Earnings Call
Agnico Eagle Mines Ltd (AEM)
Earnings Call Transcript - AEM Q2 2024
Operator, Operator
Good morning. My name is Lara, and I will be your conference operator today. At this time, I would like to welcome everyone to the Agnico Eagle Q2 2024 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. Mr. Ammar Al-Joundi, you may begin your conference.
Ammar Al-Joundi, CEO
Good morning and thank you for joining us today. We are very excited to be reporting another exceptional quarter and to share with you some of the important work that our teams are focused on to create additional value. Some of the highlights this quarter include continued strong operational performance with excellent cost control. This focus on cost control has allowed us to deliver for our owners tremendous leverage to increased gold prices, as demonstrated by our third consecutive quarter of record free cash flow. A significantly strengthened investment-grade balance sheet with over $900 million of cash at quarter-end and $250 million of debt repaid in July. We continue our long-standing commitment to shareholder returns with $50 million in share buybacks in the quarter and almost $200 million paid out in the quarterly dividend, marking over 40 years of consecutive quarterly dividends. Prudent, measured, and importantly economically-driven reinvestment into the business, including approximately $50 million of supplemental exploration budget focused primarily on Detour, Malartic, and Hope Bay, based on exceptional ongoing exploration results and announcing the next steps to developing the Upper Beaver mine and expanding Detour to potentially over 1 million ounces a year of annual production, both investments based on exceptional projected risk-adjusted economic returns. We continue to deliver stable, reliable, consistent operational results safely and responsibly in the most prospective and politically stable jurisdictions in the world. With our strong first half results, we are very well positioned to reiterate our production and cost guidance for 2024. However, before we get into the operational and financial details, I'd like to take a moment to talk about safety and sustainability. The safety of our people, our partners, our communities, and our environment is paramount. Nothing is more important. I'm proud to say we had another strong quarter on the safety and sustainability front. This performance has been recognized by our peers with our teams recently winning several industry awards, including, to name just a few, on the safety front from the Canadian Institute of Mining, the John T. Ryan Safety Awards for 2023 for Eastern Canada to Canadian Malartic, for the Prairie Provinces and Territories to Meliadine, and for Canada nationally to Goldex. At the mine rescue competitions, our mines won a total of eight awards, including five first place awards. On sustainability front, Agnico Eagle’s LaRonde Complex was awarded the 2024 Towards Sustainable Mining Environmental Excellence Award, presented by the Mining Association of Canada, and we also recently released our inaugural Reconciliation Action Plan and our 2023 Climate Action Report. As Sean Boyd, our Chairman and longtime CEO, often says, it's not just what you do, but how you do it. So well done to the teams. In our first quarter call earlier this year, with gold prices and our revenue up significantly, we chose in that call not to focus on the record cash flows we generated, but instead to focus on cost control. We wanted to emphasize cost control because while we don't control the gold price, we can work hard to control costs, and it is our strongly held and fundamental view that the benefit of higher gold prices must go to our owners, not to higher costs and certainly not to bad projects. Our performance in this second quarter demonstrates that this focus on cost control is real, and this focus is delivering results for our owners with Q2 cash costs at $870 an ounce. I can tell you with quite a bit of pride that at every mine, at every call, at every meeting, the teams remain laser focused not only on cost control but on continuous improvement to make our operations more efficient, more productive and to offset cost inflation where we can. And as we continue to deliver record cash flows and as we continue to accrue cash on our balance sheet, our focus is not only on continued cost control but also on continued discipline when it comes to capital allocation. This is your money. We remain as committed to disciplined capital allocation at $2,300 gold, at $2,400 gold, as we were at $1,800 gold. In fact, the projects we will talk about today, Canadian Malartic, Detour Underground, Upper Beaver, are exactly the same projects we talked about a year ago when gold prices were $1,800. We are moving ahead in exactly the same manner, at exactly the same measured pace as we guided at the beginning of the year. As a reminder, at Detour Underground, we're investing in an exploration ramp and bulk sample to de-risk the project. At Upper Beaver, we are investing in an exploration shaft, a shallow ramp, and bulk samples to de-risk the project. Again, these are the same projects and the same steps we guided in both February and April. Total spent for both of these combined is expected to be about $100 million a year over the next three years. This is a measured and responsible approach. These are great projects with great economics, with tremendous upside to expand and extend mine lives. They are straight down the fairway of what we do and what we've done. These are not new projects in countries we've never been to before, they are in our backyard and we've done our homework. We have the people, the skills, the resources to take these projects prudently to the next level. Again, we're talking about $100 million a year over the next three years. Our goal is to deliver projects that not only have a great return on capital, but also a great risk-adjusted return on capital. That's what we mean by disciplined capital allocation, and that's what we aim to deliver with these investments into the business. And with that introduction and summary, I now turn the presentation over to our CFO, Jamie Porter, who will go over our financial results.
