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

Okay. Welcome, everyone, to our next session. Just as an introduction, my name is Fahad Tariq. I'm a mining analyst based out of Toronto at Jefferies. I cover predominantly the large cap precious metals, including Agnico Eagle, of course, as well as some of the mid-cap copper companies in Canada. Really happy to have Agnico Eagle join us. Agnico Eagle probably needs no introduction, but I will introduce them anyway. The second largest gold company in the world with a market cap of $70 billion. That was as of last week. I think I'm off by a couple of billion so it's probably higher than that today. Through disciplined acquisitions, the company has grown to 3.5 million ounce per year low-cost producer, leveraging its regional focused approach primarily in Canada. And important to note, at least in our model, 85% of the net asset value of the company is in Canada. And I'm really delighted we have today with us Jamie Porter, EVP Finance and CFO. Jamie, welcome to our conference.

Thanks, Fahad.

Maybe just to set the stage, this is an industrials conference. We do have quite a few generalist investors who maybe don't spend as much time looking at mining. Can you just provide just a high-level overview of the company, where the assets are located and just the cost structure?

Yes, absolutely. Thank you. I mean, you gave a pretty good overview, second largest gold mining company in the world by market capitalization, we produced just under 3.5 million ounces a year. The vast majority of that from Canada. I think what differentiates the Agnico strategy though from Barrick and Newmont is that we -- while we're a global company. We have operations in Canada, Finland, Australia and Mexico. We are a regional miner. So our focus and the majority of our production comes from regional clusters in Northern Ontario, in Northern Quebec and Nunavut. Our strategy is really consolidation within a region to create a competitive advantage. So in the areas where we operate, we are the generally the largest employer, the employer of choice in many cases, our employee turnover is half of the industry average. We have long-standing multiple-decade relationships with our suppliers. We have purchasing power by virtue of the volumes that we buy. And we have the ability to share technical resources, so people, technical expertise, equipment, in some cases, parts and supplies because of the physical proximity of many of our mines. So that's really our strategy. And that's what helps us to keep our costs in check. And if you look back over the past five years, I think cost inflation has moderated but Agnico has really been a leader in terms of keeping costs low, driving -- constantly looking for continuous improvement opportunities and efficiency to make sure that we allow the benefit of higher gold prices to actually accrue to our shareholders through margin expansion rather than having it get eaten up through higher costs.

And then just to address the elephant in the room, M&A, I'm sure it comes up often in meetings. If I think about your peer group, whether it's Newmont or Barrick, just the top three, it sounds like there are more divesting assets that they are acquiring. Agnico maybe is more uniquely positioned to acquire. Just walk through philosophically how the management team is thinking about M&A? You alluded to regional focus, but what are the other filters and screens that they're using?

Yes. I mean it's a good question. If you look back in Agnico's history, there has been a fairly significant M&A that's helped to bring the company to where it is today. a lot of the company's growth has come through the drill bit and then through the development of its own projects, but certainly significant M&A in 2022 with the merger with Kirkland Lake Gold, bringing in the Detour mine, Macassa assets as well as Fosterville, which are all important core assets to the company today. We are uniquely positioned. I'd suggest in that we -- we're very happy with our current production base, producing 3.4 million ounces this year. We'll talk about I'm sure later on this morning, but we do have what we call our five key value drivers. So five projects that collectively represent about 1.5 million ounces of additional production. Now that will be offset by depletion at some of our existing mines, but we see the potential for 20% to 30% production growth over the course of the next 5 to 10 years, all with projects that we already own. So from an M&A perspective, from an external M&A perspective, we can afford to be very patient and very disciplined. And obviously, we have to weigh any external opportunities against the internal development projects that are part of our organic growth pipeline that we already own and that we know are high return at gold prices, $1,000 an ounce below where current spot levels are. So yes, we'll take our time. Obviously, it's our job to look at every decent opportunity out there, but it's a pretty high bar in terms of competing for capital against what we already have.

One specific region that comes up often in M&A discussions, and there's been some media reports around this is Australia. Agnico, of course, has the Fosterville mine that they acquired through Kirkland Lake, a single mine in Victoria. How do you think about Australia as a region? Is that a place where you'd like to grow or potentially exit as you think about just having a single mine there?

