drives the economics, but it also requires most of the capital because we need a shaft there. So you can't rush this stuff. I think the good thing is, is that Agnico and Yamana have underground experience. We know how to move these types of things forward. So you got the right people looking at this. Fortunately, the Quebec government yesterday just reopened up exploration instead of about a month after they reopened up mining. So we'll be able to get drills back in there shortly to resume our drilling. So we're in that information gathering phase, and we'll likely have, at some point, a decision to make on a ramp. This will not just need a shaft, it will likely start with a ramp and ultimately need a shaft. So those aren't small ticket items. So we've got to understand the opportunity and how it fits within both of our project pipelines and then decide how to allocate capital towards it.

Well, it sounds like a multiyear process for a few years at least. And that's -- okay.

So I would add something on that is that I think that the fact that East Gouldie was discovered, the fact that we may be picking up the reemergence of a higher grade VMS at LaRonde at depth, it, as we've said before, it kind of shows you these old camps have more life to them. And that's important because you can leverage off of skills and infrastructure have the potential for high rates of return additions to the resource and reserve base.

Okay. Actually, I was going to ask you about LaRonde Zone 20 North, which, as you know, is a big source of ore for the LaRonde mine years ago. And when you mentioned in the Q1 call, you're finding it deeper, like how far is that away from where you're mining now? And how much more drilling you need to see what you have just on the economic?

Yes, it's not that far away at all. So what it's really done is it's really opened up the eastern part of the deposit, which we just had assumed we should be focused more on the West, given the high-grade nature of the West mine area and the upgrading we're seeing. And the West mine is really a repeat of what we were mining 20 years ago at LaRonde with the North-South fractures, with the visible gold content. So here we are again, having what may be a repeat of a VMS zone that is very near where we're mining, plan to be mining. And so that's why it has potential. We hope it continues to grow. We've got a grid pattern laid out to do some additional drilling to see how far east it extends. And given the experience we have there of over 3 decades, we'll certainly know how to move it into a mine plan if there's decent volume there.

Okay. Maybe circling back to the next-generation of projects for Agnico, you mentioned spreading these out over time. What -- obviously, you are moving ahead with Meliadine Phase 2, and -- but there's a number of other targets, Amaruq underground, Goldex deeper zones, there's Kirkland Lake, Santa Gertrudis and of course, we discussed Canadian Malartic, Kittila along strike. And just how do you line all these projects?

Well, we're still doing the work to get a relative ranking so we can prioritize them. So it's -- there are some that are fairly easy. Meliadine Phase 2 is already underway. We're actually developing the pit, first pit. Amaruq underground, with COVID, we've just pushed it back a year. Kittila, shaft sinking and expansion underway, it's on hold on the -- from the shaft sinking perspective because the shaft sinkers were Canadian, we had to send them all back home to Canada with COVID, but we're working to get them back over there and to resume the shaft sinking. So those ones -- and I would put Goldex in there as well. Fairly straightforward, the deeper zones are there, we're getting more of the higher grade South zone. So we're just having some good surprises as we go deeper at Goldex. So those ones are easy, don't require a lot of capital in the big picture, good rates of return on them. The ones that we still are in that information gathering phase is the East Gouldie and the underground concept, the Canadian Malartic, Santa Gertrudis, Kirkland Lake around Upper Beaver. We know it can grow. It's just a matter of how it stacks up in there -- Hammond Reef, we'd always said it needed a higher gold price. It's 5 million ounces. It's sort of probably at the back end, but it's something we need to do more work on it. Maybe there's some innovation technology we can use on that one. So as we grow the output to sort of 2.2 million ounces, we're going to keep working in moving these projects forward in terms of assessment and relative ranking. But again, there's no appetite to build these all at once to grow at a faster rate. That's not the point. The point is, is to move the pipeline forward, while we're generating free cash flow to boost the dividend and build up some more financial strength on the balance sheet.

Yes. Okay. I can probably have another segue. We're talking sustainability of production. Certainly, that seems to be a major theme of the gold producers. So far, the global gold producers have spoken, talking about sustainable production basis, Newmont, Barrick, Gold Fields, just nobody seeing -- the larger companies, what I'm trying to say, don't want to grow too much. They just rather focus on cost and grow the cash flow and just have great brownfields expansions. Is that kind of Agnico's strategy in the 2 million-ounce range for the foreseeable future?

