Earnings Call Transcript - AEM Q2 2020

Operator, Operator

Good morning. My name is Jessy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Agnico Eagle Second Quarter Results 2020 Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. Thank you. Mr. Sean Boyd, you may begin your conference.

Sean Boyd, CEO

Thank you, operator, and good morning, everyone, and welcome to our second quarter 2020 conference call. Prior to getting into the slides, just be forewarned. We are presenting forward-looking statements in this presentation, and there are two slides that go through the disclaimers on forward-looking statements. So please, at your leisure, read those. What I'd like to do is talk a little bit about Q2 and how we managed through the pandemic, but focus more on our position going forward. The emphasis will be on our business in terms of driving free cash flow and using that to reinvest in the business and increase our dividend as we move forward. As you know, it has been a challenge; it's been a challenge for everyone. From a business standpoint, seven of our eight mines were impacted either with temporary shutdowns or with significant reductions in our activity levels at those mines due to COVID-19 and the fact that, in some of our jurisdictions, mining was not considered an essential business. We were fortunate to be able to restart those operations earlier than we had expected. We continued our dialogue with the governments in our respective regions on our safety protocols and how we were positioned to restart and keep our employees safe. In both Quebec and Mexico, both of those governments allowed the mining industry to restart before many other industries. So that allowed us to ramp up and get things moving quicker than what was in our original plan. As we've said before, the number one priority for us was to ensure that our employees were not only safe but that they were comfortable, and their families were comfortable with our approach. Also, our communities were comfortable with our approach. Our team put some unique ideas forward, particularly with respect to testing, and that just added an extra layer of comfort and protection. We'll talk a little bit about that. We closed Q2 strong, we started Q3 strong, and as a result, we expect to have a strong second half in terms of production, declining costs, and also free cash flow generation. It was important for us because in a lot of the meetings that we've had over the last few months with investors and analysts, the question was always, 'Well how much is it going to cost to manage through the pandemic?' in terms of impact or costs on putting mines on care and maintenance, but more importantly, going forward, what was that going to do to your productivity? What was that going to do to your unit costs? On page five of the slide in our press release, we've broken those down, and we’ve given you the accounting treatment. So, in the quarter, we incurred a little over $22 million; roughly $8 million of that was strictly the care and maintenance cost at those operations where we were on temporary suspension. We had an additional $14 million roughly, which were our payroll costs for employees that we temporarily laid off during COVID-19. Those amounts of $22 million were not included in our unit costs, either cash costs or all-in-sustaining costs, and we did not back those out of earnings in calculating our adjusted earnings. There have been differing treatments in the industry. We've chosen to leave them in our earnings calculation and not back them out for adjusted earnings. I think it's more important to focus on the costs going forward. In the quarter, we had $2.3 million in costs around increased hygiene, screening, and testing. Those were factored into our unit cost calculation, and we didn't adjust our normalized EPS for them. As we look forward, a couple of things in terms of moving parts. We do know we have additional expenditures to continue with the protocols around screening and hygiene, and testing. Our number for that is about $1 million a month, which amounts to about $6 per ounce in additional costs. That’s a number that the markets have certainly been interested in for a number of the companies; that’s where our number has landed. We view that as not significant in the overall picture. However, because of our unique situation, we had to reduce employment levels at seven of the eight mines, and in some cases, drastically reduce employment levels. On the restart, we reintroduced employees in stages; we gradually reintroduced employees, allowing us to match our employment levels and headcount levels against our productivity. We feel that there's going to be some cost savings there concerning the total headcount, particularly on the contractor side. So it looks like we won't have to call back as many contract workers as we had prior to the pandemic, which we think is a bit of an opportunity. We do have an additional cost of $1.4 million per month. One of the things that were done early on is that in Nunavut, the communities are at high risk for COVID-19. It was important to ensure and protect the communities, so we had to separate our operations from those communities. As a result, we sent our Nunavut workforce home, and they are still at home. We want them back, but we want them back when they're comfortable. We