Earnings Call Transcript - AEM Q3 2020

Operator, Operator

Good morning. My name is Jason and I will be your conference operator today. At this time, I would like to welcome everyone to the Agnico Eagle Third 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. Thank you for joining us this morning for 2020 third quarter operating results. Before we begin, I just want to refer you to our cautionary statement of forward-looking statements because this presentation will contain forward-looking statements. Before we get into the numbers, I just wanted to put it in context and connect to what we've been working on in our strategic focus and how we see things moving forward. Certainly, when you look at the press release, you can see the impact of rising production in this gold price environment and what that has on earnings, cash flow, and free cash flow. That is certainly a major highlight for us as we get production back into the 480,000 to 500,000-ounce per quarter range. It's from this base that we'll be able to steadily grow production over the next several years. So that's clearly important and that is what we're here to do: generate those returns for our shareholders. But also in this release, which is just as important from a value creation standpoint, is the unfolding exploration story which we've been discussing for several quarters. We're seeing a lot of life left in some of our mature mining camps. Many of our existing mines are showing that these deposits will likely continue to grow and add high-quality ounces at these operations. This has important implications for our long-term production profile as we start to look out over the next ten years with a view to growing above the 2 million-ounce mark and sustaining that production level for an extended period. In this presentation, we'll discuss some of the key projects. It's important to note that because of these results, we've increased our drill program and we're going to have a more significant increase in our exploration budgets and drill programs as we move into next year. We're in the process of ranking our projects, allowing us to effectively allocate capital to those projects. The important thing for us is to continue to steadily grow and do this while generating net free cash flow. It’s critical for us to rank and stage those projects, investing in them over time without increasing the risk by piling projects on top of each other and consuming all net free cash flow. This is an important part of our story and we'll connect some of those dots in the presentation. The other aspect here is the dividend; we've seen a 75% increase in the dividend. It's now $0.35 a quarter, $1.40 on an annual basis, which totals about $340 million per year. The dividend increase is not solely based on gold prices; we also factored in our ability to grow output from current levels. Assuming an average production of between 2.1 million ounces and 2.2 million ounces over the next several years, that works out to $160 per ounce in annual dividend payment. This is very manageable for us as we've invested heavily in the business and now we're in the harvesting stage. One more point about the dividend philosophy: it’s been good to see companies that eliminated dividends six or seven years ago reinstating them, which is a positive indicator from an industry perspective. We're also focused on ensuring that we're not only returning capital but continuing to invest in our business over decades. Reflecting on our success, it’s due to our ability to identify high-quality projects early and put money to work, realizing geological potential while managing other risks and keeping our share count low. The message here is that we'll continue to follow this plan as it has proven effective. We’ve received prestigious acknowledgments for health and safety, and our teams have been recognized for their excellent work. Moving into the presentation, we can see that our ability to increase production in the latter half of the year has benefitted us significantly, and we expect a strong second half in terms of gold production without a change in our production and cost guidance. Our longer-term guidance remains unchanged. We are producing roughly at a run rate of close to 2 million ounces and expect our assets to support going beyond that. This will guide us on how we want to build those projects in terms of scheduling and ranking. A significant piece of this will rely upon exploration. We have produced over 490,000 ounces at a cash cost of $764 per ounce. We expect improvements on the cost side as we continue to refine our operational efforts. As noted, we have decided to invest about $40 million in the closing months of 2020 to position the business for the future. This investment will help accelerate our expansion program at Kittila. We have paused the underground program at Amaruq and are restarting it now after the first half disruption due to COVID. We've taken the smart step of purchasing pipe for the waterline that we expect to have permitted at Meliadine next year. COVID was clearly important. Our teams responded well in Q2 by getting testing up and running early, which supported an effective testing system alongside other protocols. This helped us position the business and make a solid case to authorities that we could operate safely, which allowed us to get our mines in Quebec and Mexico up and running earlier than previously suggested. The key question is how the business and industry are positioned now as we see rising case counts in some of our areas. We're expanding testing; we have two labs operational and are adding another lab in the Val-d'Or area of Quebec. We're examining potential adjustments to our testing strategies to ensure effective coverage for our workforce. The mining industry has made a strong case to authorities about our role as economic engines in the regions where we operate. Our profitability indicates that we will be generating significant tax contributions that governments are seeking. We've been particularly mindful of the situation in Nunavut, focusing on separation to prevent any transmission risk. Currently, we are maintaining dialog with the Government of Nunavut and public health authorities to ensure the safety of communities before welcome back our Nunavut workforce. We understand the importance of maintaining these relationships and ensuring community health remains a priority. In terms of our production outlook, we are forecasting a 24% increase through 2022. Our current focus is not only on executing production but also understanding what comes beyond that through ongoing relative ranking of projects. We've made considerable progress in the Kittila expansion, and though COVID delays have added some costs, the permits are in place for a two million tons per year operational plan. Notably, we've seen an extension of the Sisar Zone, which will play a crucial role in our future production strategy. We’re working on expanding the Barnat pit while also managing lower-grade materials that remain economically viable under current gold price conditions. We will continually evaluate whether we can do pushbacks or reductions at our pits as we explore our options. This detail illustrates our intention to significantly extend the mine life while focusing on maintaining and improving overall production efficiency. We talked about LaRonde, which has been in production for over 30 years, and continues to excel. The LaRonde mine is complex but our team is handling it well. We’re observing significant exploration opportunities with potential for continued production growth. For Goldex, we are proud to have received the F.J. O'Connell Trophy awarded by the Quebec Mining Association for excellence in health and safety. Canadian Malartic earned similar recognition for its operational safety. Both mines have shown exceptional operational resilience in light of COVID measures. The recent construction of the Barnat project is now under commercial production slightly ahead of schedule. As for Meliadine, we've achieved record production of 96,000 ounces, and the ramp-up is continuously progressing. The focus in Mexico is on developing the center deposit at Pinos Altos, and we believe the Cubiro Deposit will positively supplement the current operations there. In summary, we have had a strong quarter. Our operating cash flow per share stands at $1.90 this quarter reflecting the benefits of increased production while keeping costs under control. We're confident in our financial position, closing the quarter with $322 million in cash and no outstanding credit lines. I’ll now open the line for any questions.