We can do a bit better than 2 million. So what is that number? It's beyond 2022. So we only put out 3-year guidance. So we continue to refine the life of mine plans at each of the sites as we gain information on things like LaRonde at depth and East Gouldie and Kirkland Lake and some of these other projects. And so for us, it's less important for growth, although growth is important, and we have that growth for the next 4 to 5 years. The good thing is it's manageable. I think that's sort of a comfort level for us. And as we said, it's -- we think it's more important for the industry with gold at $1,700, with the potential to go higher. It's much more important to remain disciplined this time around to generate that free cash flow and return it to shareholders.

Kind of a big change for the industry in 2010, '11. You know what happened there. A lot of companies took write-downs, not Agnico, but others. And maybe I could turn to M&A. Agnico's strategy has been to buy small, think big. Correct me if I'm wrong. There's been a lot of M&A in the gold sector lately, yesterday, Alacer and SSR Mining. Just wondering if you are still sticking with your tried and true strategy?

Yes, that strategy works for us. We're really focused on what's out there that could impact the pipeline or the profile 5 to 10 years from now. So it's really single asset that has geological upside for us, particularly in areas that we know well. So that's not easy to do. So you have to be patient. So with the gold price at $1,700, we haven't thrown a lot of resources at corporate development or project evaluation. It's still the same group doing its work. And that's consistent with how we have operated. There's no urgency or pressure to do a deal. We don't see that. We can see why others -- smaller, are looking at ways to combine skills and maybe combine balance sheets and get bigger and minimize risk. I think that makes sense. We've been saying for a while, there's way too many companies when you look at the size of the opportunity set. So I think good, smart consolidation of the smaller guys kind of makes sense.

True enough. And we do have a question from the line. It might be more of an industry question, Sean. But the investor asked, should we expect costs to follow the gold price higher, which, as you know, occurred in the '08 through '12, '13 period? And for the industry as a whole, just maybe you could touch on Agnico and what you think there?

Yes. I think what happened there is the industry is running at a gold price of $500 to $600 for a while, and then it jumped to $900 to $1,000, fell back a bit and went up. And then what companies did is they started using $1,000, $1,100 for the reserves. So that was almost a double from where they were just a few years earlier. And when you double the reserve price you're using, that dramatically waters down your business. And that's essentially what happened. And you're basically introducing a lot of low-quality material relative to what you were doing just a few years earlier. So if you look at the reserve statements recently put out, most of them are in that $1,200, $1,250 range versus a $1,700 gold price. So I don't think we're going to see a massive increase in the assumptions used, the gold price assumptions used for reserves, which is a good thing, which should help maintain the quality of the business. So as long as we do that as an industry, I think we can manage costs a lot better than the way the industry did it last time.

Well, that's good news for investors. And maybe I could circle back to Hammond Reef, I was going to ask you about it. I seem to remember that when Cisco had it, they had, I believe, a positive pre-feasibility study at $1,200 gold. So I'm finding that in this conference, companies with big assets like these, not much is happening. They're being studied, but that's about it. So just wondering at what gold price -- what at Hammond Reef, $2,500, $3,000, that get you really excited?

No. Well, it could probably work now because it's CAD 2,400. So we have to look at -- we're at record high -- around record high Canadian dollar gold prices. But just because it works, doesn't mean it gets built because it's got to rank up against what else we have. I think we liked it. The reason we brought the rest of it in for the value within the package of assets we bought from Yamana was $12.5 million for the other half of Hammond Reef. And so we're looking at ore sorting technology there that could help. But it's in an area where you've got local support, you can get your permits. So there's not a lot of big hurdles on the social side. It's just a matter of looking and reviewing the costs there. So we've got people that are looking at it, but we're not arm waving about it. It's in the portfolio, it's interesting, it's sizable. We don't have to spend a lot of money on it to think about it and to look at technology that could help to make it work. So it just gives us an option on the gold price.

Our firm is forecasting goal to get to $3,000 in 18 months. That's U.S., so we'll see about that. So I guess, Sean, we're coming near the end of our time. So I don't see any more questions on the line. So I want to take this opportunity to thank you and Agnico and you all for participating. And we hope we can see you live in Barcelona, May 18 to 20, 2021. Knock on wood.

That would be nice. Thanks, Mike.

All right. Thank you. Take care.

Bye now.