believe we have a safe environment for them to come back, but we are still in discussions with the Nunavut public health authorities, the government of Nunavut, and local government community leaders on when is the most appropriate time to bring them back and ensure that the communities remain protected. So, there's no set timeline for that; however, we continue to work with that. We've backfilled that workforce with some additional contract workers and some seasonal workers to help us manage while our Nunavut workforce is at home. In terms of second quarter highlights, we produced a little over 330,000 ounces, which is a bit more than we expected when we started to see the impacts of the virus. There was a lot of uncertainty surrounding the restarts. Our costs are higher on a unit basis because of producing less gold in the quarter, but going forward, we'd expect those costs to come down, and we will talk about that. We tightened up our guidance; we increased the lower end of the range, and our guidance is now for the full year 2020, 1.68 million to 1.73 million ounces. We had a fairly broad range when we revised guidance to 1.63 to 1.73, and we needed to do that because we were still in a period of a lot of uncertainty. We weren’t sure when we would be able to restart and how quickly we would be able to ramp up. Now we've gone through the second quarter, so we're comfortable tightening that range and increasing the lower end of that range. In terms of full-year guidance for 2021 and 2022, we left that the same. And what that means is during the second half of this year, we expect to produce between 480,000 to 500,000 ounces per quarter at declining costs. The next year, a little over 2 million ounces which puts us at about 500,000 ounces per quarter and beyond that over 500,000 ounces per quarter as we continue to ramp up. We continue to declare our dividend of $0.20 a share. We'll certainly look in the third quarter to revisit that, and given our track record of 37 years of consecutive dividend payments, and given the free cash flow generation, I think it's logical to assume that over time that dividend will continue to grow. Also, in the second quarter, I think it was important that we did receive some critical permits. We received a permit to increase our processing rate in Finland to 2 million tons a year. We received the permit at Meadowbank for the IVR open pit and for the Amaruq underground. We also received approval at Meliadine to double the amount of saline water we can discharge to the sea. Those were three important permits that we were anticipating, and we did receive them in the second quarter. In terms of the ramp-up, we've talked about a faster ramp-up in the previous slide. As we said, we were able to restart earlier in Quebec than expected, about two weeks earlier. We got to restart in Mexico about twelve days earlier than we had expected. As a result, we closed the quarter strong in June, and that allowed us to gradually ramp up. In July, we produced over 160,000 ounces, which sets us up for a strong second half, as we said. On an operational update, I'm not going to go into individual slides; however, they are in the slide deck. As we go through the next series of slides, I'll touch on each of the operations. LaRonde, prior to the onset of the pandemic, we had completed the planned infrastructure upgrades in the West mine area at LaRonde. We were actually developing in the West mine area before we had to reduce activities there. We have been mining in the West mine area in the second quarter, and we continue to see higher grade than we had forecast in the block model, which I think is important to see that realized as we mine out those areas. We're expecting in the second half to average about 8,500 tons a day from the LaRonde complex, about 3,000 tons of that from LZ5, with about 12% of the tonnage sourced from the higher-grade West mine area. At Meliadine, in June, our throughput in the mill exceeded 4,300 tons a day. We had always talked about 4,000 tons a day as the level that we needed to achieve, and we beat that in June. In the third quarter here, we will replace the repaired apron feeder. Reaching 4,300 tons a day with the repaired apron feeder really speaks to the success of those repairs. We will put in a new unit in the third quarter. We will upgrade the filter press system and other components that will allow us to go to 4,600 tons a day in the plant in the fourth quarter of 2020. I think it's also important that we've been able to pump out the third mining horizon at Meliadine, which was always in the plan, and those are higher-grade areas. That’s set up so that we can start mining in those higher-grade blocks in August and September and into the fourth quarter. We did make reference to our water discharge at Meliadine; we did get approval to double the discharge limit at Meliadine. We're doing that by truck in the third quarter, and we can continue to do that by truck going forward, but we feel strongly that the best solution is a water line. So, we’re moving forward with the process to get the water line permitted which is going to involve a lot of community discussion. One of the concerns that the community has about a water line is does it impact the ability of the caribou to move? They had that initial concern back in the early days of