Jamie Porter, CFO
Thank you, Ammar. As mentioned, we have had a very strong first half of the year, delivering consistent operational results and excellent cost performance. In the current higher gold price environment, our focus has been on ensuring that the benefit of higher prices accrues to the bottom line and that we deliver strong financial results, and we've certainly demonstrated that this quarter. We generated record financial results for a third consecutive quarter, with adjusted EBITDA of approximately $1.2 billion and free cash flow of over $0.5 billion in the second quarter. One of the key drivers to our strong financial results has been our focus on cost control. Cash costs were below the low end of our guidance in the quarter, driven by the strong operating results and the benefit of the weaker Canadian dollar, which was partially offset by higher royalty costs, which are linked to the gold price. With respect to all-in sustaining costs, we came in at $31 an ounce below the low end of guidance. This was driven by the lower cash costs as well as deferred sustaining capital. We do expect our all-in sustaining costs to increase in the third quarter as we catch up on sustaining capital. Our all-in sustaining costs are hundreds of dollars per ounce below our peers, and our all-in sustaining cost margin increased to 50% in the quarter, which is amongst the best in our industry. Taking a closer look at our financial highlights, our revenues increased by 21% over the second quarter of 2023 to over $2 billion. Importantly, our adjusted EBITDA increased by 33% and our free cash flow increased by over 80% when compared to the prior year period. On an adjusted basis, net income per share was $1.07 in the second quarter, a 65% increase relative to the prior year. Overall, we had strong financial results for the quarter and first half of the year. During the quarter, we significantly strengthened our balance sheet, increased our liquidity to $2.9 billion, and reduced our net debt to under $1 billion, all supported by record free cash flow. We also increased returns to shareholders through $50 million of share buybacks. In July, we repaid $100 million of senior notes on maturity. We also made an accelerated payment of $150 million on our $600 million term loan facility, bringing our total debt repayment subsequent to quarter-end to $250 million. We continue to prioritize returns to shareholders with our dividend and share buybacks representing nearly 50% of the free cash flow we generated in the first half of the year. We plan to continue to strengthen our balance sheet, reinvest in the business, and opportunistically buy back shares. This slide really highlights our disciplined approach to capital allocation. When comparing to what we budgeted at the start of the year using the $1,800 gold price, we now forecast generating an additional $1 billion of incremental after-tax cash flow. We expect that approximately 80% of that incremental after-tax cash flow will be allocated to continued strengthening of our financial position and share buybacks. We also continue to reinvest in our business. We focus on projects with solid risk-adjusted returns and advance them in a phased, measured manner with incremental capital spending. We are also providing a supplemental exploration budget of $50 million for this year based on the positive drill results we've seen at some of our key projects that Guy will go over later in the presentation. While we continue to focus on our portfolio of high-quality internal growth projects, we complement this with our strategy of acquiring strategic toehold positions in emerging high-quality opportunities, which is something that Agnico Eagle has done for decades. The theme of our first quarter conference call was cost discipline. This quarter, we want to highlight that we also remain very focused on capital discipline. We're taking a measured approach with our organic growth projects, again, to ensure that the benefit of rising gold prices accrues to our balance sheet and to our shareholders. I'll now turn the call over to Dom, who will provide an overview of our operational results.
Dominique Girard, COO
Thank you, Jamie. Good morning, everyone. Today, I will cover all the operations on behalf of Natasha and myself. I will also provide an update on the Detour and Natasha will provide updates on the Detour and Upper Beaver pipeline projects. In Q2, excellent operational performance all across the board with the quarterly production close to 1,900 ounces at a cash cost of $870 per ounce, and record operating margin of $1.3 billion. Some of the highlights include Canadian Malartic, delivering another strong quarter with the gold production ahead of the plan, mainly with higher throughput at the mill, higher gold recoveries, and higher gold grade as we access higher grade zones ahead of schedule. So overall, an excellent quarter, an excellent first half of the year for Canadian Malartic. LaRonde also benefited from higher gold grades from the favorable mining sequence. In Ontario, Macassa continued to ramp up its mill throughput, setting another quarterly record in Q2. At Detour, they achieved a new historical quarterly record about mill availability at 93%, with the budget at 91.6. The average mill throughput improved through the quarter with the introduction of new grinding media and some new controls, and they reached in June an average of 81,000 tonnes per day. At Fosterville, the mine site focused on increasing mill and mining rates, and they also set new records, with quarterly records on the tonne mined and the monthly record on the tonne milled in June. In Nunavut, Meadowbank and Meliadine continue to outperform. Both operations have made good progress to unlock their underground potential, and it is paying off. Strong performance is a key driver to our excellent total cash cost for the quarter at $870, which is below the low end of our annual guidance. But as Ammar mentioned, our cost performance is also driven by a continuous focus on cost control and optimizing our operations. Our Nunavut sites deserve a gold medal. They have implemented a strong continuous improvement culture, setting stretch targets and consistently beating them. On top of that, both of them reached health and safety records in Q2. The main gains are in productivity improvement, which affects very good cash cost performance, but also they are benefiting from cost management discipline, focusing on what matters for them, like the supply chain, flight, inventory, and energy savings. For example, more recently, they took action to reduce their footprint by closing some buildings that were no longer required, saving on maintenance, but more importantly, on energy costs. What we've learned from this, and what is remarkable about the Nunavut success, is that this has been 100% done by site management. It is great to see the teams proud of their achievement. We believe this is the way to grow our talent and achieve our business goals. So overall, with our strong performance in the first half, we are highly confident that we can achieve our production and cost guidance for the full year. With Odyssey project, it is developing on track. There was a record quarterly mining rate and gold production from the Odyssey South deposit. The ramp development was ahead of schedule, helped by more tele-remote scope operation and the addition of a new 65 ton truck for the hauling fleet. At the quarter-end, the ramp reached the third production level at East Gouldie at 832 meters below the surface. Shaft sinking is also advancing well, reaching 680 meters depth at the quarter-end. Overall, Odyssey is developing as planned and is expected to be the largest underground mine in Canada. But stay tuned. We are ramping up the drills from 16 in the first half of the year up to 23 in the second half of the year. It is our biggest drilling program ever at Canadian Malartic. On that, I will now pass it over to Natasha, who will discuss other projects and key value drivers, Detour Underground and Upper Beaver.
