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

Hello, everybody. Our next presentation, which will be the final of the North American Senior Gold Producers is Agnico Eagle Mines. And I am very pleased to have with me today from Agnico recently appointed CEO and long-time President, Ammar Al-Joundi. Ammar, welcome. It's very nice to have you here.

Thank you, Lawson.

Well, where I'd like to start off is strategy. So -- well, first of all, congratulations on the new position. But in terms of strategy, it is still relatively early days, but should investors expect the strategy to change in any way from where it's been for the last several years? .

Well, strategy always evolves a little over time, but the core strategy at Agnico, which has built this company, is going to continue. And the strategy that we've had over 60 years really has 3 main components. One is per share focus. We've always been focused on production per share, cash flow per share, earnings per share, and that's really differentiated us. It served us well and we're going to continue that per share focus. The second thing is the jurisdictions we're in. We consider ourselves more of regional gold company rather than global. And by regional, I mean, we go into regions in the world that meet 2 criteria. They have to have the geologic potential for multiple mines for multiple decades. And importantly, Lawson, you have to be able to actually operate multiple mines for multiple decades, which means political stability. So -- we're only in regions where we know we can operate for decades and where we can build a competitive advantage. And the third component of that strategy, which has served us well and we're going to continue with, is creating value through the drill bit. In the gold industry and in any mining industry, there's really only 3 ways to create value. One is by finding gold in the ground, two, you convert that gold in the ground to cash above ground, and three are -- and it's much rarer, smart M&A deals. We really believe in the first 2. That's who we are, and that's how we've created value.

So little change.

Little change. And it's worked both for us. As I mentioned, when we talk about per share metrics at Agnico Eagle and at Kirkland last year, both of us had record production, which is nice, but both of us had record production per share. And at Agnico Eagle, where you've been in business for 64 years to have record production per share, I think, is really quite remarkable.

So you mentioned Kirkland. I think that's a great direction to go in next. Congratulations on completing the merger acquisition. Can you maybe spend a few minutes just talking about the evolution of the transaction and how it came together. But then what the key benefits are to both companies? And then finally, we talked a little bit about cost synergies, about the revenue synergies.

Sure. Well, the history on the merger, and it is a merger between Agnico and Kirkland goes back about 2 years. And Sean Boyd and Tony Makuch, two gentlemen who have added a lot of value in their careers in the gold space that we're in, probably 2 of the most successful CEOs in this space. They got together and they talked about putting the companies together. Now why would 2 very successful companies talk about doing a merger of equals with no premium. And the only answer is if it's going to create materially more value for the shareholders. And the key value creation of this transaction isn't the $2 billion of synergies, although we're going to meet that and exceed it. The real value added is by consolidating what we think is the best gold jurisdiction in the world, as measured by the criteria I gave of the geologic potential for multiple mines, multiple decades and an ability to operate multiple mines, multiple decades. The [indiscernible] Kirkland belt has been around for 130 years. Some of the biggest discoveries interestingly, in the last 24 or 36 months have been from that belt, including mines that we have. So that was really the driver for this. And the integration is done. The merger is done, and the team is really focused now on the value drivers going forward.

So I'm going to ask maybe what seems like an obvious question, which is what are your views on industry consolidation. But I'd like to know what you think about overall the industry. Do you feel that the gold sector in general needs more industry consolidation?

Absolutely. Consolidation is happening, it's going to continue to happen, and it's a good thing for the industry. And frankly, I'm talking my own book, but it really makes sense for -- it's hard for the junior companies to get financing these days. And even single-asset companies are having a hard time getting financing. And the best assets really belong in the strongest hands. And I think you're going to see that. It takes a little bit of time. But the important thing, Lawson, is that they have to be done in an intelligent manner with minimal sort of premiums, and they really have to be transactions that create value and create synergies. So absolutely, we think it's going to continue. We think it's a good thing.

And in a similar vein, I mean, traditionally, Agnico's mantra on M&A is buy small, think big. Kirkland Lake is an obvious exception and I guess Osisko would be the other sort of big exception. Has this strategy for you guys changed in any way? Or is that still the general focus in terms of M&A going forward?