Baker Lake in 2007, and it was pretty evident, pretty quickly, once the road was built that the caribou were not bothered by the road and they easily crossed. We think that's the same thing with the water line—there are 70 crossover points for caribou along a 35-kilometer long water line. Ultimately, if we need to cover the entire water line, we'll do it. So a longer-term solution that we will eventually get approved, but in the meantime, we can continue with trucking the water at Meliadine. At Meadowbank, we made a lot of progress even though we were at reduced activities to catch up on the backlog of maintenance, and you can see that in the results in June, where we mined over 110,000 tons of ore and waste per day. Our target, as you know, was a 100,000 tons of ore and waste per day. The mill restarted in late May, which was a couple of weeks sooner than we had planned. The mill is currently running in excess of 9,500 tons a day, both from the mine ore and from existing stockpiles. In the balance of 2020, we expect higher rates between 2.5 and 3 grams per ton, which helps with our production in the second half and helps us to achieve our increased production for the second half. As we mentioned earlier, we received the permits for the Meadowbank complex to mine the IVR open pit and the Amaruq underground. At Kittila, that was the one mine where we were able to operate our plant continuously through the quarter. We also received an important permit there, allowing us to move forward with the expansion in the processing facility to 2 million tons a day. We were impacted with our shaft sinking because the Canadian shaft sinking crew was brought home during the pandemic; they've now been allowed to return and resume shaft sinking activities. We continued with the other construction related to that expansion program. Ultimately, we believe the future at Kittila is beyond 2 million tons a day. We're thinking about the opportunities we may see to increase the mining rate there. We've had some good exploration success as well. I'll talk about that in a minute. As we step back and look at our production profile, we see our graph showing how we've gradually increased production over time. We're now pushing on that sort of run rate of 2 million ounces a year, and we expect to exceed that in 2021 and beyond. We continue to work on our project pipeline. Kittila expansions are under construction; so is Meliadine phase 2. Amaruq underground is in planning, which was delayed due to COVID. We're working on ways where it will not impact our 2022 production number. We think we can be successful doing that in terms of timing. I'll talk in a minute about the opportunity at Canadian Malatric Underground, which is an important project. Exploration continues to be a major focus here, but I think what we've learned in the last 12 to 18 months, as we've said before, is there's still a lot of potential left in these mature mining camps. Whether it's LaRonde, Malatric, or Kirkland Lake. As we mentioned at Kittila, it's a long-life asset, but we continue to drill that deposit. We continue to intercept more grade material beyond the current resource limits, so we’re going to continue to probe that depth. That’s been a big part of our success. We don’t mind drilling deep drill holes simply from the perspective that we’d like to know what we own for planning purposes; that was the same story at Canadian Malatric Underground. The reason East Gouldie was found is because we were attempting to drill a hole about two kilometers underground. That was the target, tracing the plunge from the old East Malatric Underground, and we hit the East Gouldie deposit. We've got 10 drills currently working there. We've expanded the program to increase the drill meters by almost 20%. This is important to gather information on the potential size, tightening up the drill spacing, and improving our confidence in the East Gouldie deposit. It’s the East Gouldie deposit that makes this underground work. Without it, even at these gold prices, Odyssey and the East Malatric side would still be low grade; it's now the volume and the number of mining horizons. The potential to make this a large tonnage underground mine that East Gouldie introduces. We certainly, combined with Yamana, have the skills to understand what we own. What steps need to be taken to optimize it and turn it into a meaningful part of our business? We’re doing that now. The first stage of that, as we said, is to increase our drilling. We're working on a preliminary economic assessment, which we expect to be ready in early 2021. The initial work on an underground exploration program, which is essentially the ramp, we're going to begin that this quarter. We've made important steps to move that project forward, which will extend the mine life at Canadian Malatric and has the potential to extend it for many years. Kirkland Lake, another old mining camp, continues to drill up from Beaver; it is a mine. The question is, where we stage it in our pipeline? We continue to drill and assess the economics. We've now started to drill more targets along that land package, including amalgamated Kirkland, which is close to the boundary with Kirkland Gold. So, we're interested to see what those drill results return. In Mexico, we continue to get high-grade results at the Amelia