Natasha Vaz, Senior VP
Thanks, Dom, and good morning, everyone. So I'll touch on the two projects in Ontario that we're pretty excited about because it's an opportunity to grow low-risk, profitable production in a province that, in my opinion, is one of the best mining jurisdictions in the world. The first project is Detour Underground. We provided an update on this project in June, and it outlined a pathway for Detour to be a 1 million ounce producer annually for over a 14-year period beginning as early as 2030. Now if we were to use the current gold prices during that time period, we would generate over $1 billion in free cash flow per year from Detour alone. The Detour Underground project is not just a good return on capital. As Ammar mentioned, it's a good risk-adjusted return on capital. Now as Dom touched on this from an operating standpoint, I just wanted to highlight this again, and that's our focus on cost and capital discipline in all aspects of our business. Now as Ammar and Jamie said, from a project perspective, we're taking a disciplined and phased approach to further de-risk the project with a measured investment of $100 million in capital over the next three years. That's to first develop an exploration ramp and then to collect a bulk sample, and at the same time facilitate infill and expansion drilling to convert and potentially grow the current mineral resource. Speaking of drilling, we continue to see positive exploration results from along the western plunge of the deposit, and Guy will discuss this later on in his presentation. Moving over to the Upper Beaver project, this is another low-risk opportunity to grow the production profile in a camp that we know pretty well. In fact, we expect this project to leverage and benefit from our technical expertise and our workforce at Macassa. With the internal assessment we've completed, we've outlined a standalone mill concept, but we continue to evaluate ore transportation options, specifically at LaRonde. Based on this internal assessment, we see the potential for Upper Beaver to be a low-cost, long-life project, with a solid risk-adjusted return and upside potential that supports moving us to the next phase. Like Detour Underground, we'll be taking a steady and disciplined approach to de-risk and optimize this project, starting with a measured investment of $200 million over a three-year period. This includes first developing an exploration shaft, then an exploration ramp, and collecting two bulk samples, one in the upper level of the deposit using the exploration ramp to test the shallow mineralization in the basalt, and a second bulk sample will be using the shaft to test the deeper porphyry mineralization that hosts a large portion of our resources. During this timeframe, we'll be developing underground drilling platforms to convert and expand the current mineral resources. We don't just see the exploration potential at depth; we also see the opportunity for Upper Beaver to unlock the potential in the region. And with that, I'll pass it over to Guy to explain the potential a little bit more.
Guy Gosselin, Vice President of Exploration
Thank you, Natasha, and good morning, everybody. To start with, I'm very happy to provide additional information on the Upper Beaver project. Since the previous PFS study in 2017, there's been a lot of work done by the exploration team on site, by our technical services group, and by our project study team, integrating more than 225,000 meters of drilling and 440 drill holes completed over the year since the last study. This additional drilling helped to de-risk the geological model by infilling and expanding the resource base. The interpretation of the ore body was completely refreshed, and the updated mineral resource system for the new internal PE study now totals 3.4 million ounces of indicated resources, with an additional 0.4 million ounces of inferred resources. These results show significantly higher potential than the 1.4 million ounces mineral reserves contemplated to be mined by the historic study in 2017. We now expect that a large portion of the new indicated resources will be brought to mineral reserves. This new PE study and the three-year advanced exploration phase that we are about to undertake will help to de-risk the project through the collection of the bulk sample that was described by Natasha. While we continue exploration around the Upper Beaver deposit and the adjacent deposits in the camp such as Upper Canada and Anoki-McBean, we're working to develop the full potential of the Kirkland Lake camp that we now own 100% from the Macassa mine to the Upper Beaver project following the merger, with the ability to leverage operational synergies, expanding our global mineral reserves and resources at the camp that already exceed 10 million ounces in all categories. This is all within a camp that has over 100 years of mining history and more than 40 million ounces of historical gold production. Next, we're pleased to announce that following the exploration results received in the first half of 2024, in particular in Canadian Malartic, Detour, and Hope Bay, we are increasing the exploration budget by $50 million for the second half. We believe that this will lead to another successful year of growth in mineral reserves and mineral resources at our key value driver projects. At Malartic, in the East Gouldie deposit at the Odyssey mine, recent exploration drilling continues to demonstrate the potential to grow the deposit laterally, with good results both on the eastern and western extensions outside of the current footprint of the mineral reserve outline. The results from the ongoing exploration program are anticipated to have a positive impact on the mineral resource system at Rand and continue to support our view to improve the throughput of the underground mine in the future as reserves and resources continue to grow laterally and also supporting the potential to develop new underground mining areas. This is core to our fill-the-mill strategy in Malartic. Moving to Detour Underground, infill drilling, as previously mentioned by Natasha, continues to deliver high-grade results in the high-grade core of the deposit below the west of