Well, it absolutely remains the focus. And I would say that again, by being in a region that has demonstrated gold potential and being in that region for a long period of time, where you know the ground better, you know the exploration company is better, the partners better it really does give you an advantage in being able to buy early and buy small, think big. And you create a lot of value that way. And I would say that even the Kirkland merger. Again, it was a merger is 2 companies that had very similar philosophies coming together to strengthen a position in, again, an exceptional part of the world. You heard [ Mark ] talked about very eloquently about the difficult geopolitical environment that we're in today. I don't see that changing for a long time. And I think you're going to have more and more differentiation, not just on strategic metals, but strategic locations. And having a competitive advantage in the best geologic locations in the world, with the political stability that comes with it, I think that's going to be more and more a differentiating factor, not just in the gold space, not just in the mining space, but in the entire resource space. And probably at some point in the manufacturing space as well.

Interesting point. I'd like to ask about divestitures. We were talking about this off stage earlier. But I mean, you alluded to it on your last call that there could be some noncore assets in the portfolio worth looking at a potential divestiture. One group of assets that I continually hear about from investors is Mexico. It seems to be headed towards potentially a nonmaterial asset in the portfolio. Why does it make sense to stay in Mexico?

Well, we always look at all of our assets. It's natural. This is what companies need to do. You look at what you've got, you look at how to optimize the positions that you've got, and that's a normal organic part of running a business. So we do look at Mexico on a regular basis. We like Mexico. Mexico absolutely meets the criteria of the geologic potential for multiple assets over multiple decades. I mean they've been mining in Mexico for 500 years. They are good miners. It is a mining culture. The environment is very friendly towards mining very, very professional. It doesn't meet the second criteria of being able to operate multiple mines for multiple decades. It does. We've -- again, we've had nothing but good experience in Mexico. Our issue in Mexico has -- is simply -- it's been difficult to replace the pipeline. The toughest part of our business for any miner is replacing the pipeline we've done that better than most. I think we have the strongest pipeline of any of our peers, all of whom have also very good pipeline. But in Mexico, it's been tough to replace the pipeline. But I would suggest that our investors are okay with it because it does show a certain discipline. It's not hard, Lawson, to buy stuff. It's easy to buy. -- it's hard to buy good things. It's hard to buy things that really are going to generate the return that you want, the potential that you want. So while we haven't replaced the pipeline in Mexico as much as we'd like, that's largely a result of being disciplined. And I would end by saying there are some good potential things that we're looking at. All of that said, we acknowledge it is becoming a smaller part of our business. And strategically, you have to review that.

You guys are a much larger producer now. And so in that vein of finding reserves or replacing reserves and having exploration success, there's been some talk about the potential of changing gold price assumptions for calculating reserves. Is that something that Agnico is considering, i.e., a higher gold price in order to help with that reserve replacement? Or how do you think about that?

No, I don't think we would think about it for purposes of reserve replacement. What I would say is every gold company, every metal company has to take a look at what metal price they use for their mine plans. And that's natural, and that's normal. And I think what the industry has done has shown a very good discipline by not raising it too high, too quickly. That said, every year, all of us, we take a look at it. At some point, -- at some point, you have to be careful, though, if your reserve price is too low, are you going to be -- and the gold price is, let's call it, $1,000 an ounce higher, do you end up actually sterilizing profitable production? . So it's a balance that we go through every year. We look at it twice a year. It's a very disciplined program. And it will be determined by a bunch of factors, but it's not determined by well, we better raise the gold price so that our reserve number doesn't change. Our team has done an excellent job, both the legacy Agnico and legacy Kirkland team with the drill bit. We've -- we're really excited about the areas we're in. We're spending $325 million on exploration because we are -- we've got some really good results. And again, we've grown our reserve base quite substantially over time, consistently just as we've been on a per share basis our production.

