Earnings Call Transcript
Agnico Eagle Mines Ltd (AEM)
Earnings Call Transcript - AEM Q1 2022
Operator, Operator
Good morning. My name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to the Agnico Eagle First 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. Mr. Ammar Al-Joundi, you may begin your conference.
Ammar Al-Joundi, CEO
Thank you, and good morning, everyone. It’s been 65 days since we last spoke, and we've been very busy. We’ve been working hard, and I think today we’ll demonstrate some good progress. There’s a lot to cover this morning. We’re excited about our current position and our future direction. For those familiar with Agnico, we can go on and on about the Company, so we’ll try to be brief and leave time for questions. Before I delve in, there are four key points to highlight from this call. First, on the operational side, we had a strong quarter and a good start to the year. We’re reaffirming our production guidance and, importantly in this inflationary environment, our cost guidance. The numbers are strong, especially given the production challenges we faced. We've exceeded our internal budget in the first quarter, which is exceptional considering the initial hurdles with Omicron in January. We've also managed to keep our costs slightly below our internal budget, which is remarkable given the inflationary pressures we face. We're reaffirming our combined company full-year production guidance of 3.2 million to 3.4 million ounces and our full-year cash costs of $725 to $775. The second takeaway is about the integration of the merged entity, which has gone exceptionally well. The senior management team is in place, and everyone is well-informed about their roles. We quickly streamlined the organization as promised, leading to synergy savings that are roughly double our initial estimates. We projected about $15 million a year in streamlined organizational costs, but we’re already closer to $30 million. Third, our value drivers are strong. We always have a robust pipeline, particularly off existing assets in safe jurisdictions. We’ll discuss the significant potential at Detour and Malartic, both of which are among Canada’s largest gold mines and among the top 10 globally. Their long-term prospects from existing infrastructure are a solid return on capital and risk-adjusted return. Lastly, while this quarter was strong, it is important to note that it was a stub quarter, with complexities due to the merger. The second, third, and fourth quarters will be full quarters, and we expect the first quarter to be our weakest of the year, anticipating stronger results moving forward. Moving on, pages 2 to 5 of the presentation will cover some non-GAAP numbers and forward-looking statements, which we recognize are relevant in such a volatile industry. Some highlights from page 6 show solid production in the combined entity post-merger, with 661,000 ounces produced at a cash cost of $811. For the entire company in the full quarter, that translates to 806,000 ounces at cash costs of $755. This is well within our guidance and represents a strong start to the year, with exceptional results from key assets like LaRonde, Fosterville, and Detour, along with solid contributions from other operations. Regarding COVID-19, the situation has been fluctuating, particularly with Omicron in December and early January, but we’re back to full production. The inflationary environment remains a significant concern, and while we acknowledge the challenges, our team has done an excellent job managing costs amidst it all. Since completing the merger on February 8, the integration has exceeded expectations, with synergies ahead of schedule. We’ve repaid $125 million of debt and declared a quarterly dividend of $0.40. Focusing on our value drivers, the Odyssey project is on schedule and within budget, and despite a tight labor market, we’re attracting high-quality talent due to our reputation as a major employer in the area, enhancing our competitive advantage. In looking at Detour Lake, we are only beginning to realize the full potential of that mine. Mill optimization projects are progressing well, and we'll share more details in a technical report mid-year, as we're incorporating additional resource ounces into the mine plan. As for Kirkland Lake, the potential lies in consolidating our land package, with more guidance expected in the coming year. We’re also exploring our Hope Bay acquisition, which we've committed to focusing solely on exploration, with promising drill results. Meliadine is growing, and LaRonde, which has operated for over 34 years, is producing exceptional results. We are maintaining our commitment to environmental, social, and governance principles, with Detour Lake recently receiving an award for its practices. In summary, it was a strong quarter with exceptional milestones across several operations. For example, LaRonde produced 105,000 ounces at a cash cost of $560, and Detour Lake delivered 100,000 ounces at $600 in this quarter. Fosterville achieved remarkable results as well. The overall post-merger operating margin was solid, demonstrating the company’s potential. Now, I would like to invite our CFO, Dave Smith, to discuss our strong financial position further.
