Earnings Call Transcript - AEM Q2 2021

Operator, Operator

Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Agnico Eagle Second Quarter Results 2021 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. Sean Boyd, you may begin your conference.

Sean Boyd, CEO

Thank you, operator, and good morning, everyone, and thank you for joining our second quarter conference call. We’ll be going through a series of slides. And please take note that in the presentation, there’ll be forward-looking statements, and there’s some material outlining the notes to investors in the slide deck as well. As we look at the quarter, as it ties into our strategy, it was a solid start to the year. We look at first half production, which was at record levels, over 1 million ounces. What was really gratifying is, we’re producing more gold, but doing it more safely than we’ve ever done in our history. So, we had the best safety performance in over 64 years in terms of fewest lost-time accidents. Congratulations to all of our employees for that focus on safety. Also, we had good cost performance, which generated really strong cash flows and strengthened our cash position. It’s still a company that’s growing. We’re still investing in the future. We have the ability to continue to grow output, and we’ll take you through that, with 24% production growth from last year and extending through 2024. The strategy is also based on taking advantage of geological opportunities. We’ll talk about some of that. We’re spending more on exploration this year as part of that strategic push to understand the opportunities we have, particularly at the existing mines. These are Brownfield opportunities. That’s important information for capital allocation. The focus is to grow in a way that improves the quality of the business. One of the key measures there is our ability to drive cash flow per share. Risk is important here. We like where we are in terms of operating platforms. Those are areas where we’re really comfortable being in, and we see them as important for the future success of our business. Not only do we bring expertise to the table, but we have the ability to operate in those regions. We’ll talk about ESG as well. A lot is going on in the quarter and a lot of highlights from an ESG perspective. In terms of operations and production, in the quarter, we produced a little over 500,000 ounces not including Hope Bay, and the cash costs were under $740 an ounce. So, good solid performance in terms of managing unit costs. That puts us on track to achieve our production and cost guidance that we put out earlier this year in February. Our CapEx is around $800 million, excluding funds that are being spent on Hope Bay. We declared our quarterly dividend of $0.35 per share. I made reference earlier to ESG. We see that as an investment in opportunities to improve the business and manage risk. We have a lot of good things happening. We were able to begin the reintegration of the Nunavummiut workforce. That’s underway at both Meliadine and Meadowbank. I think it was gratifying to see that as the Nunavummiut workforce returned to work, we had celebrations there to welcome them back. Some of the workers were actually in tears because they were so happy to be back at work. That shows it’s more than just a paycheck; it’s about opportunity. It’s about the chance to provide for their family and build a career, and those are big parts of the benefits that we’re focused on delivering. Another important initiative in Nunavut was an MOU that was signed with a consortium of Inuit-owned businesses to move forward on our renewable energy plan for the Hope Bay project, which includes wind turbines. We see that as an important first step as a way to invest in resource development but also to do it in a much more environmentally friendly way. This is going to extend beyond Agnico Eagle and other companies, as well as governments, to continue investing in this infrastructure. We see this as an important first step not only in the Hope Bay region but also to expand the options for renewable energy in the Rankin Inlet Kivalliq region around Meadowbank and Meliadine. Staying in Nunavut, today we have the pleasure, right after this conference call, to have something we call Good Move of the Week. Every operation, every business unit will report over the week where they’ve made improvements, whether it’s an environmental initiative, safety initiative, community initiative, productivity initiative, or exploration initiative. We review these weekly and get updates. Annually, we select one to recognize and honor the groups that win the annual award, which is today at noon. The winner of the Good Move of the Year was the Nunavut shared services and Nunavut teams for their onsite COVID testing. You’ve heard us talk about it many times and I think what that demonstrates is leadership and clear thinking in the face of uncertainty we were all dealing with last March. We had testing running by last April to protect our sites. We also received external acknowledgment in Mexico for the second consecutive year from the Mining Association of Canada for winning the Total Sustainable Mining award for our work in the local community around Creston Mascota. As Creston Mascota's heap leach operations wind down, we asked workers what we could do during the transition. They indicated that the community needed access to safe and sustainable drinking water not just for homes but also for clinics and businesses. Our team has put together a community development project to supply 300 families with clean and sustainable drinking water, using solar panels to power the system. This is another good example of how we’re able to share some of the benefits and good fortune from the strength of our business in the communities where we have employees and partners. We also made reference at the start to exploration. We put out an exploration release earlier this month highlighting a number of initiatives moving forward. I’ll touch on a couple of them. The underground component at Canadian Malartic, East Gouldie, was the driver for the underground mine in terms of consolidating multiple sources of ore to establish a long-life business with an attractive