I'd also like to talk about cost pressures. So incredibly, you experienced very little cost pressure, no change to the cost guidance for 2022, obviously. And you said it a number of reasons, but one thing you cited for the cost control or cost saving initiatives. So I'd be curious to get your thoughts on more detailed thoughts on what those are, first of all. But second all, I was a little surprised that you weren't experiencing more cost inflation on labor, especially given what's happening with contractor rates in Canada right now? Is it just a matter of time before that factors through? Or what do you attribute the difference? .

Well, on the broader cost management, the team has done an exceptional job. And I would say -- there are two elements. There are some structural advantages we have, and then there are some proactive measures that the team took that really made a big difference. If I look at some of the structural advantages we have, let's jump into labor. Because we have a regional strategy, and we like to be in a region for decades rather than 1 mine here and 1 mine there. We end up -- a consequence of that is we have a higher proportion of employees relative to contractors versus, say, the industry on average. Now that doesn't necessarily mean you have lower labor costs, but it means there's less variability, less volatility in your labor costs. So for example, in the Abitibi, we don't have any unions and we sit down every November over really a cup of coffee with the representatives and we negotiate the numbers. And I think last year in November 4, 2022, the labor increase cost was, I think, 3.2%, up from about 2.5%. If you go out and you try to hire contractors, a contracting firm, the labor costs are probably up 15% or 20%. So there's an example where we actually have a structural advantage, where we don't have the same variability. And our -- and labor represents 40% of our costs. So that's a big advantage. Another structural advantage we have, all of our mines in Ontario and Quebec, all of the electricity is effectively hydro. And hydroelectricity is not subject to changes in oil prices or gas prices. So again, it's a structural advantage that we have. But we have also taken some proactive measures that have made a big difference. Our Executive Chairman, Sean, who used to be CEO, has been saying for a year, we don't see inflation as transitory. We see that this is going to last a while. So we did some longer-term purchases, just basic stuff like that. And then Dave Smith and his finance team have done an excellent job on hedging. We've got about 40% of our fuel hedged. We, again, having a higher proportion of underground mines and access to clean grids. We use less diesel fuel than many of our peers, and it shows in our greenhouse gas emissions. But we have 40% of that hedged, as I mentioned. So they've done a good job on that. We've got about 40% of our currency hedged at levels better than what was in our budget. So it's a combination, Lawson, of taking some proactive measures and also having some structural advantages. That said, inflation is out there. We anticipated a certain amount of inflation in our guidance, and we think that what we had anticipated is going to be enough, and so we're maintaining our cost guidance.

That's excellent -- excellent answer. I'd like to ask the audience if there's any questions. I did not see any hands go up. And so I guess I'll move on to some of the other questions that I want to do, [indiscernible] Definitely I would be remiss not to touch on capital allocation before the end of this. So number one, what are the capital allocations for Agnico, but second question, which I get a lot, which is what are your thoughts on a buyback?