David Smith, CFO
Thanks, Ammar. As mentioned, the strong operations allowed Agnico as well as good pricing, of course, allowed Agnico to add cash to the balance sheet during the quarter. We had free cash flow of about $200 million. We have liquidity of approximately $2.3 billion, in fact, not including an uncommitted accordion of $600 million. As Ammar mentioned, subsequent to quarter end, we repaid $125 million of notes that matured. We paid that off with cash, of course, continued our $0.40 per share dividend, and pleased to announce a new tool. Our normal course issuer bid should be in place next week. And that will provide us with a very flexible way to continue to increase shareholder returns. I’d like to add as well that financially, our hedge book helped offset some of the inflationary pressures that certainly the entire industry is seeing. And I think Agnico is in a great position to continue with a strong year. Every quarter is going to be better than this quarter, we hope. I’m knocking on wood right now. And we’re very excited to continue delivering very strong financial results to you quarter-after-quarter.
Ammar Al-Joundi, CEO
Thank you, Dave. Regarding synergies, we made a commitment during our last call to provide more details. We've been focused on this aspect, which is crucial for our investors. I'll summarize some highlights. For corporate synergies, we have exceeded our expectations and are raising our guidance. Initially, we targeted $15 million to $25 million in this category for the year but have already achieved $45 million, with $35 million being annual. We now expect a run rate of $40 million to $50 million annually, up from $35 million. We're guiding towards $200 million pretax in the first five years, increased from $145 million, and anticipate $400 million over the next ten years, up from $320 million. This is a strong start. Importantly, it's not just about the financial figures; the team is engaged and performing well. Moving to strategic optimization, we're maintaining our guidance, but we are ahead of our initial projections. We've discussed the potential to integrate amalgamated Kirkland into the Macassa Mine, which is progressing positively. We expect to decide on that before the end of the year, with a potential increase of about 40,000 ounces a year in production, contributing approximately $40 million annually from resources around 600,000 to 700,000 ounces, and drilling is proceeding well. This project alone could generate over half of the total anticipated synergies over the next decade. Additionally, there's the possibility of saving $20 million on equipment related to the Upper Beaver shaft from available resources at Macassa shaft sinking. In terms of operational synergies, there's a solid update in the press release. We're still aiming for $50 million a year in procurement savings by 2024 and have made strong progress. Simple optimizations at the Detour mill could potentially yield $5 million a year. Steeper pit wall slopes at Detour could lead to $100 million over the mine's life. We also have various other initiatives mentioned in the press release, including centralized control systems and energy management, that could collectively provide about $75 million a year. If there are questions later, I'd be happy to discuss further. Overall, we’re making significant progress and have just begun. At Agnico Eagle, our approach to value creation remains straightforward, disciplined, and proven, focusing on low costs, strong margins, robust cash flows, and a solid production profile with growth potential in safe jurisdictions led by experienced leadership. We prioritize value per share, and sustainable practices are integral to our strategy. We are excited about growth from existing mines, excellent exploration results, and a solid history of returning capital to shareholders, marked by 38 consecutive years of dividend payments. We anticipate the normal course issuer bid will be approved soon. Let me briefly highlight operational successes. LaRonde had an outstanding quarter, with 31% of production mucking done autonomously. LaRonde Zone 5 also saw 21% of mucking in automated mode, showcasing our commitment to innovation. Canadian Malartic is on budget and on schedule. We're highlighting the potential of the asset including its milling capacity. The Camflo property has been added to our landholdings, offering potential feed for the mill. Goldex continues to deliver promising exploration results. Detour Lake reported an impressive 182,000 ounces this quarter, showcasing effective cost control. Macassa and Kittila are on track for shaft completion by year-end or early next year, with Meliadine increasing to 6,000 tons daily. Fosterville also had a strong quarter, thanks to our dedicated team in Mexico. With that, I'm ready to open the floor for questions.
Operator, Operator
Your first question comes from Tanya Jakusconek with Scotiabank. Please go ahead.
Tanya Jakusconek, Analyst
Great. Thank you. Good morning, everyone. And congrats on your first quarter as the new company. A couple of questions, if I could. First off, just a quick one, maybe Dave can help me on this one. Just to reconcile the numbers that you provide on an annual basis for guidance for production costs. You mentioned Q1 would have had production of 806,000 at $755 total cash cost. Do you have the all-in sustaining costs, so that I can reconcile that too, please?
Ammar Al-Joundi, CEO
We can give you that, Tanya. I don’t have that available with me right now, but we’ll get you that.
