Earnings Call Transcript - AEM Q3 2022

Operator, Operator

Good day. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Agnico Eagle Third Quarter Results 2022 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

Well, thank you very much and good morning everyone. Thank you for taking the time out of your busy day to join us on our call this morning. Last quarter, we started the call by thanking our operating teams for delivering some exceptional operating results. And this quarter we'd also like to thank our operating teams, not just for delivering solid operating results, but notably and importantly we'd like to thank our operating team for delivering the best quarterly safety performance in the company's 65 year history. Nothing is more important than the safety of our people and our communities. A safe mine is a well-run mine and a well-run mine is a safe mine. So thank you very much to all of our employees and our operating teams for delivering that. With the strong results in this third quarter, we've now got nine months under our belt, and we are pleased to be able to say that we are reiterating guidance for 2022, production guidance, capital expenditure guidance and importantly cost guidance and that hasn't been easy in the highest inflation environment in probably 40 or 50 years. The team has done a very good job and again congratulations on that. We are maintaining our guidance on all of those, albeit at the higher end of the cost guidance. This strong quarterly production allows us to have strong earnings per share, cash flow per share, and create value per share, and maintain our strong financial position on both liquidity and cash flow generation. The real story that I think you'll see during this call is the continued progress on our expansion projects and some excellent and exciting drill results. These are the items that are going to drive value creation going forward, and I think that what really separates us and differentiates us versus our peers. Finally as an introduction, we are proud to say that we are announcing an interim target of a 30% reduction in greenhouse gas emissions by 2030 on our way to a target of zero greenhouse gas emissions by 2050. This is not a challenge we take lightly. It's not a challenge we think is going to be easy, but it's a challenge we are prepared to undertake and are confident we will achieve. Next slide, please. Thank you. Some of the third quarter highlights. Solid quarterly production and costs 817,000 ounces of production at cash costs of $779 and all-in sustaining costs of about $1,100, quarterly net income of $0.17, but adjusted to $0.52, and Dave will talk about that later, operating cash flow at a solid $1.26 per share. Some of the highlights of the operating results include record gold production at Amaruq. That's 123,000 ounces this quarter. I think that is a world-class mine by any standards and some material improvements at Macassa, a great ore body that is coming into its stride. And I'm going to be asking Dominique Girard and Natasha Vaz in a moment to talk a little bit about progress on those two projects. Pressures related to cost inflation, workforce availability and COVID-19 remained, we were able to manage them during the third quarter. We see continued pressure on inflation. We are starting to see some potential relief. I think it's too early to say that we are completely past this situation. We are in fact expecting and planning for continued cost pressures going forward, but the team is focused on that and focused not just on mitigating cost pressures where we can, but optimizing mine efficiency, mine throughput, gold production, which also helps to offset some of the cost pressures and the team has done a good job with that. Financial position remains very strong. We have paid down another $100 million of debt as it came due. We told all of you we are planning to pay our debt as it comes due through cash flow and that's what we're doing. Some additional share buybacks of about $43 million, about 1 million shares this past quarter and a quarterly dividend of $0.40, continually paying a dividend since 1983. And maybe Dominique, if I can ask you to talk a little bit about Amaruq and then Natasha, a little bit about Macassa.

Dominique Girard, Vice President, Operations

Thank you, Ammar. Amaruq had a strong quarter and a record quarter also for the division. This has been obtained with a very good result with operation, maintenance, mill throughput, and also good grade coming from the pits. As we mentioned in the past, the deeper we go, the higher the grade is. We also have interesting grades at the IVR pit plus the underground ore, which is coming in right now. The underground has also reached an important milestone. We mentioned in February 2021, the cost to build it would be $180 million, and we did it on budget and on schedule, which is a good achievement despite the COVID situation and the inflationary environment we are in. I would like to thank all the employees, the contractors, suppliers, and also the local communities for their support as we developed this project. We also celebrated in Q3, 4 million ounces at Meadowbank, so quite a good success this quarter.

Ammar Al-Joundi, CEO

Thank you. Natasha?