Yes. I think when you look at our strategy, I mean, we're willing to accept technical risk and geologic risk but we're not -- we're less inclined to go into jurisdictions where there's high potential geopolitical risk or uncertainty around permitting and then the ability to develop projects and the rule of law and everything else. So looking through that lens, Canada is obviously a great place to operate the United States and Australia would be some of the top three gold mining jurisdictions in our view. So we are focused. We've got 85% of our NAV in production coming out of Canada. Newmont and Barrick have done a good job with the U.S. with their joint venture in Nevada and Australia is an obvious potential expansion jurisdiction for us. That said, I'd say our thinking on Australia has evolved over the past several years. Immediately, after the merger with Kirkland Lake, there was a thought to potentially divesting of the Fosterville gold mine. At the time, the gold price is about $1,600 an ounce. Fosterville had been in operation for about 15 years. For most of those 15 years that had made a lot of money, and then they hit this ultra high-grade Swan zone and was printing like $1 billion a year of cash flow was one of the top five corporate taxpayers in Australia for a period of a couple of years. But those -- that zone was being mined through and grades were on the decline. And the thinking was, well, maybe this asset should be divested. What's changed since then has really been the gold price. We've gone through a period of a near doubling of the gold price over the last several years. And now we're generating north of $1 million a day of free cash flow from the Fosterville mine. So it's extraordinarily profitable. Our geologists are very optimistic that there's strong potential for us to find another ultra high-grade zone and have another kind of boost in production. And where that mine is located, Fosterville's in the state of Victoria in Southern Australia, there's really no other mining -- gold mining operations in close proximity to us. So the infrastructure that we have there, the processing facilities creates a lot of optionality if there's other discoveries in the region. If we can find or another junior finds a good gold deposit within 100 kilometers of where we're located, that's likely going to be processed at our facility. So we see a lot of exploration upside. We see a lot of optionality associated with the infrastructure, and we're making a ton of money. So Fosterville is core for now. Do we expand in Australia over time, potentially? But again, our focus is on regional clusters. So creating that competitive advantage from physical proximity and where Fosterville is located, there's not much around it. So we'll be very selective in terms of an expansion into Australia. And any opportunity again, would have to be weighed against our internal growth projects.

And then a lot of the opportunities, as you alluded to, in Australia would be Western Australia, which is not the same as Victoria. Is that -- would that still be considered. a Regional cluster if it was an acquisition, let's just say hypothetically in Western Australia?

There would be the potential, certainly, and again, because that's a location where you have multiple mines within the same kind of geographic region, and you can create that strong supplier network that employee base and everything. So yes, that would be a potential at some point if the right opportunity came along. But today, we're very focused on Canada and our existing development pipeline there.

And then maybe just lastly on M&A, and then I promise we'll talk about the operations. On commodity, we hear from some investors that we talk to that maybe the right thing, not just for Agnico, but for any gold company that's trading at a decent premium is to do something countercyclical, potentially look at copper opportunities. Maybe just talk through at a high level how management thinks about commodity.

Yes. So I would say our strategy differs from that of our peers. Some of our peers years ago decided they were going to pick another metal, copper, and they were going to set a target percentage of their revenue that they wanted to be in that other metal. And they kind of scour the globe for those opportunities. Our strategy, I'd say, is entirely different. We are not choosing a specific metal, copper. We're willing to look at any other metal but only if it's an opportunity where we can lend our competitive advantage, our skill set. So if there's a copper, zinc, nickel, whatever project that's in our backyard, where we have the workforce, we have the supplier network, we'll look at it and then see if we can generate a good return for our shareholders, we'll absolutely consider that. But we're 98% gold by revenue currently. We have one significant copper zinc project, our joint venture with Teck in the state of Zacatecas in Mexico. And even with that up in full operation, we're still 96% gold. So I would suggest that we will remain primarily gold for the short, medium and likely long term. But again, it's just based on the opportunity set. If there's an opportunity for us to do something approximate to where we already operate and we see a competitive advantage, then we'll consider it, and we're almost metal-agnostic.