Tanya Jakusconek, Analyst
Okay. That’s perfect. And then, maybe just keeping on, just on the quarters. You mentioned that we’re going to see much stronger quarters going forward. In the press release, you did give guidance on your mines and what we’re seeing quarterly at LaRonde, Fosterville, Meadowbank and Kittila. Can you just give us maybe from a bigger picture, are we looking at like 55% second half or 53% second half? I know, it’s quarter-over-quarter improvement, but just a bit more that we can help us with some of the other mines?
Ammar Al-Joundi, CEO
I think we mentioned previously that the first quarter would be about 20,000 ounces lower than the next three quarters. I believe that's a reasonable estimate for the second quarter. We're currently evaluating this, but we anticipate improvement throughout the year. Therefore, the 55% to 45% split seems appropriate at a high level.
Tanya Jakusconek, Analyst
Just to clarify on the pressures, you mentioned C$0.90 per liter for diesel. I believe the sensitivity for a 10% change was $6 an ounce. Is that still accurate?
David Smith, CFO
Yes.
Tanya Jakusconek, Analyst
And you do have about 40% of your oil...
David Smith, CFO
That’s correct.
Tanya Jakusconek, Analyst
Can you just remind me when you would be purchasing all of your fuel for Nunavut and what you’re seeing out there for purchase price?
David Smith, CFO
Yes. Beginning in July, and the forward rate for the remainder of the year on diesel is about $1.13 a liter. That number was a bit a week old.
Tanya Jakusconek, Analyst
And when do you expect to have all of this done, in having to put it all in and complete?
David Smith, CFO
I think the shipping season ends kind of September, October.
Tanya Jakusconek, Analyst
I just wanted to ask about other inflationary pressures. You say that your labor, you’re not seeing it. Are you seeing it in any other consumable?
Ammar Al-Joundi, CEO
We are noticing some challenges, particularly in Finland, which is where the supply chain disruptions are most intense. While we are experiencing these issues, our team has been proactive in addressing them. We are managing the situation in real-time, and they have improved operational efficiency, which has helped alleviate some of the pressure. However, we are seeing inflation affecting consumables, including reagents and steel, and it is definitely present.
Tanya Jakusconek, Analyst
Can I ask what sort of levels are you seeing the inflationary pressures at in those items?
Ammar Al-Joundi, CEO
You mean percentages?
Tanya Jakusconek, Analyst
Just a round number.
Ammar Al-Joundi, CEO
Well, in general, we indicated a range of 5% to 7%. I would say the actual numbers are higher, but we've managed to offset some of that. There are items that have increased by 30% and others that remain unchanged, so it varies. The most affected areas tend to be geographically differentiated, with Finland being particularly sensitive, primarily due to steel and products derived from natural gas, which makes sense.
Operator, Operator
Your next question comes from Fahad Tariq with Credit Suisse. Please go ahead.
Fahad Tariq, Analyst
Maybe first for Dave Smith, just an accounting question. So, I can see that the Kirkland operations, the sales exceeded production by about 56,000 ounces. I just want to clarify, after all the adjustments and everything, those 56,000 ounces are included in revenue, but the costs are not included in the quarter. Is that correct?
David Smith, CFO
Yes. The inventory cost went through the production costs, and you’re talking about the revalue, right?
Fahad Tariq, Analyst
Correct.
David Smith, CFO
That’s correct.
Ammar Al-Joundi, CEO
So the costs did go through, Fahad, they would go through our costs.
Fahad Tariq, Analyst
Because you value them essentially at the current market rate.
Ammar Al-Joundi, CEO
Increment goes through the production cost.
Fahad Tariq, Analyst
Okay. I understand. And then, just switching gears to the operational synergies that you highlighted for 2022. You mentioned in the press release that it could be about $10 an ounce this year. Is there a particular quarter or timing when that comes in, or is it kind of gradually through the year?
Ammar Al-Joundi, CEO
It’s gradually through the year.
Fahad Tariq, Analyst
Okay. And then, just the last one for me on Macassa. Any update on the battery electric fleet? And you mentioned in previous conversations that you might be looking to use conventional diesel or something to get the productivity back up. Any update on that?
Natasha Vaz, Operations Manager
Yes, sure. Thanks, Ammar. Hi, Fahad. Yes. So, we are continuing to work with the OEMs on that. In terms of the performance, we are continuing to troubleshoot with Sandvik in terms of our battery issues. We’re seeing a supply chain concern. I think there’s like a chip shortage that’s plaguing the automotive industry, but seeing a slight increase in availability, we’re fixing some of the issues, but still a lot of work to do, on that end.