Natasha Vaz, Vice President, Operations

Thanks, Ammar, and good morning everyone. So with respect to Macassa, the site had a very solid quarter, and more importantly, the mine is starting to become more reliable. As the press release mentions, a significant factor that led to our strong performance in the quarter was the added ventilation through the mine. The connection of Shaft 4 to our existing workings resulted in improved ventilation in the areas we were mining and that contributed to lower temperatures and improved working conditions. This improved ventilation helped with our productivity gains in the quarter relative to our budget. In addition to the ventilation improvements, we're also seeing better adherence to plan quarter-over-quarter. The team has focused on the short-term plans to deliver our weekly and monthly targets, so kudos to the team on that. On the equipment side, we're starting to see slightly better availability on our battery trucks. With the added ventilation, we also have the flexibility of utilizing our conventional trucks if and when needed. Looking ahead, we continue to work on the new mine strategy and we're planning on running a few scenarios when we get the year-end model to better understand the optimum production levels at Macassa and the possible benefits associated with the AK zone. Overall, a very good quarter. The mine is starting to stabilize and we're very proud of the entire team at Macassa for their hard work and dedication to get us to this point. With that, I'll pass it back to Ammar.

Ammar Al-Joundi, CEO

Thanks, Natasha, and Dom. The real excitement continues to be on the key value drivers, and I'll just hit a few highlights quickly. Dominique mentioned Amaruq underground completed on schedule and on budget. That's never easy, particularly tough in an inflationary environment. Congratulations on that. The Odyssey project remains on schedule. The shaft sinking activities are expected to resume early in January, again excellent performance by the team there. I think it would be difficult for any company in this environment to keep a project as ambitious as that on schedule. Our team has done it and I think that the way we're able to do it is because we've got access to the best people, contractors, and suppliers in the regions where we have been operating for over 60 years. The Detour Lake mine, we were up there just a couple of days ago, and what an exceptional property. We've installed the screen in front of the second crusher. The team did a great job doing that in the quarter, on schedule and on budget. They used the 610 refeed, which worked flawlessly. Importantly, in September, we reached the equivalent of 28 million tons per annum throughput at lower energy usage. We are very confident with what the team has done. We are looking forward to installing the second screen into the first circuit in the fourth quarter. While it's early, we are confident that not only will we be able to reach the 28 million ton per annum target, but possibly reach that ahead of schedule and exceed that number. Regarding Kirkland Lake, commissioning of the number 4 Shaft is expected to be done at the end of this year. The underground ramp from Macassa to the amalgamated Kirkland deposit has been completed. When we did the merger, we identified this as an opportunity to create some synergies. It’s done now eight months later, and I hope that’s a demonstration of our commitment to hit the ground running and deliver the synergies that we promised. We've also had some exceptional drill results in that area that the team will discuss shortly. The Kittila shaft sinking is completed, and commissioning is expected to start in the fourth quarter. The Meliadine expansion to 6,000 tons per day is progressing as expected. I want to make two points. One is that everything we just talked about is exciting, and all of it is at existing assets, leveraging existing infrastructure, leveraging competitive advantages. That's how you consistently get the best return on capital and the best risk-adjusted return on capital in our business. Secondly, every single one of these expansions opens up the potential at all of these mines, which still have exceptional exploration upside, and we will talk about that next. Next slide, please. Thank you. I'll just talk very briefly about this, and then I'll ask Guy and Eric to comment, as they are the experts. At Odyssey and Detour, two world-class, multi-decade mines, we've had good infill results, but what's really exciting to me and to all of us is the step-out drilling. We have good step-out results, one to two kilometers beyond the existing perimeter of the ore body. It's early to say what that means, but it is exceptionally promising for these mines. At Macassa, as I mentioned, the ramp to the amalgamated Kirkland deposit is now complete. We're drilling, and I just want to point out one hole here, effectively 31 grams over 3.5 meters. That's impressive, 64 meters underground. At Fosterville, Eric will provide more information on that. And I will just ask Guy and Eric to briefly talk about some of the things they're most excited about.

Guy Gosselin, Senior Vice President, Exploration

Thank you, Ammar. Overall, 2022 is obviously the most important year in terms of exploration spending for the company. From the original budget of 325 that we announced early in the year, we've added an additional 30 million that was announced in the August press release following good results. Year-to-date, we've successfully completed in excess of 1 million meters of core on schedule. We're on our way to complete our total of 1.2 million meters of drilling. With all of that, we're certainly positioning ourselves favorably for the year-end reserve and resources update. We've seen good success at several of the mines, which will more than offset the depletion we anticipate this year. We've seen solid results at or near mine at several operations like Kittila, LaRonde, Meliadine, and Amaruq. On the key value driver project, we've seen some solid results and good step-out results, particularly at Odyssey. We now have 14 drill rigs operating, and we're on our way to complete our target program for this year with 160 kilometers of drilling. We've been getting solid results and infilling at the Odyssey deposit, and we are anticipating starting production at the end of Q1 2023.