deposit. It’s going to need some more drilling. The team is focused on completing those drill programs and then updating a study on the potential at Santa Gertrudis. I’ll just add LaRonde here; we continue to drill both LZ5, the old Bousquet Barrick property to the west of LaRonde; our intention there is to ultimately mine out several hundreds of thousands of more ounces. We are also drilling to the east of the main LaRonde ore deposit where we’ve picked up massive sulfide mineralization over the last several months in the 20 north zinc southlands. So that continues to be a focus for us on the exploration front. On the operating results, we talked about most of these mines, but I'll talk about Goldex here. Goldex was doing extremely well prior to the pandemic; it was exceeding its budget, getting very good productivity from the rail air system, along with getting good productivity in the high-grade south zone. We expect to be able to increase the mining rate in the south zone as we move through this year, generating more production coming out of Goldex in the second half. The team has done a really good job optimizing that asset, generating free cash flow. At Malatric, we've talked about the underground potential, but the mine during the second quarter actually did extremely well in its ramp-up. In May, the monthly tonnage mill was 64,000 tons a day, which is a record. We have to congratulate the team because they did produce in the second quarter the 5 million ounces since the mine started. That’s a tremendous achievement in a short period of time. There's a lot more ounces to come, particularly as we look at the underground, but there's a top-notch team there that's doing a really good job maximizing the open pit and looking at the opportunity to extend the mine life with the underground component. In Mexico, the focus continues to be on advancing satellite opportunities, whether it's Sinter or Cubiro, or Pinos Altos or Chipriona at La India. I should also give our thanks to our Mexican team. The mines are in a region where communities have been hit fairly hard with the virus, unfortunately. I think what that has done is allowed our teams to really be helpful in the community. What we've been able to do is bring in additional medical resources and medical personnel to help the communities. We have better logistics; we have better medical facilities in some of the communities. We’re in a better position to respond, and our team has done an exceptional job working together with the communities to help them deal with the pandemic in the communities. Our screening program has been effective for the most part. We've been able to screen out employees prior to getting on site. We’ve had some who were asymptomatic that passed through screening. We isolated them immediately; we're using rapid testing followed by detailed testing afterward. The testing has been a big factor in our ability to manage through this; as I said earlier, our team did an exceptional job implementing testing in April in Nunavut. We now have a test facility in Quebec at Val-d'Or, which essentially pre-screens and pre-tests every employee we bring up from the south into Nunavut. By the time the plane arrives in Nunavut, we have the test results essentially. If all the tests are positive, all the employees are released to work on their 14-day shift. I think, using testing, the highlights for us were early adoption of testing, the fact that our team thought about it, were able to execute. The fact that in the regions where we've been, we found ourselves in a strong position to help the communities, and our team truly stepped up. Just quickly on financial highlights, even though the quarter was down from a production standpoint due to COVID, we did have good earnings and good cash flow generation. We expect all those numbers to improve as we move through the second half. We did draw down $1 billion on our credit line as the pandemic struck, just to be extra cautious. We have now fully repaid the $1 billion that we had drawn on the credit line. We've made reference to the dividend. It's important to note that over the last six years, even though we were in a heavy construction period and the gold price averaged around $1,200, we increased our dividend in each of those years. We raised the dividend in February of this year, given where the gold price is and our growth trajectory in terms of production. We would expect that dividend to continue to increase as we move forward. To wrap up, we talked about our ability to manage through COVID and ensure that not only were the employees safe but that the assets remained properly positioned to manage and deal with some things that we had to address largely in Q1 and a little bit into Q2. We successfully did that, which sets us up for a strong second half and a strong 2021 and 2022. Again, we have a renewed exploration focus where we feel we can continue to add a lot of value in some of our mature mines. There's still a good opportunity there, and those are high-quality ounces considering they’re at existing mines that are not only near physical infrastructure but also near our skilled workforce, who's demonstrated a track record of being able to add value. So operator, that's the formal part of our presentation. We'd like to open up the lines, if you could, and take questions.