Ammar Al-Joundi, CEO
And Natasha, maybe just talk a little about the ventilation progress and the flexibility that will give you.
Natasha Vaz, Operations Manager
Right. So, at the end of this year, we plan on completing the ventilation upgrades. So, we’re going from 300,000 CFM to about 750,000 CFM with the shaft and the two raised bores that we’re doing. We’ve completed the excavation of the raised bores. We are putting the fans on later this year and changing out the entire event system. So, we should have additional flexibility in our options.
Fahad Tariq, Analyst
Okay. Just to follow up on that, Natasha, it seems like the focus is not on returning to conventional diesel just yet; rather, it is still about figuring out the battery electric fleet. Is that correct?
Natasha Vaz, Operations Manager
Absolutely, we’re committed to pursuing this. It’s nice to have that flexibility.
Operator, Operator
Your next question comes from Lawson Winder with Bank of America. Please go ahead.
Lawson Winder, Analyst
Ammar, I wanted to address my first question to you. In the Aussie press in late March, you made some comments that Agnico wants to own more Aussie assets. And just would be curious what form that expansion might take? And would that be acquisitions of existing operations, development stage or exploration stage, and would you consider partnering as well?
Ammar Al-Joundi, CEO
Hi Lawson, and that’s nice to hear your voice. Well, I’d tell you, we had a fantastic trip to Australia and the team there is really a great team, nice people, very capable. And they’re doing a lot of really leading-edge technical things there. Australia absolutely meets the criteria of geologic potential for multiple mines over multiple decades and meets the criteria of you can actually operate there for multiple decades. So, it has great potential. It would be tough for us to go there from nothing because the Australians are good miners. But what we’ve got now with the merger is an exceptional team, an exceptional asset and a strong foothold, and also, as we discovered some really good relationships with the local communities and government officials. So, it is now in the category of good regions in which we operate. To the extent we expand in Australia, Lawson, we do it the same way you would. Any opportunities there have to compete with opportunities everywhere else in the world. And we typically think we make a lot more money for our shareholders through the drill bit. And so, we probably would do what we’ve done successfully for over 60 years, which is sort of take a small position early based on knowledge and then try to create value from there. So, good region, good potential and the opportunity to expand will be a function of what we see, and it will have to compete with everything else.
Lawson Winder, Analyst
Okay. And then, that same sort of vein, are there any assets in the portfolio that might be worth considering divesting?
Ammar Al-Joundi, CEO
There are some positions that we have that we look at. Those are non-operating assets, and we’re always looking at optimizing the portfolio that we have. But all of the operating assets we have right now, we’re pleased with.
Lawson Winder, Analyst
Okay, great. Can you provide more details on the diesel costs? In your release, you mentioned that the hedges in place are expected to help mitigate inflation for the 2022 sealift diesel costs. Could you elaborate on that, especially regarding the timing of when these hedges come into effect? For instance, is there a significant strike related to these hedges in July when you will incur those diesel costs? Any insight into the factors involved would be appreciated.
David Smith, CFO
Yes. It might be helpful. Our hedge rate is $0.57 a liter. The guidance rate was $0.90 a liter. And as I mentioned, the forward rate was $1.13 a liter. So, mark-to-market, our hedge book right now is about $20 million in the money, which certainly will help us.
Operator, Operator
Your next question comes from Jackie Przybylowski with BMO Capital Markets. Please go ahead.
Jackie Przybylowski, Analyst
I wanted to congratulate you guys on the synergy so far. It’s really terrific to see that’s ahead of schedule. And maybe if I could ask you a question, just to get some more color on that. Are the synergies that you’ve achieved year-to-date so far and that you’re expecting to achieve this year, are those new synergies that you had not previously identified, or are you bringing forward things that you weren’t really expecting so far? Maybe if you could just give us a little bit more info on that, I’d appreciate it. Thanks.