Eric Kallio, Senior Vice President, Exploration

Thanks, Guy. In terms of Detour, we had very good progress in the quarter both in terms of the productivity of the drilling and the results. We drilled about 74,000 meters in total, focusing on the west side of the pit and extending that up to about two to two and a half kilometers to the west. We're showing some very good results there. Close to the pit, we're seeing broad zones of mineralization similar to what we see in the pit and some high-grade intercepts as well. So everything is coming together very well, and we believe we're on track to add more to the open-pit and underground projects as we move forward. Macassa continues to focus on both the deep mine and on the AK project. The deep mine's main targets are the Main Break in the South Mine complex to the East Main Break. We found a very high-grade hole there, 25 grams over about two and a half meters. Fosterville has also been exciting this quarter; we are starting to receive a lot more drilling results, confirming the continuation of the Swan zone to depth with more high-grade lenses. This all bodes very well for the future at Fosterville.

Ammar Al-Joundi, CEO

Thank you very much. Those are excellent results. And what I want to emphasize again is none of these are results from an area we've never operated in before. These are at operations where we have the people, we have the infrastructure, we have the competitive advantages, and we are creating value for our shareholders. Moving on to the next slide. As important, Sean Boyd has always said, as important as what we do is how we do it. We continue to demonstrate the culture of the company. We talk in this slide about the record quarterly safety performance. Again, that is a fantastic representation of the culture of the company and also how we operate. We're also well-rated by all the external agencies regarding greenhouse gas emissions and water usage relative to our peers. We are doing very well, but take a look at the bottom points. Agnico Eagle was awarded the 17th Best Place to Work in Mexico, not just among mining companies, but against all companies in Mexico, as measured by this Best Place to Work award. That is impressive and shows who we are. Furthermore, La India won the distinction of a socially responsible company by the Mexican Center for Philanthropy and the Foundation for Sustainability and Equity. Sometimes, it's the small things on the ground at the communities that really make a difference, and it shows the culture of the company.

Dave Smith, CFO

I don't mind at all, Ammar. I'll just focus on a few numbers here. Looking at the operating margin, it's $2.4 billion year-to-date, a significant number. The size, scale, and liquidity of companies are more important in this market than ever, and certainly, Agnico is delivering on these important metrics. For Q3, the operating margin is in line with what we've done year-to-date, about $800 million. Importantly, it’s well balanced between our regions. I think that diversification and balance throughout the portfolio are very comforting to our investors. The quarterly cash flow per share numbers extrapolate to a yearly number of more than $5 per share. If you told me a few years ago that Agnico was going to generate more than $5 per share in cash flow, I would've said the share price could be close to or above $100 per share. We're not near the top of the market for the valuation of gold equities right now, and I think we've got a solid base for the share price to continue moving higher as the equities and the gold price recover going into next year. Flipping to the next page, we have strong liquidity with more than $800 million of cash and undrawn bank facilities of $1.2 billion. The debt maturity schedule is very light, spread out over time intentionally, giving us tremendous financial flexibility to continue what we've been doing for decades.

Ammar Al-Joundi, CEO

Thank you, Dave. Next slide, please. On the synergies, I'll hit these very quickly. We divide them into corporate synergies, operational optimization, and strategic optimization. In corporate synergies, I wouldn't say it was easy, but we've done a really good job on that, frankly, better than anticipated, roughly double the original estimate. Congratulations to the team, and we are continuing to do this. There was another $2 million saving annually by consolidating some insurance policies. On the operational side, we are targeting $130 million a year. I will tell you we've identified more than $130 million a year of opportunities, but not everything you identify comes to fruition. We are confident in the $130 million a year target, but we said it would take a couple of years to get there, and we are on track to exceed our expectations for 2022. On strategic optimization, we've talked about Amalgamated Kirkland; eight months into it, the ramp is done, the drilling is underway, and we hope to bring production there in 2024. I can assure everyone that progress is happening faster with the combination of the two companies than it would have happened individually. Our vision remains the same. We have a consistent, disciplined, and proven approach to value creation. It's based on building a high-quality business with low costs, strong margins, and strong cash flows. We aim for a robust production profile from premier jurisdictions, focusing on places with geological potential for multiple mines over multiple decades and the political stability to operate there. Our strategy is to create competitive advantages in those regions, leveraging existing infrastructure. We have proven leadership with a track record of building value per share. We prioritize creating value on a per-share basis in a responsible manner. Finally, we maintain a strong financial position, which is essential in a cyclical business. We aim to be the best community member in the locations where we operate, striving for sustainable growth from existing mines and a high-quality exploration program. We are dedicated to returning capital to shareholders, with 38 years of uninterrupted dividend payments. In conclusion, our story remains consistent: deliver strong operational results reliably, have the best growth profile at the lowest risk, deliver value through the drill bit, and do it responsibly with the best ESG credentials. Our part of the call will end here, and we will transfer over to questions, operator.