Operator, Operator

Your first question comes from Ralph Profiti with Eight Capital. Your line is open.

Ralph Profiti, Analyst

Hi. Good morning, everyone. I'd like to have two questions, if I may please. Firstly, what's your gut feel on how big Kittila can be? You talked about the sweet spot being above the 2 million ton per annum rate. Maybe you can give us some context around what you're thinking? How big the investment can be, and is this going to be sort of a larger high-grade or a larger low-grade deposit compared to what we see now?

Sean Boyd, CEO

Our sense is that we're just taking it a step at a time. I think that it's pretty clear that we bought it initially for C$150 million when it was a little over 2 million ounces resource because we expected it to get bigger. The reserve and resource is roughly 8 million ounces or so; we've mined over 1 million ounces. We're in the middle of that program to get to 2 million tons a year. We started it around 1 million tons a year, and I think we've doubled it. The challenge we have is to match the production rate with the size of the ore body. It’s an anomaly, as you know, in Scandinavia, most deposits tend to be around 1 million ounces. This one will likely mine out at maybe 10 million ounces because it's still wide open; it's still growing. I think the next level, our team is now starting to think beyond 2 million tons a day. A logical next level could be 2.4 to 2.5 million tons a day; that'll take a few years. We're already in the initial stages of thinking about how that could be done as we drill the zone of depth, which opens up another mining horizon for us to allow us to increase the mining rate. So, it's still early, but given the size of the opportunity and the fact that we've been staging investment over a number of years to increase capacity there, I think that was the right approach. We’ll continue with that steady, measured approach to maximizing what is a strong geological asset for us.

Ralph Profiti, Analyst

Yes. Okay. Sean, when can we expect more drill results from East Gouldie before the year end 2020 reserve and resource statement comes out? And maybe just a broader question, given the care and due diligence you're doing around all these operations. When it comes to reserve and resource replacement, how are you guys shaping up as you bring back the full capabilities of the exploration program?

Sean Boyd, CEO

Okay, we'll start with East Gouldie. Our plan is to have drill results come out with the Q3 results. Exploration activities were suspended in Quebec for actually longer than the production activities were suspended. So, we weren’t able to drill things like LaRonde and the targets at Canadian Malatric Underground, so that's resumed as we've said in the release with 10 drills. Lots of information will be available to us prior to the end of October when we put out our Q3, so the expectation is that we will put those results out. The plan is to update the resource in February to put out a PEA at some point in the first part of 2021. But our sense is that we'll have to make a bigger decision for the overall project which would include a shaft. We'll have to make that decision based on resource. We won't have or won't be in a position to have drilled it all off to the levels of a reserve. We're comfortable doing that based on what we know. We believe the drilling now where we tighten up the spacing will increase our confidence level to be able to do that. We've done this a number of times. What we're seeing in East Gouldie is thick and higher grade with a higher-grade core. It's still open. Regarding reserve resource replacement, I would expect we're working on a number of areas where we believe we can convert resource to reserve. We had a slight decline this year, but it's not just drilling; it's completing studies. We spent some time while our drills were down talking about strategy around what resources do we need to put to work, and the second half of the year, to compensate for the lost time of drilling, but also to ensure we get the studies done on time to move resources to reserve. We're confident that we can, at a minimum, maintain what we have. Hopefully, we can grow it. This isn't a prediction. The plan is designed to ensure that we pick up the pace of drilling in the second half to account for the time we lost in Q2. We’re well positioned to complete the studies we feel need to get completed to convert resource to reserve. What the final number is, we never know, but I think we're well positioned.

Operator, Operator

Your next question comes from Jackie Przybylowski with the BMO Capital Markets. Your line is open.

Jackie Przybylowski, Analyst

Thanks very much. I just wanted to ask, I guess, another exploration question. The results that you've put out on the zinc deposit at LaRonde look fantastic. I know it's still very early. I guess more strategically, how do you guys think about zinc in your portfolio? Is this something that you'd be comfortable mining yourself and having in your portfolio longer term?

Sean Boyd, CEO

Absolutely. At one point, our friends at Barrick years ago when Agnico was 50% zinc revenue and 50% gold out of LaRonde, we were happy to take that zinc because we were selling it at $1.50. My friends at Barrick used to see me at conferences and say, 'How's the zinc mine going, Sean?' We have a history of zinc. We've made a lot of money at zinc. We've used the money we made from zinc to build a gold business, partly to build a gold business. We feel really comfortable with that. We hope it's a sizeable lens. These things are lenses. It’s relatively near infrastructure down there; it would certainly give us flexibility. The NSR value of some of these holes is very high. It’s not a surprise; it’s something we're used to seeing. The fact that we've hit something reinforces the need to continue the systematic drilling. What we’ve decided to do is focus more drilling there ultimately. Do we need to extend the ramp eastward to give us a better platform to drill below three kilometers as we move to the east, and potentially move on to the adjoining property which we own, which used to be Barrick called El Coco? That wasn’t really drilled at depth at all. As we move to the west, Barrick never really drilled at the depths we’re mining at LaRonde. So, there’s lots of potential there, and we have a very well or wide felsic package of rocks running through that belt. There are still lots of open areas that haven’t been drilled. It’s our job over the next few years to keep seeing what we have.

Operator, Operator

Your next question comes from John Tumazos with Very Independent Research. Your line is open.