Well, let's start with the latter, with the buyback, and then we'll talk more broadly about capital allocation. So we start our budget process always with a dividend. That's always the first line in our budget process every single year. We've -- we've paid a dividend since 1983, and we're coming into our 39th year of consecutive dividend payments. Our philosophy on dividends is -- and we understand there's a lot of different ways to look at it. And our philosophy on dividends though, is always pay one, always try to raise the dividend and do whatever you can so you never have to cut the dividend because it's not symmetric, the market reaction. Sometimes you have to but really do everything you can to avoid ever cutting it. So what we do is we set a dividend that we know we can pay in a cyclical business. And by definition, that means that sometimes you're generating more cash. And what we're -- what we've decided is to the extent we have additional cash that variable portion will be returned to shareholders through a share buyback. So this year, we've targeted and have an intention to do a share buyback of $500 million because the price of gold is strong and the operations are doing well. And if the price of gold continues to go up, and we think it's going to stay up, then we'll raise the dividend as well. But what we don't ever want to do is cut the dividend. Some people will pay a dividend based on a formula. That's fine. That's okay. But again, by definition, in a cyclical business [indiscernible], that means that you're at some point, cutting the dividend. And we think that's -- what we would rather do is have a steady, growing dividend and a variable return in the form of a share buyback. So that's -- that's the question on capital discipline with regards to returning capital to shareholders. What I would say is the most important thing about capital discipline that we don't talk enough about in this industry is what really is capital discipline? And I would argue that 90% of capital discipline goes into the analysis before you make your investment. People, including myself say, look, our target is 15%. But that's really not discipline. That's just saying that your target is 15%. The discipline comes in, am I really going to get 15%. Have we really done the work? Have we assessed the risk? And the one thing that I would emphasize, our regional approach, which means typically, we've been in a region for decades. Our pipeline, we have a lot in the pipeline, a lot of value-added projects. Let's just hit some big ones. Detour, 10 million ounces in reserves and resources added last year, new mine plan that mine is going to be operating probably past 2050. [ Malartic ], 15 million ounces of resources underground, still open, going to be transitioning from Canada's biggest open pit gold mine to Canada's biggest underground gold mine. Kirkland Lake consolidation, we think between Macassa and Upper Beaver and Amalgamated Kirkland, we can roll that hub to 500,000 or 600,000 ounces. All of those, Lawson, and same with [ Meliadine ], same with [ Kittila ], the same with all of the expansions. They're all in regions where we operate. And they're all leveraging off existing infrastructure. So on the capital discipline, you're not just -- you will always get your best return on capital, taking advantage of existing infrastructure always. And importantly, and what I think the market doesn't talk about, you always get your best risk-adjusted return on capital because the risk is always lower and something that you've built and you've operated for decades.

I definitely want to get in a question on ESG. It was a clear theme in both of your 2 competitors prior presentations. And so I guess to frame it this way. Where is the low-hanging fruit in your portfolio to achieve your ESG targets?

Well, so ESG, the -- so let's talk about the environment, and then let's talk about the social parts of that. The environmental I thought Tom did an excellent job on. The industry is going electric. The industry is going autonomous. It absolutely is. By the measures, objective measures, we're industry leaders when it comes to low greenhouse gas emission and low freshwater usage -- and I mean we're the leaders by a long shot. And some of that is actions we take. But again, if you operate mines in Ontario and Quebec and all your electricity is green, you've got a structural advantage. The key point, and again, Tom did a very good job talking about this is the -- there are very few industries in the world. That are as amenable to automation, autonomous moving electric is the mining industry, and we're going to do it. I'll give you a very simple example. For every -- if you have a diesel truck and ag in LaRonde, for every kilogram of diesel, you bring down, you have to bring down, I think, 13 kilograms of air to burn that. And then you've got a pump 14 kilograms of air, 3 kilometers back up. If you can -- electricity has no mass. I mean, just the economics of it makes a lot of sense. The environmental makes sense. But the real push and the thing I think we're really proud of at Agnico is the social part of ESG. It is a core part of who we are. It's a core part of who we've always been. If you're in a region everybody is socially responsible in this industry, if you're a major player, you have to be. And I think in the culture, and I know these people, they're all good people. What I would say at Agnico is if you plan to be somewhere for 50 or 60 years, you have to take it to another level on the social side because you can't -- you'll never build your second mine, your third mine, your fourth mine, if you didn't do a good job with your first mine. And what makes us the most proud is when we go to the Abitibi and we have employees whose parents work for us, in some cases, grandparents work for us. When we go up to the -- up to Nunavut and we talk to the regional authorities there in front of the public, and we get an ovation at the end of it because of some of the things we've done it. It really it's -- frankly, it moves me a little bit. So I'm delighted to see that [ Mark ] talked about ESG as importantly as we did. I'm delighted that [ Tom ] talked about it as importantly as he did because we think it's essential and frankly, we're proud of the industry that mining is an industry if its done well and do a lot of good.

That's very well said. I guess, an incredible statement that some of your current employees grandparents worked there in the company that is really amazing. I'm going to end it there. We're nearly out of time. I'd like to thank you very much for being here today.

Thanks a lot.

Thank you all.