the reserve open pit. This continues to confirm good grade and continuity of the high-grade corridor that we described at our June update. Recent results, such as 4 grams over 22 meters and 20 grams over 5.4 meters near the proposed exploration ramp recently announced in June, support our view that the underground project first presented in about a month ago in June has great potential to continue to grow and will help bring the Detour mine site, combining open pit and the underground, to the select club of a million ounces of gold per year producer for years to come. Finally, in the Madrid deposit in the Patch 7 zone, exploration drilling continued to return excellent results, just at 400 meters depth, continuing to confirm the larger thicknesses and higher gold grades in this new zone compared to the historical mineral reserves and resources at Hope Bay mine. These results are expected to lead to a significant increase in grade and total mineral resources at year-end 2024, supporting our view for the potential to develop a larger operation at Hope Bay in the near future. In closing, Agnico Eagle has a strong pipeline of internal exploration projects with world-class exploration potential, and more importantly, around existing infrastructures in safe jurisdictions that we can leverage with our own expertise. On that, I will return to Ammar for some closing remarks.
Ammar Al-Joundi, CEO
Thank you, Guy, and very exciting stuff. Great work to you and the team. At Agnico Eagle, we strive to build a simple, high-quality business that generates great returns for our owners. The mandate our owners give us is simple. Our owners want Agnico Eagle to be the best place to invest in the gold space. That means, one, giving them the best leverage to increases in gold prices; and two, giving them this leverage with a reasonable risk profile. The strategy we use to deliver on this mandate is the same strategy we've used for over 60 years. One, we want to focus on low-risk mining jurisdictions, jurisdictions that have multiple mines, multiple decade geologic potential, and districts that have political stability for multiple decades. We want to focus on the regions we know well and have a simple manageable business in those regions. Two, we want to be the highest-quality senior gold producer possible. That means high ESG standards based on a multi-decade investment horizon. That means disciplined capital investments based on knowledge and experience in the regions we operate. And that means creating value through the drill bit and technical expertise. We feel we are uniquely positioned with robust land packages in core mining jurisdictions, with unique potential to leverage existing capital and existing assets. We know we have a competitive advantage from over 50 years of operating in the regions where we are, and we believe we have unique mining experience and expertise in Nunavut and the Canadian North. Finally, we are always focused on financial returns, with an emphasis on per-share metrics, maintaining a strong financial position to fund project growth, to strengthen the balance sheet, and to return capital to shareholders as demonstrated by over 40 years of continuous quarterly dividend payments. So thank you all once again for joining us, and thank you in particular to all of our employees who delivered such a great quarter safely. And with that, we end our presentation and open for questions.
Operator, Operator
Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. One moment please for your first question. Our first question comes from the line of Josh Wolfson from RBC Capital Markets. Go ahead, please.
Josh Wolfson, Analyst
Thanks very much. First question on Upper Beaver. I'm just curious about understanding the economic decision to progress this on a standalone basis. I guess I'm wondering if there are any other opportunities to maybe leverage the infrastructure the company has talked about historically across the Abitibi to reduce some of that CapEx or is this the best plan going forward?
Ammar Al-Joundi, CEO
Hi, Josh, it's Ammar and thank you for that question. There is absolutely an opportunity to continue to consider leveraging existing infrastructure. As Natasha mentioned, we are still looking at the transport option to LaRonde, which would obviously materially reduce the capital that we would have to spend. The numbers we've given, Josh, are based on an on-site mill, because even with an on-site mill, the returns on this are quite strong. At current levels, it's in excess of 20%. So, given, as you would know, that the longest driving factor is the shaft and given that the shaft is independent of where you have the plant. What we've decided to do is basically, we've said, look, worst-case scenario, we build a mill, it still makes a lot of money for our shareholders, so let's get started on that shaft because it's a great investment. But to your point, absolutely, we are still looking at transportation to LaRonde, and if we were to do that, we would do it because it improves the economics.
Josh Wolfson, Analyst
Thanks. Next question is on East Gouldie. In terms of some of the infill drilling that's been identified on what looks like a pretty large area and then the comment, I guess, much more clearly this quarter about the potential for a second shaft. I guess I'm wondering, given that the first underground project at Malartic was advanced with an inferred resource at a PE level. Would this resource extension give you the confidence to be able to progress or make a decision for a second shaft? Or what sort of timeframe could we have the information that would be able to advance that or not advance that?
Guy Gosselin, Vice President of Exploration
Hi, Josh, Guy speaking. We're still getting some strong results on both sides for both the east and west extensions. They're not tightly drilled enough yet to make those kinds of decisions, so this is some of the internal consideration we're currently having. By increasing the drill program by year-end, we want to tighten fill that area where we’ve been getting some pretty high grades and good thicknesses in the east and west. That will help further down the road in making decisions about how to proceed.