John Tumazos, Analyst

As you go forward, how do you plan for 2021 or investment decisions? Whether it's, I probably now $1,200 gold from two years ago, but you probably aren't using $1,954 today either. How do you plan vis-à-vis the health protocols in mining? Clearly, if you have fewer people at your site, it's spread towards the virus, and that's a great advance. Thank you.

Sean Boyd, CEO

I think we're assuming that most of the protocols remain in place. Ultimately, I guess there's a vaccine or there's an effective treatment. If that occurs, then I’d say face coverings go away and testing goes away. However, hygiene and focusing on hygiene and possibly screening, I think probably stay going forward. The way we've looked at this strategically, not knowing whether there's a second wave or whether we stay at an increased level going forward. In the second quarter, we tried to get to our governments who made a call that mining is not essential and the fact that we were able to open up earlier. Mining was able to open up earlier, meaning the governments concluded that mining could operate safely because there's a lot of natural physical distancing. The governments got comfortable with our screening and hygiene and testing procedures. So, I think we've made the case that we can continue to go, and as far as investment decisions, that’s the number one question we're getting: Is the industry going to have a better result this time versus 12 years ago or so when gold ran? There are keys to that. One major difference is the input price pressures we’re not seeing as in 12 years ago, probably due to a lack of activity in terms of big projects in the resource space. We're not in that position where, 12 years ago, the gold price went from sub-$300 to over $1,000 in a short period of time, and the industry made a strategic mistake where they kept calculating reserves. As you know, at a higher and higher price every year, which saw a dramatic dilution in the quality that business had over a short time. Here we are now as an industry with a relatively stable reserve price anywhere between $1,100 and $1,300 for years, which means the base on which the mine plants are built to deliver margin expansion over the next three to five years is pretty solid and conservative. It's up to the industry to maintain that conservatism in terms of the reserves and resources, and we're at $1,200. We're not going to be tempted to go a lot higher. For us, it’s focused on free cash flow generation, staying disciplined, working our pipeline in a measured fashion. Be mindful that the price level is good. Let’s continue to explore. Let’s continue to understand what we own. Let’s continue to look at early-stage opportunities that we could bring into the pipeline. There’s no real significant change in how we think about this. It’s really about how we can continue to be a high-quality business that’s able to drive per-share value. We are asked a question today: Did it matter to you that this week your stock went through C$100, and that you've hit an all-time high in Canadian dollars while other companies have not returned to all-time highs? Does that matter? I said, 'It really only matters from the perspective that it reinforces the strategy that we've put together in the late 90s when we were single asset $50 million in revenue, $4 million in EBITDA, one mine. The strategy was to diversify away from one mine to get bigger, but do it in a way that added value. The fact that it's hit C$100 reinforces that strategy worked. Let’s just stay focused and make sure that we’re continuing to be a high-quality business.

Operator, Operator

Your next question comes from Anita Soni with CIBC. Your line is open.

Anita Soni, Analyst

Hi, good morning, everyone. My question, let's go back to Canadian Malatric in East Gouldie. So, I'm just wondering what kinds of, I know it's fairly early stage, you're going to do a PFS, and that's going to be out in early 2021. But if we're trying to figure out how to envision this opportunity, what kind of tonnage would you be able to pull from underground considering you got to 50,000 tons per day that you're going to be feeding into?

Sean Boyd, CEO

Yes, it's too early to really give clarity on that. The two reasons I think it's become elevated in terms of priority – it was the ability to have multiple mining horizons now when you include Odyssey, the old East Malatric, and then add East Gouldie, which is thicker and better grade. What that ultimate number is, it’s too early to put a number out; we still need to do the work, but I think it’s at a level which gives Yamana and Agnico comfort when you layer in the higher grade from East Gouldie and potentially have a sizable opportunity here. So, we need to be able to drill it. The fact that we're starting to ramp this quarter is important. We’d had that permitted for a while. Makes sense to move that forward and creates an ability to drill it better. The exploration ramp can easily be converted into a production ramp ultimately leading to shafts; we’ve got or coming up from a ramp ultimately to the shaft. When you think about the shaft that’s further down the line, it may have some impact in terms of production before the shaft is completed. It’s not that significant, but it helps; ultimately, we need the shaft to augment what’s coming out from the ramp. So, we’ll provide more clarity early in 2021 on those types of numbers.