Just switching to the actual operations. Canadian Malartic, of course, is the major growth driver or one of the major growth drivers. And the current plan is to mine additional ore underground at Malartic and then also satellite deposits, Marban, Wasamac. A lot of investors, particularly general investors, they don't have maybe as clear of an understanding of just how those different satellite pits or the underground come into the mine plan. Can you maybe just provide a high-level overview of where Malartic is today and how it grows to, let's say, 1 million-ounce per year?

Sure. Yes. So it's a good question, and maybe I'll go back in time 100 years. I mean this deposit was initially discovered in 1923 by a couple of brothers named the Gouldie Brothers. And now the heart of our deposit underground is called East Gouldie. But Agnico got involved initially in 2014 when Osisko Mining sold the Canadian Malartic asset. At the time, it was basically a big open pit project. It was a relatively low-grade bulk tonnage, 1-gram per tonne, 60,000 tonnes per day being mined and processed through the mill. Agnico entered into a 50-50 JV with Humana at the time. And a couple of years back was able to take out Humana's position and consolidate 100% of it. The open pit, so that this was Canada's largest open pit gold mine for a number of years. And what we're doing at the Canadian Malartic complex is transitioning it to being the largest underground mine in Canada. So we're going from 60,000 tonnes per day of relatively low grade 1-gram per tonne material to 20,000 tonnes per day of 3-gram per tonne material. So our production stays about flat, around 600,000 ounces a year. But all of a sudden, we've got 40,000 tons of available access mill capacity, which is -- provides tremendous optionality. So obviously, what we're doing is looking at ways to fill that mill because if we can fill it at that grade, we can produce well north of 1 million ounces a year. And then that's really been the objective. The underground deposit at our Odyssey project has gone from zero ounces in reserves and resources in 2018 to -- we're north of 20 million ounces currently and growing. Deposits open in every direction. It's been arguably the best exploration discovery in the sector in the last decade. So we're north of 20 million ounces currently. We see the potential to sink a second shaft and secure another 10,000 tons per day of mill feed from a second shaft. We also have the satellite deposits that you alluded to, the one called Wasamac that's about 90 kilometers away from the Canadian Malartic mill. We see potential to develop that and truck that ore to the mill. We also acquired a company called O3 Mining. We announced that acquisition last December. And through that, acquired their Marban deposit, which we're drilling off now and [ drill defining ] but we see the potential for 14,000 tonnes per day of mill feed coming from Marban as well. So if you put it all together, 20,000 tons from the planned first shaft underground gives us about 600,000 ounces a year. A second shaft gives us another 200,000 ounces a year and then if you add Marban and Wasamac, you get up to about 1 million ounces a year, and you still have about 13,000 tons of excess mill capacity. So there's tremendous exploration upside and again, tremendous optionality associated with having that mill capacity. We're drilling at a pace around Canadian Malartic that we never have in the company's history. We've got 25 drill rigs active currently on the Odyssey underground project and in the 20 kilometers surrounding that Malartic mill. There's a number of old mines that were shut down in the 50s, 60s, 70s because it just wasn't economic, but they were mining down to a depth of maybe 800 meters at a grade of 4 or 5 grams per tonne, we're down to 3.4 kilometers at our LaRonde mine. So the exploration potential and depth of these old mines is significant. And we're looking at ways to optimize the grade of that mill feed. If we can find other deposits and develop those at closer to 2 or 3 grams per tonne, we could see well north of 1 million ounces of annualized production. So that's the -- really, the focus there is just maximizing the value of that complex and that infrastructure.

Great. And is it fair to say that to the extent that you can expand the mining underground at Odyssey that, that would always take precedence over the satellite pits just from a grade perspective?

Yes, absolutely. I mean the average grade underground at Odyssey is around 3 grams. Our Wasamac project, the average grade is about 2.5 grams, but it's 90 kilometers away. So you have the incremental hauling cost, the average grade of the Marban satellite pit is closer to a gram. So it's relatively low grade. So we will absolutely prioritize continuing to figure out exactly how much we've got there and how underground and how best to access it. I mean, there's talk of a potential third shaft at some point. All of this takes time. We need to do the infill drilling and engineering and mine planning and everything else, but there's tremendous upside potential at that asset.

You touched on the exploration at Malartic, including at the satellite pits. What about the rest of the portfolio? What is the exploration team getting excited about? I mean there seems to be a lot of work being done at multiple mines. How would you kind of rank order where the most exploration upside is?