rate of return. In that rock package, the host East Gouldie, we’ve continued to drill, and our team has been focused on understanding what else is in that sedimentary package of rocks. We've had significant step-out holes that extend beyond the horizon where the East Gouldie deposit is found, including a recently identified structure 400 meters south of the projection of the East Gouldie deposit. We’re starting to see this as an extremely long life opportunity, and what we like is that it is essentially in our backyard where we’ve demonstrated decades of experience and know how to build these underground mines. We’re looking forward to continued exploration results, and we’ll be doing more drilling and adding additional resources there. For the Upper Beaver project, we continue to drill and are getting high-grade gold intersections with attractive copper grades. This drilling program will continue and drive clarity for the study. We’ll be moving that study into 2022 based on the drill results and our goal to increase the drill program there as we move forward. At Hope Bay, we’re observing extensions that suggest we can mine the Doris project longer, which is promising. We’ve also acquired more drills for this summer, allowing us to expand our drilling on regional targets like Madrid. This was part of the plan: to acquire more drills, drill these large geological belts, and focus on Doris, where we know there’s more potential. While we've worked on this, we’ve also been improving mill performance and recovery. We experienced a solid quarter at Kittila. When we first got involved with that project, we noted the Abetiti structure, which hadn’t been drilled deeply. We’ve now drilled it down to nearly 2,000 meters, and as we move north, we're seeing really promising thicknesses and grades. We’re already contemplating another expansion now that we’ve reached a processing capacity of 2 million tons a year based on the deposit size. This is an exciting drilling and exploration opportunity. Ultimately, all of these results at these deposits, plus in Mexico at Santa Gertrudis, have yielded good outcomes. We’ve also had positive results at Meliadine. This information is crucial as we assess our long-term capital allocation decisions, which is why we strategically opted to invest more in exploration. Now, moving on to slide 8, which lists all the mines, I’ll work my way down and comment on some highlights from the quarter regarding our operations. LaRonde continues to deliver exceptional results quarter after quarter. The operating margin for the last quarter stood at $130 million, producing nearly 100,000 ounces of gold at a cash cost of $500 an ounce. What’s encouraging, in addition to solid performance, is the steady improvement in the percentage of tons being mined using automated equipment. That advancement is crucial as we delve deeper into the mine. At our Goldex mine, we saw steady performance as well, resulting in a solid quarter regarding cash costs and production, coupled with good performance in rail operations and the underground mine. Canadian Malartic hit a quarterly record for tons mined and gold production. This is a significant mine, generating substantial cash flow and production. As mentioned earlier, it recorded over 18 million tons in the last quarter, processing 62,000 tons a day. This excellent performance reflects our initial ownership discussions from June 2014 when we set targets of achieving throughput rates, and we just surpassed those benchmarks. At Kittila, we also set new mill tonnage records in April and May, resulting in a solid quarter overall. In terms of the shaft, we target commissioning in the second half of next year, with project costs projected between €190 million to €200 million. In Meadowbank, we achieved a solid performance with slightly over 85,000 ounces produced. We’re still identifying improvements, but we’re making steady advancements on a quarterly basis. We noted a record month for tonnage of over 380,000 tons per day. This gradual ramp-up positions us to produce more gold moving forward, making it a stronger contributor. Our focus now is on developing underground resources since we have higher grades there, which will complement our open-pit production. Meliadine has shown impressive progress; the mine is hitting its stride with almost 97,000 ounces produced and nearly $100 million of mine operating profit in the last quarter. We observed monthly record throughput and gold production in May, making it a long-term contributor to our operations. We’ve also been ramping up exploration efforts and making progress on permitting, especially concerning the saline water discharge line, which has been a significant focus. We're working closely with communities and regulatory authorities and anticipate obtaining the necessary permits in Q3 of this year. In Mexico, good performance has led to over 40,000 ounces produced, contributing to positive cash flow generation. India had a slow start this year due to lack of rain, but we’ve experienced a lot of recent rainfall, setting us up for a better performance in the latter part of the year. Overall, this solid performance across the board has culminated in record output exceeding 1 million ounces in the first half of the year. It’s driven strong earnings for the quarter and impressive cash flow per share of $1.67 for the first half and over $3 per share in operating cash flow, which has increased our cash position to over $280 million. In summary, we’re positioned for a stronger second half and further production growth as we look beyond 2021. Our strategy focuses on operations in very-low geopolitical risk pro-mining jurisdictions, which has proven successful. As for our ESG commitments, we achieved record safety performance in the quarter and have contributed significantly to communities during these challenging times. This commitment will continue going forward. We maintain low intensity in greenhouse gas emissions and fresh water usage, with plans to improve further. Regarding dividends, we have declared $0.35 quarterly. As we continue growing output and build our cash position, we see potential for increasing dividends, which is a key focus for us going forward.