Ammar Al-Joundi, CEO
Thank you, Jackie. It's a combination of factors. We conducted thorough due diligence on this deal, particularly regarding synergy potential. Generally, out of every 10 identified synergies, four might not materialize, while four new ones may emerge unexpectedly. The key takeaway is that Dave and his team excelled at quickly reducing financial costs, accomplishing this within weeks. For instance, there's no need for two bank facilities or two insurance policies. Some of these savings were anticipated, but they executed the changes much faster than expected. Additionally, the streamlining process was crucial. It's challenging to predict what would happen during the integration. Once we started making decisions, we aimed to move swiftly, not just for cost savings but also for the employees' sake. Uncertainty about job security can be distressing for staff, so we committed to resolving this within 30 days, and we actually completed it in 20 days. This acceleration was largely about ensuring we treated our people fairly.
Jackie Przybylowski, Analyst
Thank you. I'd like to ask about the NCIB that you announced in February and have now approved. Can you provide some insight into the strategy for its execution? Do you expect to implement it quickly, or is it more likely to be a gradual process, such as using $500 million over the course of a year?
David Smith, CFO
Well, I think it’s a very flexible tool that we have, and we’ll try and be opportunistic in the buying, and I anticipate it will probably be spread out over most of the year. But again, that could change if there is a moment that we feel we should be opportunistic. And that’s what I like about this tool in terms of return of capital. We’ve always represented that this would be our variable, very flexible tool that we have for return of capital.
Jackie Przybylowski, Analyst
Maybe if I could just ask one last question. Ammar, you mentioned this earlier and you sort of promised us that we could ask about this on the Q&A. So, I’ll bite. Can we hear a little bit more color from Guy about the changes to copay and the exploration that’s going on so far and what the current thinking is for once it restarts production?
Guy Gosselin, Geologist
Hi Jackie, it’s Guy. We have been increasing our drilling capacity. Our main focus has been understanding the potential at depth at Doris. Currently, all the mining infrastructure is in place, and our due diligence provided us with insights about connecting some of the deeper sections at Doris below the dyke. We have positioned some drills on the surface in the first quarter, and as shown in our press release, we have obtained impressive results with grades above 10 grams, even reaching 25 grams over 5 meters in an area that had not been tested before we took over. We are excited to see these results within the fold at depth because it’s a tight fold at Doris. Not only are we getting good results from the folds that were previously mined, but we are also confirming the existence of high-grade vein systems within the fold that are open at depth and laterally. Therefore, we plan to continue increasing our drilling in this area.
Ammar Al-Joundi, CEO
It’s not just about Doris. The key point is that we understand how to operate in the North, and our vision for that project is in the range of 300,000 to 400,000 or possibly more. Madrid has seen considerable drilling, and we are confident there is gold there that we can extract. While Doris is significant on its own, it also plays a role in our larger strategy by providing additional high-grade tons right next to the mill that would benefit the Madrid project. We haven't even discussed Boston yet, but it's clear that it's not solely about Doris; it's about how Doris integrates into our overall strategy. Dominique, would you like to add anything further on this?
Dominique Girard, Geologist
We are aiming to initiate a first project with an output of 300,000 ounces over a 10-year period to establish a foundation. We plan to work with the existing mill and enhance its capacity to 4,000 tons per day. This will be our initial project, and as exploration progresses, we could potentially increase production to 500,000 ounces. It is still early in the process, and I am pleased with the positive results we've seen. Our current focus is concentrated on drilling and exploration.
Guy Gosselin, Geologist
We are excited to return to Boston as soon as possible. Last summer, we transported supplies by barge and used winter road hauling to bring in new equipment to refurbish the camp established in the 1980s by BHP. We needed to invest in that camp to prepare for resuming drilling. We know that the deposit remains open at depth, with some high-grade material available, and the Sizar Zone also shows promise with 56 grams over 10 meters at a kilometer depth. There is a lot more to discover there, and we believe we can ramp up activities and increase our drilling capacity.
Operator, Operator
Your next question comes from Greg Barnes with TD Securities. Please go ahead.
Greg Barnes, Analyst
Ammar, I just want to talk about Detour and the upcoming mine plan. Do you see that more as an incremental step? And then, 18 to 24 months or 12 to 18 months from that point, you’ll have another mine plan with the expanded mill, the underground. And would the underground be the source of all the feed to fill the mill from the 28 million to 32 million tons?