Anita Soni, Analyst

Okay, thank you. And then question with regards to 2021 costs. So, in the second half of the year, you're guiding now to $740 to $690 on the cash cost range, and you can see that with the graph you put out that you're starting to hit those kinds of numbers with higher production levels. So is that an okay run rate to be using for next year considering the production levels are similar, if not slightly higher?

Sean Boyd, CEO

I think it's reasonable. We're still in the middle of our budgeting process, but I think it's reasonable.

Anita Soni, Analyst

Okay. And then in terms of capital, I know you said there's an ongoing $500 million to $700 million that people should be using for their combined growth capital and sustaining capital projections, and then you add exploration on top of that. Do you think that continues to remain a valid assumption or should we be tweaking things in terms of exploration with a higher gold price or some project moving forward accelerating some spending?

Sean Boyd, CEO

Yes, the fact that Kittila starts to come down gives us some room to add things. Next year Canadian Malatric, it’s not that significant; it’s the ramp, which is not a totally big number. So there are some things to replace, like Kittila. I think it’s reasonable to assume we’re at the higher end of that range at $700. Exploration is around $100. So, I don’t think that’s unrealistic, but we still have to do the work. That’s part of the budget process, which concludes in November and December of this year.

Anita Soni, Analyst

And last question, because that's been the focus of questions from investors just about the gold companies in general. Is there any view to changing the gold price assumptions that you're using on your reserves going into next year?

Sean Boyd, CEO

Not significantly, no. That's always a healthy discussion here. Exploration has a bias for more ounces, which they'd like at a higher price, but our operating teams have won that arm-wrestling match for the last several years. So, the bias is knowing it’s important to deliver on production and cost targets. You need to stay conservative. We feel as we calculate reserve and resource that way. The plans we’ve laid out are to maintain reserves now and maybe increase them a bit without having to adjust the gold price. We’ll see how that all unfolds over the next six months as we pick up drilling and try to make up for the meters we didn’t get in Q2.

Anita Soni, Analyst

Okay. And then just last comment, congrats to Yvon on making it out, and I know you're still with us until the end of the year, but congratulations. And to Dominique, on his promotion.

Sean Boyd, CEO

Thank you. You didn’t mention Ammar, who’s got more reports to him. The fact that Ammar has been wandering around the halls here since he came back from Barrick with nothing to do. We figured, we better give him something to do. Just kidding. I think everybody's earned their increasing responsibility. I think we’re fortunate here that we have some strong bench strength. We’ve been very focused on how we bring along our younger people and give them different exposure and different levels of responsibility. Dominick's a good example that he started as a summer student 20 plus years ago. He’s worked at a number of our operations in the Abitibi, Kittila, and Nunavut. He’s gone through tech services, mine planning, and enrollment strategy. We’re lucky. But thanks for congratulating Yvon. Yvon, really, though his focus, his wife beats him at golf all the time, and he just couldn’t take it anymore. He said he needed to spend more time golfing.

Operator, Operator

Your next question comes from Carey MacRury with Canaccord Genuity. Your line is open.

Carey MacRury, Analyst

Hi, good morning, Sean. Maybe just a question on cash costs for the second half in terms of you’ve had the quick ramp-up now back at Meliadine and Amaruq. Just wondering what we can expect on cash costs from those two operations.

Unidentified Company Representative, Company Representative

Meadowbank, that's going to decrease because obviously the units are going to decrease; cash flow is going to be between $1,100 and $1,200 for the second half at the Meadowbank. Meliadine is going to be in the $650 range for the second half. This is the forecast for now.

Carey MacRury, Analyst

And then maybe there are a lot of questions around the Malatric Underground. Do you envision that this operation will be concurrent with the open pit, or is it going to be sort of up closed open pit?

Unidentified Company Representative, Company Representative

Yes, that's a tough one now because of the need for a shaft. The timeline is a focus. You can see how we manage the timeline in Nunavut. We didn’t want to go too fast. We wanted to ensure we were careful with respect to the timeline. We don't want to have to speed up; if there's a gap, there's a gap necessarily. The underground could be around for 10 to 20 years. We must ensure we get the right infrastructure in place at the right time frame.

Carey MacRury, Analyst

In the event of an underground-only scenario, can you just reconfigure the mills to operate at a lower level? Is that the potential?