Operator, Operator

We will now begin the question-and-answer session. First question comes from Josh Wilson of RBC Capital Markets. Please go ahead.

Josh Wilson, Analyst

Thanks. Good morning. I had a couple of questions on inflation. The commentary in the release mentions inflation ramping up for the next couple of months. I’m curious to understand what’s causing that now versus prior disclosures or quarters? Is it a matter of inventory or hedging that’s rolling off?

Ammar Al-Joundi, CEO

Hi, Josh. It’s Ammar here. We don’t really see an acceleration of inflation. In fact, we’re hopeful that we’re past the peak and are starting to see some light at the end of the tunnel. What we’re trying to communicate is that it’s still too early to say it’s over. We are planning to do everything we can to control costs because it’s our responsibility. So I don’t think we’re seeing inflation accelerate, and we didn’t intend to suggest that.

Josh Wilson, Analyst

Okay. And then the other question on inflation relates to Odyssey and the cost reevaluation there. Could you provide more information on what was incorporated in the original study, maybe in terms of flexibility?

Ammar Al-Joundi, CEO

Yes, that’s a good question. We are making progress at Odyssey and will start production soon. Every year we go through a budget process where we reassess our costs based on the last 12 months. We’re in that process now. It’s early to provide guidance, but we expect to work hard to offset these cost pressures. Dominique can elaborate on our approach to efficiency and revenue opportunities.

Dominique Girard, Vice President, Operations

Yes, one opportunity we have is the internal zone at Odyssey South. We know that mineralization is there; it's complex, but it’s close to our infrastructure. We will see answers coming from those zones in the coming years. Our construction team is strong, looking into alternatives to mitigate costs. The cost per meter is better than expected, and we have a solid staff for shaft sinking given our past experience. We are optimistic about performance.

Ammar Al-Joundi, CEO

To wrap up, we still see an inflationary environment. We’re working hard to mitigate it as much as we can. We can’t predict inflation with any accuracy, but I assure you, the project is progressing well, and the team is doing a good job.

Josh Wilson, Analyst

Got it. And what percentage impact has inflation had on costs so far?

Ammar Al-Joundi, CEO

We’re reviewing the budget now, but I expect that, on average, it’s about 7% more expensive than last year. We have some relief on currency and less movement on wage inflation. We are focused on both input costs and efficiency to offset pricing pressures.

Dave Smith, CFO

Regarding fuel for 2023, we’re about 36% hedged on our exposure. It's actually above our guidance rate from February but therefore, we feel comfortable with that position, though it remains to be seen what the oil price will be in the second half of next year.

Josh Wilson, Analyst

Great. Thank you.

Operator, Operator

Anita, please go ahead. Your line is open.

Unidentified Analyst, Analyst

Hi, good morning. I had a question regarding some exploration highlights and specifically at the TMAC zone. Can you discuss some of the high hits that interest you? What do you need to see develop before proceeding with that project?

Guy Gosselin, Senior Vice President, Exploration

Hi, Anita. We’re focusing on the depth as we are seeing potential full-end repetition. We’ve been getting very interesting results, such as 7.3 grams over 15 meters. The drill spacing isn’t ready yet for resource categorization, but we have extended the drift early and are now drilling from underground with a second drill rig. We’re optimistic about the project’s resources.

Unidentified Analyst, Analyst

Thank you. Can I ask about operational items at Malartic? The grades came down a bit; are you expecting grades to uptick going into Q4?

Dominique Girard, Vice President, Operations

Yes, we are aligning with guidance at Canadian Malartic. Everything is on track. It's just a matter of sequence and stockpile that we processed more in Q3, but all is going as planned.

Unidentified Analyst, Analyst

And how about Detour? Any expectations for an uptick there as well?

Natasha Vaz, Vice President, Operations

We’re still tracking against guidance at Detour. The grade was about 0.94 for the year, and that's where we expect to be.

Unidentified Analyst, Analyst

Lastly, in Macassa, the unit costs seem to be going down. What’s driving that and can we expect further gains in Q4?