Dominique Girard, COO
Yes, to be sure we are very excited about the results, Josh, and it's actually progressing probably faster and better than we had anticipated. But, as Guy said, where you put the shaft is pretty important, and that's going to be defined largely by the ore body, again, defined by drilling. We're not at a position yet to say absolutely this is the right place to put a shaft, but certainly, we love what we're seeing.
Josh Wolfson, Analyst
Got it. And if I can sort of tuck in one more, there's a bunch of projects the company is evaluating at this point. I guess more recently, Detour Underground and Upper Beaver, still a number beyond that in the pipeline. And then this quarter, there was a large equity investment made in a junior developer in the base metal space. I just kind of want to understand what the company's perspective here is on growth and internal versus external opportunities, and how is the company going to manage capital with all these different options on the table? Thank you.
Ammar Al-Joundi, CEO
So I'll address that. We keep emphasizing the phrase risk-adjusted return on capital, and, of course, that is the return on capital on the risk-adjusted. By definition, we have more knowledge on internal projects, and we're able to make an assessment on risk much better. So if I had an external project at 20% and an internal project at 20%, we would go with the internal project, again, because we would have a better view on the amount of risk associated with it. But broadly, we look at a lot of things, which is what our investors want us to do. Our investors want us to make them money in this space. And the way we do that is we try to be in places that have good geological potential and we try to have a knowledge advantage there. We are always looking at a number of things, and it's a very good thing. I tell you, and I've been in this business for 25 years, it's fantastic to have the pipeline of opportunities that we have. But I will be very clear and we tried to emphasize this explicitly. We are going to continue to be disciplined in our capital approach. I mean, Detour Underground, it's fantastic to get to a 1 million ounces per year. It's a ramp and a pace plan. I mean, it's simple. This is stuff we do. Malartic, we've been there a long time. It's the same mill. We're currently building a shaft. If we build another shaft, this is stuff we know how to do. Upper Beaver, we know how to do. Some of the things we look at are more complex than others, but we are very comfortable that we have the resources, both financial and people, to move at the measured pace that we're moving forward. Honestly, I love the fact that you're asking about which of the many good pipeline opportunities we are going to prioritize because we have a lot of really good opportunities.
Josh Wolfson, Analyst
Great. Thank you very much.
Operator, Operator
Thank you. Our next question comes from the line of Anita Soni from CIBC World Markets. Go ahead, please.
Anita Soni, Analyst
Hi, good morning. First off, congratulations on a strong free cash flow quarter. My next question would be on Hope Bay. So what would be the next steps as we think about startup timelines for Hope Bay and what you need to see more there to make a go-ahead decision?
Guy Gosselin, Vice President of Exploration
Hi Anita, it’s Guy. Obviously, we need to continue drilling Patch 7. We are still not yet at the drill spacing that allows us to bring them into indicated and into the plan. So our focus—and this is why we are accelerating the pace in terms of drilling. The plan for us is to bring the core portion of that new high-grade zone that we think is the needle mover on the project as quickly as possible to a drill spacing that will allow us to integrate them into the plan. A year from now, we should be in a much better position in terms of our understanding of the grade and Patch 7 and to start integrating that into some scenarios.
Anita Soni, Analyst
Okay. Thanks. And then just an operational question. Are there any shutdowns or maintenance in the back half of the year that we should be aware of at any of the major operations?
Ammar Al-Joundi, CEO
Yes. Hi, Anita. We had one at LaRonde, which is over. We had 10 days in the mill and 14 days on the ground at LaRonde have been done successfully. Another one is coming at Canadian Malartic, a 10-day shutdown at the mill. This is to change the drive system at the tailing stick there.
Natasha Vaz, Senior VP
Hi, Anita, it's Natasha. And with respect to Detour, we have two more shutdowns coming up, one in August and one in November, but it's typical shutdowns. We normally have four shutdowns a year.
Anita Soni, Analyst
Okay. And then just again at Canadian Malartic, though, it's delivering pretty good throughput and grade. Is that – should we expect that to continue for the remainder of the year? I think it's outpacing the guidance by a significant amount in the first half.
Ammar Al-Joundi, CEO
Yes, we should expect the tonnage to keep; we're going to keep a good tonnage to the end of the year, but the grade we expect that it's going to be lower than the first half. In the second quarter, we were mining two inner pits close to old workings, where we had the upside on the grade. Now we're moving more to a phase where we need to move more waste in the lower-grade ore. So we can have a good tonnage, but lower grade than we had in the first half.
Anita Soni, Analyst
Okay. I'll leave it there and let someone else ask questions. Thank you very much.
Operator, Operator
Thank you. Our next question comes from the line of Lawson Winder from Bank of America Securities. Go ahead, please.