Ammar Al-Joundi, CEO
Thank you for your question, Greg. You're right, and we want to emphasize that point. We view this midyear update as a small step along a much longer journey. As I mentioned, and I appreciate Natasha’s quote from yesterday, this is just scratching the surface of the life of mine potential. So yes, I believe that's the right perspective. The midyear update will reflect the work done to integrate some of last year's drilling efforts and to progress from 24 million to 28 million tons. Jean and Natasha are collaborating closely on this. The next focus will be on the potential to increase production from 28 million to 32 million tons annually. Importantly, reaching that target won't solely rely on underground resources, as the pit continues to expand. Eric Kallio can provide insights on exploration later. We believe the pit can accommodate significant throughput through the mill. When we develop underground resources, we anticipate grades of around 2.5 to 3 grams, compared to 1 gram. This presents an opportunity to introduce higher-grade materials into the mill, potentially elevating your annual production above 1 million ounces, hypothetically speaking. The plan is to expand the mill, the pit, and the overall potential, while also accessing higher-grade feed from underground.
Greg Barnes, Analyst
And the mill is licensed to 32 million tons is what I understand. It wouldn’t require significant CapEx to achieve those numbers.
Ammar Al-Joundi, CEO
It is permitted at 32.4 million. You're exactly right. We are progressing towards that goal. We discussed this with Jean yesterday. He has a variety of ideas he's considering. However, it will probably take us about one to one and a half years to refine our approach. Eric, if you're available, could you briefly outline some highlights of the exploration progress?
Eric Kallio, Geologist
Good morning, everyone. As Ammar mentioned, we are very optimistic about the exploration potential at Detour. Since our press release in February, we've undertaken significant drilling on the west side of the pit, where previously there was little activity, yielding excellent results both on the north side and deeper areas as well as on the west limits. We anticipate drilling in the pit during the midyear update based on our current results. In our recent press release, we also announced new drilling results from up to 500 meters to the west, which continue to show broad intersections and impressive grades, including up to 38 grams over 3, and 3.5 over 48, along with 3.1 over 10. These findings reinforce our optimism for growth. Overall, things appear to be looking very promising. Our regional geophysics suggest that the structure may extend at least another kilometer to the west. Beyond that, we have uncertainties, but we are seeing significant potential for further development.
Ammar Al-Joundi, CEO
Thank you, Eric. And again, thanks, Greg, for asking because that’s an important point.
Operator, Operator
Your next question comes from Anita Soni with CIBC. Please go ahead.
Anita Soni, Analyst
I just have questions about the nitty-gritty as I usually do. So, on Macassa, the grades were a little lighter, I guess, than you had just forecast a few weeks ago. So, how do we expect the grades to evolve over the year? Like, will it rebound? I mean, I think you were forecasting 24 and it came in at 16. So, could you give us a little bit of color on that, and how we would expect those to rebound over the course of the year?
Natasha Vaz, Operations Manager
Hi Anita, it’s Natasha. The grade for Macassa was slightly lower than our predictions for the quarter. However, as you know, Macassa has a high-grade orebody and operates on a small tonnage scale, which leads to some variability on a localized level. Changes in the mining sequence have also contributed to the grade differences. We anticipate that the grades will stabilize over the next couple of quarters and align with our guidance.
Anita Soni, Analyst
Okay. Similar question. I guess, this one goes to Dominique for Meliadine and Amaruq as well in terms of the grades.
Dominique Girard, Geologist
Yes, good morning, Anita. Both Meliadine and Meadowbank were impacted by COVID issues earlier in the year, but that's now behind us, as contact tracing has become much easier. The Nunavummiut and the entire crew have returned. At Meliadine, we had to process more low-grade open pit stockpile while decreasing mining activity, which affected our ounces and costs. However, we are now back on track, and the grade is expected to improve. At Meadowbank, we experienced a pause in January but have since restarted operations. The grade has improved throughout the year; we recorded 2.26 grams per ton in the first quarter and are forecasting an annual average of 2.5 to 2.6 grams. As we dig deeper into the pit, the grade is expected to increase, and this will continue in the coming years. Additionally, our underground operations are ramping up. We will be conducting our first tests and commissioning in May, with full production anticipated in the second half of the year, which will significantly contribute to increased ounces.
Anita Soni, Analyst
Okay. Was the underground not operational yet? I thought I had seen that there were a few stopes in Q4 and Q3. Did it contribute at all this quarter or not?
Dominique Girard, Geologist
We experienced a slight development ore, but it was minimal. The significant progress is expected to take place in May and June. Additionally, I'm pleased to report that a key performance indicator is our broken inventory, which currently stands at 2.5 million tons. We are in a strong position for the rest of the year.