Operator, Operator

Thank you. Your first question comes from Tyler Langton, JP Morgan. Tyler, please go ahead.

Tyler Langton, Analyst

Good morning. Thanks for taking my questions. Yes, maybe just to start, sort of in the release, you kind of talked about inflationary pressures. I was trying to see them, but it’s still on track to hit your guidance, just due to some initiatives you can take. Can you provide more detail on the type of pressures you’re seeing, on what costs, and what these initiatives are? Is 2021 benefiting from any fuel hedges or supply contracts that could mean added pressure next year?

Ammar Al-Joundi, CFO

Hi Tyler, it’s Ammar here. There is inflationary pressure across the board. As you can imagine, cost control is a focus of Agnico and every mining company. Our team has done a great job managing that. We’re maintaining our cost guidance despite inflation pressure and currency volatility. Our Treasury team is on top of this; we’ve got about 50% of our position hedged through the rest of this year and a portion into next year. Our team has effectively managed costs overall.

Tyler Langton, Analyst

Okay. Then maybe just switching to Hope Bay, production this quarter was above your quarterly exit rate; costs were lower. What are your expectations for the second half?

Dominique Girard, Senior Vice President

This quarter has been a bit higher than expected, and it also depends on timing. We're still expecting to achieve 18,000 to 20,000 ounces per quarter at Hope Bay. The mill is exceeding recovery expectations, so we’re pleased with its performance. We’re progressing underground and will move to the DCN Zone to create more flexibility and productivity for the second half of the year.

Operator, Operator

Thank you. Your next question comes from Puneet Singh, IA Capital Markets. Puneet, please go ahead.

Puneet Singh, Analyst

Hi, good morning. I’ve seen Meadowbank had another strong quarter. Originally, you guided for a step-up in the back half of the year. In yesterday's release, you mentioned you were reviewing the plan for flexibility. You’re still maintaining your overall world production guidance. Could you provide more color on the effects we could see this year at Meadowbank?

Dominique Girard, Senior Vice President

Meadowbank continues to improve on all aspects, and I’m very proud of the team's success in moving tons as well as the long haul trucks. We’re optimizing the mining sequence between the IVR, Whale Tail Phase 1, Phase 2, and Phase 3. This is a work in progress. We expect to have a good year at Meadowbank. The press release mentioned some challenges at the northeast of Whale Tail pit, but this is normal for mining, and the teams are adjusting the sequence accordingly. We have good monitoring tools in place and no significant issues.

Puneet Singh, Analyst

Great, thanks. My final question is, last year in the third quarter you reviewed the dividend policy with a substantial hike. Considering strong cash flow, are you following the same timeline this year for updates?

Sean Boyd, CEO

We review it quarterly, and last year we made increases twice. So, it will certainly be reviewed in Q3. With stronger output expected in the second half and the success of the first half, our ability to pay dividends is certainly on the rise. Our track record shows that we like to pay dividends, and that will remain a focus for the Board.

Operator, Operator

Thank you. Your next question comes from Anita Soni, CIBC World Markets. Anita, please go ahead.

Anita Soni, Analyst

Hi. Thanks for taking my call. I’m focusing on the exploration results you provided a couple of weeks ago. You mentioned you were looking to grow reserves and resources. Does this apply to reserves this year as well? Could you provide some insight on how we can expect reserves to play out this year?

Guy Gosselin, Vice President of Exploration

Maybe I can take this one, Anita. Good morning. Yes, we’re ramping up activity with a combination of drilling from existing operations and from pipeline projects. We’re currently assessing surveys for reserves. At Hope Bay, we’re increasing drilling efforts at Upper Beaver and considering building a study further in 2022. We’re also working on infilling East Gouldie, where we are unsure about the drill spacing needed. We are expecting to grow reserves by year-end, which will be a mix from existing operations and pipeline project updates.

Anita Soni, Analyst

Okay. And regarding Kittila and the shaft expansion, you’ve pushed it out to the first half of 2022. This was meant to reduce costs. Can you elaborate on that?

Dominique Girard, Senior Vice President

The shaft will help reduce mining costs while in operation. We’ll move fewer tons with trucks, which is part of our strategy to improve costs.

Sean Boyd, CEO

As we continue to see encouraging drill results at Kittila, it's poised for a very long mine life and will extend below 1 kilometer. The shaft is a beneficial strategy.

Operator, Operator

Thank you. Your next question comes from Mike Parkin, National Bank. Mike, please go ahead.