Lawson Winder, Analyst
Thank you, operator. Good morning, Ammar and team. Thank you for the update today. Always very helpful and wonderful to hear from you. I wanted to follow up on the capital return theme and just observing the very strong cash flow in Q2 and looking out to the second half and next year at spot and even lower than spot gold prices, that free cash flow generation will continue to be very robust, to put it lightly. With that as context, when you look at the capital return program and the increased focus on the buyback recently, is there any thought internally to maybe shifting that back to the dividend with a potentially higher dividend? When you think about paying a dividend, what's kind of a comfortable free cash flow payout on that dividend level? Thanks.
Jamie Porter, CFO
Lawson, it's Jamie. Thanks for the question. Yes, I'll answer it just by focusing on the last part of your question. Our dividend payout ratio was 36% in this most recent quarter, and I think that's really a comfortable level. If you factor in the combination of the dividend and the share buybacks, the $70 million in share buybacks in the first half of the year, we're running at a rate of about 50% direct returns to shareholders as a portion of our free cash flow. So I think the dividends at the right spot where it is currently representing about a third of the free cash flow that we're generating.
Lawson Winder, Analyst
Okay, very helpful. I wanted to also ask, just given the theme, Ammar, of your early comments on cost management and cost reduction, congratulations on the success there. In the recent past, so in the past sort of two to three years, there's obviously been a lot of labor and cost inflation in the industry, but particularly on labor. It would be helpful just to get your comments on what you're seeing in the various regions today. Is that continuing to improve both with respect to labor cost and labor availability? Thanks very much.
Dominique Girard, COO
Hi, Lawson, Dominique speaking. We see stabilization in terms of workforce availability. We still have a very low turnover between 3% and 6% average in 2023 in Quebec. It's also going well in Ontario. In terms of salary increase, we just expect a normal year, normal 3% to 4% kind of. So there's no—we don't see big issues on that. And maybe while we're talking about inflation, there's interesting trending going on diesel, steel, and also cyanide that we see now, and that's going to help a bit more higher on the line, but other than that, it is stabilizing, maybe getting lower a bit.
Natasha Vaz, Senior VP
Hi, Lawson. Just on Ontario, we still have a tight market, but as Dominique mentioned, it is stabilizing. We have a low turnover, and at Macassa in particular, one of the reasons that our costs are lower is that we are focused on internalization of our contractors, and we've seen good progress. Overall, vacancy rates are pretty low.
Ammar Al-Joundi, CEO
And I'll just jump in by saying something I often say, which is a big driver of quarterly cost is quarterly production. When the teams do a great job, like they did this quarter, they almost always deliver great costs. So it's just important to keep that in mind as well.
Lawson Winder, Analyst
Okay, yes. Thank you all for those comments. And then just, Guy, you made some comments on Hope Bay and some of the other assets and the outlook for resource and reserve growth for year-end. Maybe could we get just an early look on your thinking in terms of overall reserve replacement for—on a consolidated basis for Agnico heading into year-end. And then just any thoughts on whether there might be an update to the gold price assumption considered.
Guy Gosselin, Vice President of Exploration
It's a bit early in the year, I would say, to commit to a gold price assumption and whether we are going to move on. So that still needs to be seen. We are usually completing our analysis during Q3 and Q4 to finalize our mine early in the year. So it's early for that, and it's difficult. We've been basically running a couple of internal run analyses just with the Q1 results. I think we're in pretty good shape, and I'm expecting, as I mentioned, that we can replace what we mine this year. I would say there's no major study to come, like when we added Detour and East Gouldie last year. We're not expecting a big bump with major project updates. We expect more of a flat replacement as I see it, but it's still early in the year.
Lawson Winder, Analyst
Good, fantastic. Thank you all very much and congratulations on a great quarter.
Operator, Operator
Thank you. Our next question comes from the line of Ralph Profiti from Eight Capital. Go ahead, please.
Ralph Profiti, Analyst
Thanks very much. Good morning. Ammar, when we look at this supplemental exploration budget, how much of this is strategic and geology-driven, and how much, if any, comes from increasing cost pressures? So, said another way, is there any performance carryover on what we're seeing on the operating cost discipline side into the exploration and discovery cost side of the business, especially when we look at this second-half budget?
Dominique Girard, COO
I would say to the contrary, we've seen some easing into our overall drill cost. We managed to drill about 10% more than planned in our first half. The addition we're making in the second half is very directed to Detour because along with the exploration ramp and our desire to bring the upper part of the western extension of the deposit to reserve. So it ties along with the ramp development, and the same in Malartic, to eventually commit to additional infrastructure. We are also increasing the pace there to get more clarity sooner than later and for Hope Bay with the great results we've been getting in order again to come back with more clarity in 2025 or 2026. Our better cost performance is allowing us better unit costs. The market is favorable; it's currently difficult for a lot of the smaller juniors to get capital. Therefore, we've had some easing, and we've been quite pleased with our ability to renegotiate contracts and get better rates.
Ralph Profiti, Analyst
Great. Excellent answer. Jamie, a capital allocation question on the private placement debt and the cost of that debt as we're likely to see the outlook for rates come lower and we're seeing a step up in the gold price. As these maturities come due, how are we thinking about the process of looking into either paying that off, partitioning, or rolling it forward?