Anita Soni, Analyst
Okay. Now, regarding LaRonde, the situation is different. The grades are quite good. You mentioned it was the higher-gold lower-zinc zone. Will this continue into the next quarter, or are you going to be moving out of that zone right away?
Dominique Girard, Geologist
Yes, the upgrade mainly came from the East mine in the first quarter. This month is still looking good. We will see how it progresses throughout the year. Part of the improvement was due to stopes that were planned for the fourth quarter but were moved to the first quarter. We are now seeing those results, and they still appear to be on track for the end of the year.
Anita Soni, Analyst
Okay. Regarding costs, I'd like to discuss Macassa. The costs were better than anticipated, coming in at 523 compared to the 692 guidance, which aligns more closely with the performance from the last quarter and previous quarters under KL. Is it possible that there was an overly cautious estimate, or will the Macassa costs increase as the year progresses?
Natasha Vaz, Operations Manager
We expect to be within guidance, Anita. There were some delays with respect to some of the sustaining capital in terms of the number 4 shaft and such. So, we plan on being within guidance.
Anita Soni, Analyst
I was talking about unit cost…
Natasha Vaz, Operations Manager
Cash cost per ounce?
Anita Soni, Analyst
Yes.
Natasha Vaz, Operations Manager
Yes. Same, same.
Ammar Al-Joundi, CEO
Yes, Anita. So, yes, there’s a cash cost per ounce and then there’s the unit cost per ton. They do vary a little bit. Overall, though, it went pretty well. That’s just kind of a normal variance. Yes.
Anita Soni, Analyst
Yes. I wanted to follow up on something a competitor reported last week about labor issues in Australia. They also mentioned that they were lagging behind on some operational sequencing. Is there anything we should know as we hopefully emerge from COVID and the last two years, particularly regarding aspects you might be working to catch up on in the next two years?
Ammar Al-Joundi, CEO
No, not really. The first quarter in January was challenging, and the team had to put in significant effort. As Dominique pointed out, a clear example is that Meliadine relied more on the stockpile. We will be replenishing those stockpiles, which is a typical kind of variance.
Operator, Operator
Your next question comes from Mike Parkin with National Bank. Please go ahead.
Mike Parkin, Analyst
Could you just give us an update where and what permits are remaining outstanding at Detour Lake, or if you’re kind of going after West Detour in the Saddle Zone, I recall all those permits quite aren’t in hand yet.
Ammar Al-Joundi, CEO
Well, Mohammed, why don’t you take that one?
Unidentified Company Representative, Representative
Sure. Thanks, Mike. With respect to the permits remaining for Detour, there are two principal permits that we have submitted to the authorities, and we’re waiting for their technical review and approval. They would be the closure plan associated to the West Detour layout and includes closure and closure costs as well as the what we call the overall benefits permit for the Caribou. Once those are in place, that would be the two principal permits, then there’s just your construction various other permits.
Mike Parkin, Analyst
Great. And do you have agreements with all your first nations as well?
Unidentified Company Representative, Representative
Correct, we do. And if I may say noteworthy that we have all our agreements in place and updated agreements that include West Detour.
Ammar Al-Joundi, CEO
Including a trip next week to sit down with one of the first nations and celebrate some of those agreements. So, very good progress by the team on that. Just to close up, I’m sorry, Mike, not cutting off, Mike, did you have any other questions?
Mike Parkin, Analyst
No. No, that’s it for me. Thanks so much.
Ammar Al-Joundi, CEO
Well, before we end, I think, Dave, you wanted to make a comment?
David Smith, CFO
Yes. I just wanted to go back to Fahad’s question for clarity. I think Fahad was asking about whether or not the fair value inventory adjustment was included in our non-GAAP KPIs, like cash cost. The answer is, it’s included in the GAAP measures. So, it’s on the income statement, as I mentioned, in production cost, but it is not as a nonoperating, noncash, nonrecurring item. It is not reflected in the KPIs, it’s the non-GAAP KPI. So, I just wanted to make that clear.
Ammar Al-Joundi, CEO
Thank you, Dave. In conclusion, I want to express my gratitude to everyone on the call. Sixty-five days ago, we ended the call by stating our commitment to working hard for our investors and communities. I believe we have made significant progress. I would also like to extend my thanks to all of our employees who have been dedicated to their efforts. Thank you, everyone, and have a great day.
Operator, Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.