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

Okay. Hello, everyone. So next, we have another huge gold producer, the one with a little bit more geographical concentration than the last 2. So Agnico Eagle is by far the largest gold producer in Canada and in each of the Canadian provinces and territories in which it operates. Agnico is also the largest gold producer in Finland. Now while not the largest, also a very significant producer in Australia and is a very important contributor to Australia's national gold production. So this importance, of course, comes with many benefits. And with me here today from Agnico to speak about these and many other things is Executive Vice President, Finance and former Chief Financial Officer, Dave Smith. Dave, welcome to have you here in Barcelona. It's really nice to see you.

Thank you very much, Lawson. Thanks for having us.

So I wanted to start off and get your view on the gold price. It's had a great start to the year. Where do you think it goes from here?

Yes. I just listened to Mark Bristow talk about it, and I think he nailed it. Though I disagree a little bit. He thought that it doesn't have a lot to do with rates. So I think in the near term, it probably does have a lot to do with rates. But Mark also talked about the longer term and the money printing. One thing I would add to what Mark said is that I think COVID taught us that there's not only the ability of central banks to print money, but there's now actually the expectation that they will print money to solve all of our problems. So I'm just a poor mining engineer, so I have to keep everything in simple terms. And so I think of it in terms of supply and demand. And if there's an infinite supply of something like paper money, then I guess the price heads towards 0. And that makes something like gold, other hard assets, too, worth much, much more because they're, of course, priced in that paper money. So I think by the end of the year, we'd probably see an even stronger gold price than we have today. And then I think over the long term, it just bounces around, but continues to head higher as it always has.

So bullish. There seems to be a theme.

Surprise, surprise, the gold mining companies are bullish.

Well, it's not always the case. I mean we've had conferences where the gold buyers are bearish of the gold price. Those are...

I never was. I'm always bullish.

I also wanted to get your thoughts on M&A. Obviously, Agnico's last year completed a huge M&A transaction. You've done another this year, the partnership with Teck on San Nicolas. I mean it seems you guys are sort of always doing some sort of M&A. And going forward, can we expect more of the same? And what type of M&A? Are we talking big, transformational M&A like the Kirkland deal or more like the San Nicolas transaction with Teck?

It's hard to say. And as the former CFO of Agnico, I always joke that it was impossible to budget for M&A. I think it's your job to prepare the balance sheet to make sure that you can handle whatever gets streamed up. Typically, Agnico has gone small scale, early stage. I think there are periods where buy is smarter than build. And I think the last couple of years, that was actually the case due to the inflation run-up. So going forward, I think we have the ability to do anything. We don't have to do anything because we have a strong pipeline that will keep us busy for the next 10-plus years. So that's a luxurious position to be in. And of course, our balance sheet is pristine to support that as well. The one thing I can say for certain about M&A is that it will be effectively in our backyard. Unlike Barrick and Newmont, we are not a global gold mining company. About 80% of our production comes from Canada. And we like Canada. I think the importance of Canada is continuing to grow as people look at geopolitical risk around the world. And so we've got a great opportunity to keep growing within Canada, within our own projects, but also it's possible we'll do more M&A.

You touched on something really interesting there, which is it was better to buy than build as a result of cost inflation. That actually worked out very well for Agnico. You guys were one of the few companies we cover that finished 2022 within guidance. And I think your acquisition of Kirkland Lake and the synergies that came along with that helped quite a lot. So just sitting here today, what is your outlook for cost inflation? Are you starting to see some pressures alleviating? Then on the other hand, I don't think all the cost pressures are alleviating. Where are you still seeing some of those pressures? And where do you expect things will go throughout the rest of this year?

Yes. For example, I think cement is still elevated. Steel is starting to come off, things like that. One of the great opportunities that we've had and we took advantage of is the weak operating currencies. We don't operate in the U.S. 80% of our gold production is in Canada, as I said. And the Canadian dollar is extremely weak. That is a huge benefit to us. And in fact, we often get asked about fuel. Fuel has come down as well, so that's helpful. But our total exposure to diesel is only about $400 million per year, not a big number. Contrast that to the Canadian dollar exposure that we have, which is about $4 billion per year through OpEx and CapEx. So cent here and there on the Canadian dollar actually dwarfs most other inputs to the business other than gold. And as a result, we had a very good first quarter. Gold production was strong. Cost performance was strong. Versus our budget, we were about $30 per ounce lower than we expected to be. And about half of that impact was the weak operating currency, specifically the Canadian dollar. So there's a lot of components, of course. Inflation is not gone, but I would subscribe to the thesis that it's probably peaked.

Just getting back to M&A and asset transactions. Are there some assets in the portfolio that could be potential divestiture candidates? And the question that keeps coming up for contacts is whether or not Australia is a core operating base for Agnico, particularly given like how successful you've been concentrating in Canada, also Finland. You're less concentrated in Australia.

It's another question that we're getting constantly. It's quite logical. As you say, Australia is kind of far away over there, not close to Canada. We've only owned it for 1 year, though it does have a declining grade profile in the coming years. Coming from that super high grade of the Swanson, it's forecast to go back to normal to 5 to 6 grams ultimately, which is what it always was as a grade. So something with a declining grade profile, therefore, increasing cost profile, and it's a one-off on a different continent. I think that's why logically, people are coming to that. We don't know. I've made up odds that say I think it's probably 50-50, whether we sell it or keep it and use it as a base to expand in Australia. Australia is a great mining country, and the team we have in Australia is absolutely excellent. So you could go either way, frankly.

So what's going to determine that?

Drilling, frankly, yes. If there's hints of Swanson 2.0 super high grade, I think that's something we'd like to hold on. So we're probably 1 year or 2 away from really deciding. Somebody comes in and knocks our socks off with a tremendous offer for it, I guess we would listen.