Sean Boyd, CEO

Yes, we can.

Operator, Operator

Your next question comes from Tanya Jakusconek with Scotiabank. Your line is open.

Tanya Jakusconek, Analyst

Good morning, everybody. I'm going to ask, I think, a question to the technical team. So I don't know who wants to take it, Yvon, Dominick, Ammar. What do you guys need to see at Amaruq to start on the underground again?

Unidentified Company Representative, Company Representative

The development restarted. We will continue the ramp. The underground is an opportunity, which is a higher grade than we put with the open pit. Underground is another project. We're still doing the study on that to finalize our numbers, and we're going to provide information beginning next year about the results of that.

Tanya Jakusconek, Analyst

And how often does it fit into the mine plan?

Unidentified Company Representative, Company Representative

We will have more details on the mine plan in February of next year? Yes, it's going to be integrated. The underground could be as long as we have an open pit. We should be able to have answers starting in 2022 to the end of the life of the mine, which we have right now at 2027.

Tanya Jakusconek, Analyst

Okay. More to come back. Sean, just for you. I'm looking at the year 480,000 to 500,000 ounces coming through the second half and into next year. The gold price looks favorable, but I think you're going to be generating a considerable amount of cash flow. Deduct that $700 million of CapEx and the debt repayment is minimal. You're going to generate quite a bit of unallocated free cash flow. Can you talk a little bit about how you see that and your priorities for it? What minimum cash balance are you going to keep on the balance sheet so that we have an idea of where we can go with this dividend?

Sean Boyd, CEO

Yes. I’ll just start with the allocation of the free cash flow. Dave can talk about the strategy and thinking around the balance sheet. Our current dividend is at $0.80, which is around $200 million a year based on where the gold price is now. We can certainly pay more and a lot more. The propensity and track record are to pay more. That’s certainly something we're looking at now, now that we’ve come through the impacts of the virus on operations in Q2, and we are heading into a stronger period of production and cash generation. That will certainly be a priority. We'll continue to work the project pipeline; exploration is our focus. The Canadian Malatric Underground has sort of moved up the ladder in terms of priorities. That’s a focus, but it doesn’t chew up a lot of cash next year. It’s more when we decide to go with a shaft. We need to make room for that. As we look at it, certainly part of it will be increasing our financial flexibility. The gold industry has potential for a lot of cash like it did back in the late 70s when gold went from sub-$50 to $800. We certainly have the potential now, and our debt repayment isn’t until 2022; we’re building up flexibility. But I’ll let Dave talk about some of his thoughts on that.

David Smith, CFO

So, Tanya, as you may know, we used to carry a minimum balance of about $100 million of cash for working capital purposes. I think given the virus and all this uncertainty related to that, it's prudent to carry more than that, at least in the near term. I would think we would be more around $150 million to $200 million in cash as a minimum balance just due to this uncertainty. Given that, starting now, we expect to start generating strong net free cash flow. I think you're going to see our cash balance begin to grow quickly, especially next year, which leads us to the fun problem of what are you going to do with all the money? Sean already talked about increasing the dividend. So, I think we're going to have the opportunity to do that. In the near term, we will carry more cash. I think in the longer term, we're a bigger company than we used to be, so maybe we'll carry a little more cash for working capital purposes. Let’s round off my answer at about $150 million minimum.

Tanya Jakusconek, Analyst

Okay. So, we've got that $100 million of exploration that Sean had mentioned, going through we've got that $700 million of CapEx, really not much in terms of debt repayment, and anything in excess of $150 million could potentially go to dividends?

Sean Boyd, CEO

Yes, theoretically, it's just how we split it up. It won't all go to dividends. I think it will have a bigger cushion on the balance sheet. But our track record of 37 years and the fact that we didn’t eliminate it when others did a few years back and we were the first to actually start it up again and increase it. It has gone up and up in each of the last six years. I think this demonstrates our mindset around dividends. So, it means it's going up. But it's not really up to the board, and we'll have those discussions around the Q3 results.

Operator, Operator

There are no further questions at this time. I turn the call back to the presenter for any closing remarks.

Sean Boyd, CEO

Thank you, operator. Thank you, everyone. Thanks for your attention. If there are any follow-up questions, feel free to contact us. Thanks again. Bye.

Operator, Operator

This concludes today's conference call. You may now disconnect.