Natasha Vaz, Vice President, Operations

Yes, we did see lower costs due to higher throughput compared to budget. The ventilation has helped, and we expect continued improvements as we proceed further.

Ammar Al-Joundi, CEO

That emphasizes the importance of throughput and efficiency in mitigating costs.

Operator, Operator

The next question comes from John Tumazos of Very Independent Research. Please go ahead.

John Tumazos, Analyst

Thank you. As Shaft 4 ramps up at Macassa, do you envision the tonnage going from 814 in the September quarter towards 2,000 tons a day? What year should we hope for that?

Ammar Al-Joundi, CEO

You’ve outlined the potential well, John. It’s a great ore body, and we’re investing in infrastructure and ventilation. It will take a couple of years to achieve that potential but the mine has the capabilities for significant production.

Natasha Vaz, Vice President, Operations

With respect to the shaft, it has the capability of hoisting 2,000 tons of ore a day. It's right near our main reserves, and we’re working on optimizing the production strategies.

John Tumazos, Analyst

Switching back to Agnico legacy properties, the underground Malartic and its measured, indicated, and inferred resources are almost 8 million ounces now. Should we be modeling 3 grams for East Gouldie and 2 grams for the other zones post-infill?

Ammar Al-Joundi, CEO

Guy, go ahead.

Guy Gosselin, Senior Vice President, Exploration

We're expecting some dilution as we transition from inferred to indicated resources, which means the grade will slightly lower. However, East Gouldie's core section confirms earlier predictions. The overall blend of grades will depend on mining sequences.

John Tumazos, Analyst

The grades aren't as strong as Macassa or Fosterville, but there are a lot of tons and ounces. How low do you think your costs per ton will be at 19,000 tons to earn good returns?

Ammar Al-Joundi, CEO

We're assessing economics right now, but this transition from the largest open pit to the largest underground mine in Canada will require a strategic approach to maintain profitability.

John Tumazos, Analyst

Thank you.

Tanya Jakusconek, Analyst

Great. Good morning, everyone. Thank you for taking my questions. I just wanted to circle back to inflation. Ammar, I know I asked on the Q2 conference call where inflation was running at that time, and I think 7% or 8% is what you said in Q2. Is that similar to what you saw in your Q3 costs?

Ammar Al-Joundi, CEO

Yes. Yes, Tanya. Nice to hear from you, by the way.

Tanya Jakusconek, Analyst

You spoke of inflation relief. Is that related to transportation costs eased?

Dominique Girard, Vice President, Operations

Yes, Tanya. We are starting to see positive trends in supply. Container costs from China to North America were at times 10 times higher during COVID. We’re now around double pre-COVID costs and it is improving further.

Tanya Jakusconek, Analyst

Regarding labor negotiations, are you expecting 3.5% to 5% wage increases in certain regions?

Dominique Girard, Vice President, Operations

Yes, we’re expecting those ranges but labor costs will depend on regional demands. Negotiations are ongoing.

Tanya Jakusconek, Analyst

Any relief on other consumables, not fuel?

Ammar Al-Joundi, CEO

We’re noticing relief on consumables in Finland. They are experiencing decreases in costs for various items, though we must plan for the worst.

Tanya Jakusconek, Analyst

Moving to reserves and resources at year-end, are you thinking about the same level for reserve and resource pricing?

Guy Gosselin, Senior Vice President, Exploration

We’re evaluating year-end reserve assumptions now, considering FX rates and gold price trends. We expect to revisit that closer to year-end.

Tanya Jakusconek, Analyst

For reserve replacements, will you grow reserves at Detour?

Ammar Al-Joundi, CEO

We’re working on it. We will see partial reserve replacements, plus net gains at Detour, contributing to an overall net gain, but specifics will be clearer at year-end.

Tanya Jakusconek, Analyst

Thank you for taking my questions.

Ammar Al-Joundi, CEO

Thank you. Operator, one final question, and then we will wrap it up.

Operator, Operator

The final question comes from Mike Parkin of National Bank. Please go ahead.

Mike Parkin, Analyst

To discuss AK project integration, is it fair to say AK material will be a lower priority than primary Macassa ore as you balance the mill capabilities?

Ammar Al-Joundi, CEO

As Natasha mentioned, we’re reviewing the mine plan with Shaft 4 and ventilation. We’ll optimize mill feed based on profitability. Our metallurgical tests are underway, and we’ll adapt as needed. Thank you, everyone. Operator, we will terminate the call. Have a nice weekend. Bye-bye.

Operator, Operator

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation and ask that you please disconnect your lines.