Mike Parkin, Analyst

Hi, guys. Thanks for taking my questions. For Canadian Malartic, can you give us an idea of what percentage of the ore feed was from Barnett?

Dominique Girard, Senior Vice President

About 60% of the ore is coming from Canadian Malartic, with the remainder a mix between Barnett and partially stockpiled ore. It should remain steady for the rest of the year, approximately 60% from Canadian Malartic.

Mike Parkin, Analyst

Is this portion going to remain steady or will it increase as we move towards the end of the year?

Dominique Girard, Senior Vice President

That will be steady for the remainder of the year, but it's expected to increase more in 2022.

Mike Parkin, Analyst

Could you provide additional details regarding the seismic event at Goldex?

Dominique Girard, Senior Vice President

Deep mining involves seismicity, which is a common occurrence as we mine deeper. We’re adjusting protocols and mining methods, and while this occurred at around 1 kilometer below the surface, it hasn’t caused any major issues.

Mike Parkin, Analyst

Is the experience at LaRonde helping in terms of best practices?

Dominique Girard, Senior Vice President

Yes, there is synergy between the two divisions. LaRonde is nearby Goldex, and our strong team collaborates and leverages external expertise to implement best practices.

Mike Parkin, Analyst

Lastly, have you encountered any challenges with the supply of shipping containers?

Dominique Girard, Senior Vice President

We are on target. Our teams faced logistical challenges, but overall, we managed to execute our plans for the barge. We anticipated container difficulties but planned well, so we have not encountered significant issues.

Operator, Operator

Thank you. Your next question comes from John Tumazos from John Tumazos Very Independent Research. John, please go ahead.

John Tumazos, Analyst

Could you provide an update on the strategy for Hope Bay? Initially, it was described as a long-term exploration and development project. With the latest results from June, are these sustainable?

Dominique Girard, Senior Vice President

The strategy for Hope Bay is in transition. We're mining the Doris deposit, with expectations of producing 18,000 to 20,000 ounces quarterly. Integrating the operation is going well, and we continue to look at the bigger picture while assessing the mill's capabilities for higher throughput.

John Tumazos, Analyst

Will you incorporate more drilling to replace what you're mining?

Guy Gosselin, Vice President of Exploration

We’re continuously assessing and extending zones that are currently being mined, and we have several rigs on site to enhance drilling capabilities. We're actively monitoring potential new structures to reinforce the long-term value of this project.

Operator, Operator

Thank you. Your next question comes from Tanya Jakusconek, Scotiabank. Tanya, please go ahead.

Tanya Jakusconek, Analyst

Good morning, everyone, and congrats on a good quarter. Can I circle back on the exploration results? Were there plans to grow reserves this year in addition to Upper Beaver and Hope Bay? Any specifics?

Guy Gosselin, Vice President of Exploration

Yes, you covered them all. There’s ongoing work to bring new resources into reserves, particularly in the pipeline and assessing existing operations. We’re also awaiting studies for a more comprehensive picture of reserves.

Tanya Jakusconek, Analyst

Could you provide an update on exploration work planned for Amaruq?

Guy Gosselin, Vice President of Exploration

We’ve been updating on several projects, and at Amaruq, there’s potential for some areas and ongoing exploration at Whale Tail and Mammoth. We’re pleased with recent drilling and will provide further updates later this year.

Tanya Jakusconek, Analyst

Lastly, could you comment on the impacts of inflation on costs and your capital structure as we look into 2022?

Sean Boyd, CEO

The big question is whether the inflationary pressure is temporary or permanent. From the labor side, which is about 40% of our costs, we expect it to remain in line with historic figures of 2% to 4%. We prepare for this by anticipating potential offsets based on our mine plan. We’ve had good relationships with our suppliers, particularly in exploration labor, so we’re managing our costs effectively.

Operator, Operator

Thank you. Your next question comes from Carey MacRury, Canaccord Genuity. Carey, please go ahead.

Carey MacRury, Analyst

What are your current thoughts on Upper Beaver? Have your views changed regarding that project?

Sean Boyd, CEO

The exploration results we’ve seen lately are promising, with higher gold and copper grades. Upper Beaver is a mine, and our current focus is on how to fit it into our overall pipeline while ensuring long-term viability. The exploration work and analysis will continue, factoring in permitting, which could take 3-4 years.

Operator, Operator

Thank you. There are no further questions at this time. I will now turn the call back to Mr. Boyd for closing remarks.

Sean Boyd, CEO

Thank you, operator. Again, thank you, everyone, for your interest and for the good questions. If there’s any other information you need, please reach out to us. Have a good afternoon, and for those who will have a long weekend, enjoy it!

Operator, Operator

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