Jamie Porter, CFO
Yes, thanks for the question. I'd say we do have the remaining $450 million on the term facility due in April of 2025. We'll look to certainly repay that between now and then. On the private notes, the terms are actually quite favorable. I think the average coupon is in the fours in terms of what's outstanding, and they're spread out really over the next decade. So I'd be happy keeping those in place and paying them off as they come due.
Operator, Operator
Thank you. Our next question comes from the line of John Tumazos from John Tumazos Very Independent Research. Go ahead, please.
John Tumazos, Analyst
Thank you. Could you provide more details about the Mine Safety Awards? LaRonde operates nearly 10,000 feet deep, and you mentioned a 4.1 Richter seismic event on June 24th where no injuries occurred. Kim Ross sold Macassa for $5 million to Kirkland Lake after a seismic event damaged the shaft at 5,700 feet, preventing access to 7,250; they decided to exit and close the mine. Can you elaborate on how everyone stays safe and how you continue to win these awards while working in two of the more challenging mines in Canada?
Dominique Girard, COO
Yes, John, Dominique. The rewards are recognized from the mining industry and given to us based on last year’s performances, and we're very proud that we won two regional and one national awards. With the LaRonde situation, we had a big seismic event at 4.1, but overall, we did not have major damage. Our ground support did the work that they were supposed to do, and we had to shut down the underground mine for two days to do the inspection. After that, we returned and did some rework. Our model expected major seismic events, so it was as anticipated, and the team continued to develop their expertise, working with external expertise to understand those mechanisms and to protect the workforce. One part of that is also getting to more automation, allowing workers to be further from the face, so using more mechanized and remote operations.
Ammar Al-Joundi, CEO
Maybe just to add, thank you, John, for that question. We appreciate it because safety is paramount. Maybe I could put Carol Plummer on the spot. She is our Executive Vice President, and broadly safety falls under her and she and her team have done an awful lot of work every day on this, and maybe just more broadly on our philosophy on safety management. Carol?
Carol Plummer, Executive VP
Yes, certainly. I think we can sum up our safety management philosophy by saying that we very much believe in safe work, that every job can be done safely every time. There is a lot of focus at all of our sites on ensuring that our people have the resources, they have the materials, they have the skills and the knowledge to work safely. There is a big emphasis that has been placed over the last couple of years in what we call 'boots in the field' or visible felt leadership, where not only supervisors are out in the field with the workers but management is also present, as well as the engineers. Anyone walking through has their eyes open, they are looking for risks and ensuring that risks are controlled so our people can continue to work safely. None of this will prevent 100% of everything from happening. We also put a lot of emphasis on understanding what critical controls need to be in place to prevent accidents. When an incident occurs, whether it is near misses or an injury, we dig deep to understand the root causes to ensure that it cannot happen again at that site or at any of our other sites by putting the correct preventative measures in place. All of these awards our teams won last quarter are based on safety performance from last year, which was a record safety year across the company. This is a celebration of the excellent work done by our management teams, supervisors, and workers throughout the last year, and we just continue to encourage them to do that every day with every job they undertake.
John Tumazos, Analyst
Could you elaborate on the steel or other ground support systems at LaRonde and how they're more than just a rebar mine roof bolt or cement and how they were strong enough to survive and support a four-Richter event?
Daniel Paré, Engineer
Daniel speaking. Our ground support has evolved over the past decades at LaRonde. As we are mining deeper, we adapted our design and our ground support to resist those kinds of events. As Dominique mentioned, we were expecting one at over four, and we did experience one of that magnitude. The good thing is we understand where it is. It was in a sub-parallel geological structure down at 2.9 kilometers. At that depth, our level design is adapted, our ground support is adapted, and it has shown good results as it withstood the events we experienced at the end of June.
Dominique Girard, COO
Thirty years ago, I worked underground in South Africa where there were 50 deaths a year, one every week. I never returned to that. Now, I work underground with Agnico Eagle. Thank you.
Operator, Operator
Thank you. Our next question comes from the line of Mike Parkin from National Bank. Go ahead, please.
Mike Parkin, Analyst
All my questions have been answered. Thanks very much.
Operator, Operator
Thank you. Our next question comes from the line of Tanya Jakusconek from Scotiabank. Go ahead, please.
Tanya Jakusconek, Analyst
Good morning, everyone. Thank you so much for taking my questions and congratulations on a good quarter. Jamie, over to you first. Can I ask about the Canadian dollar impact on your mines this quarter? Obviously, I think that helped a bit on the costing front. Just remind me your sensitivity. I think you budgeted at $1.34, but I just want to be reminded of the sensitivity for the remaining portion of the year on what we have.
Jamie Porter, CFO
Thanks, Tanya. Yes, that's absolutely right. We budgeted $1.34 for the full year. Our realized FX in the second quarter was 1.37. We are benefiting from a unique period where we have both the benefit of higher gold prices and a weaker Canadian dollar. The impact on our cash costs in Q2 was about $18 per hour. So it is certainly helping. I will point out and I think Ammar mentioned it in his remarks, we do face higher royalties expense in this higher gold price environment. The benefit from the weaker Canadian dollar is more or less entirely offset by the higher royalties cost. For the second half of the year, based on where the Canadian dollar is now, I'd expect a similar $15 to $20 benefit arising from the weaker CAD.
Tanya Jakusconek, Analyst
Yes, it's just that there are some views out there that this Canadian dollar is going to continue to go down versus the U.S. and therefore Agnico is going to benefit. I seem to remember, and Jamie, correct me if I'm wrong, for a 10% move in the Canadian dollar, it's about $50 to $55 per pound on your cost structure. Am I in the ballpark?
Ammar Al-Joundi, CEO
Yes, that sounds correct.
Tanya Jakusconek, Analyst
Okay. Thank you for that. My second question is for you, Ammar. I wanted to come back to two things. One is just the strategy and the capital discipline. I wanted to look at the projects that you have. The second one has to do with this investment strategy in juniors. So just on the first one, which is the capital discipline, as we think about these projects, so you've got Detour on the go, potentially Canadian Malartic with another shaft. We now talk about Upper Beaver potentially coming in by 2030 or thereabout. And then we have Hope Bay that is telling us in a year from now we'll have some sort of outlook on where that can fit in. Where do we see your total capital budget going to? Right now, it's 1.6 million to 1.7 million. Trying to just get a handle on where do you see this going longer-term? Do we max out at $2 billion as we phase these in? That's my next portion is how do we look at phasing these in because you can't just bring them all in at once.
Ammar Al-Joundi, CEO
Yes, very good question, Tanya. I’m an engineer, but I’ve also spent most of my career on the finance side. So we start with a very practical approach: are these good investments? I know that sounds obvious, but what sometimes gets big companies like ours in trouble is when people focus more on growing the business or doing a deal rather than on whether they actually make money. So everything we do starts with does it make money and is it a good return for the amount of risk we're taking on. Something like Detour Underground is straightforward; a ramp, a pace plant, and an extra 300,000 ounces per year for decades. That’s a pretty easy decision. A second shaft at Malartic has the mill, and when Guy and his team confirm, I'm comfortable exploring this as what's underground. Honestly, that’s also a simple decision. It depends on the investment opportunity. I’m not evading the issue; I’m just being honest. It's not just financial capacity, it's also human capacity. We assess our people, and we prefer utilizing our own employees. I feel more confident when Daniel Paré and his team build a project rather than an outside consultant we've never used before. So, in short, it depends on the project. Is there a total CapEx number in mind? We've stated we're around 1.7. Could it reach $2 billion if it makes sense? Yes, but we will spread out our financial requirements and our human requirements based on the capacities we have.
Tanya Jakusconek, Analyst
And just because, Ammar, we all remember a time when we tried to build several mines all in one go and those things are just hard on human capacity, as you know.
Ammar Al-Joundi, CEO
They are hard. You're absolutely right.
Tanya Jakusconek, Analyst
Okay. So if we were to think of these four additional projects as we space them out on human capacity, we may get to the $2 billion, but we try and keep that margin, $2 billion total capital and everything else would be available from an upside for our shareholders? Would that be a good way to look at it?
Ammar Al-Joundi, CEO
That's a good way to look at it. Now the one thing I would say is everything we invest in is upside for our shareholders. That's the only reason we invest in these things is to make the money.
Tanya Jakusconek, Analyst
Okay. Thank you for that. And just coming back to your strategy on investment, so you've got the exploration which Guy gave us a rundown on. Maybe we could talk about how you're looking at the strategy of investment in these juniors. Two things I'm trying to understand on that is one, you usually run a portfolio, I think it’s about $150 million to $200 million or thereabouts, if I can remember. What I'm noticing is that your investments are more in non-gold juniors. I have two questions. Is it because these non-gold opportunities are in camps that you're located in and therefore you can see your mining expertise helping, or is it that you are going to be moving more into non-gold over the longer-term?
Ammar Al-Joundi, CEO
We aim to remain the leading gold company globally, especially in Canada, and will maintain our focus on gold. Our investment in Forend is promising; although it involves copper, it is a significant VMS project that aligns with our expertise. We believe in its potential, but it’s still early stages. Historically, we take early positions in attractive projects in our operational regions. I want to reiterate that our financial discipline is informed by our knowledge. We have a deep understanding of that part of Canada, the project, the region, and VMS deposits. Therefore, our strategy is guided by a knowledge-based evaluation of investment potential.
Tanya Jakusconek, Analyst
Okay. So we should think about this as areas that you operate in, opportunities, gold, non-gold, where you can add value and you have expertise? Do you have this portfolio that you're working on as we have an exploration budget; do you also have a budget on investments?
Ammar Al-Joundi, CEO
First of all, I think you summarized it well. We agree with that. We're quite flexible now that we're a bit larger. Typically, we've operated within the range of $100 million to $150 million, and I can see that it's considerably higher right now. This is partly due to some successful investments we've made that are significant. As we've grown, that figure has increased, but it's essentially the same strategy we've always followed. Well, it's our pleasure, and thank you, Tanya, always a pleasure. And with that, we are now past noon. So again, thank you, everyone for taking time out of your day, and for everybody at Agnico who is listening. Thank you for all your hard work. Have a nice day.
Operator, Operator
Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.