Operator, Operator

Your first question comes from Fahad Tariq from Credit Suisse. Your line is open.

Fahad Tariq, Analyst

Just first as you think about the upcoming reserve update. Is it fair to say that this will involve depletion, reserve replacement, and reserve growth? It sounds like next year is really when you're going to increase exploration spending and maybe see more reserve growth. So I'm just trying to get a sense of what the share outlook is shaping up to be.

Sean Boyd, CEO

Yes, we haven't finalized those numbers. We conduct mid-year runs, and there are still projects updating studies and drilling. We're hopeful we can maintain, perhaps even slightly increase, where we were. But we still haven’t finalized those numbers yet.

Fahad Tariq, Analyst

Okay, no problem. And the only other question I had was about the COVID case data; it looks like 75% of cases are in Mexico. Are there specific health and safety protocols in place there to try to mitigate that? And from a financial perspective, is there a higher cost that we should expect?

Sean Boyd, CEO

I'll provide a general response here, and then I'll let Mark Legault give further details. Unfortunately, in northern Mexico, where many cases exist, we've had to adjust our protocols. We've found that some of our employees using public transit to get to pickup points has raised concerns. We’ve adjusted to pick employees up directly. While we carry out testing, it hasn't always been 100% accurate. When we do find cases, we’ve been successful at isolating them to prevent widespread transmission, which is important. Additionally, we are in a position to offer logistical support and resources to our communities in need, and the governments appreciate that. Overall, there are additional costs associated with our COVID protocols, but we aim to ensure safety without significantly impacting operations.

Operator, Operator

Your next question comes from the line of Josh Wolfson from RBC Capital Markets. Your line is open.

Josh Wolfson, Analyst

With regards to the Odyssey PEA, the phrasing in the release seems to focus on that asset. Can you share if the study will include expectations for East Gouldie, and will there be a focus on the open pit extension? What are the high-level ideas there?

Sean Boyd, CEO

Yes, Dominique has further details on that. We know that we've got to assess this project resource-wise; we are tightening up drill spacing to improve confidence in that resource. The big portion of this study will include the new well-integrated bits including East Gouldie. The team is examining how to extend the pit, including exploring potential reserves from Barnat as well. The study will help clarify how production will flow and enhance our understanding of the potential.

Dominique Girard, CFO

The study will include integrated assessments of several core bodies, including East Malartic, Odyssey, and East Gouldie. The integration of East Gouldie significantly changes our project dynamics, and we want to explore how to connect these assets effectively.

Sean Boyd, CEO

Yes, it’s essential to move forward with clear communication among teams and maintaining the work pace. We are focused on quality over haste in our decision-making because this project has the potential for long-term success.

Josh Wolfson, Analyst

Just to clarify, it sounds like production would not go to zero, especially since ramp production would come earlier, correct?

Sean Boyd, CEO

Yes, that’s correct. We can access some lower-grade resources while we prepare for future produce at East Gouldie. The continuity in production remains a focal point in our planning.

Josh Wolfson, Analyst

The level of dividends going forward seems intriguing. Given the recent significant increase, what might the dividend levels look like in light of fluctuating gold prices and project needs?

Sean Boyd, CEO

We will consider that as we gather more information. Balancing our dividends with project investments and maintaining financial flexibility is essential as we navigate market conditions and gold price dynamics.

Operator, Operator

Your next question comes from the line of Puneet Singh from Industrial Alliance. Your line is open.

Puneet Singh, Analyst

At Meliadine, you mentioned higher grades this quarter. With throughput stepping up at Tiriganiaq, what are we looking at for average grades going forward? Additionally, regarding Meadowbank, you stated the strip ratio will drop; how will that affect your cost per ton?

Dominique Girard, CFO

At Meliadine, throughput is going up to about 4,600 tons per day. We expect production between 90,000 and 100,000 ounces per quarter, with average grades around 6.5 grams per ton overall. As for Meadowbank, the shift in the strip ratio from around 11 to falling in the range of seven to eight will significantly improve costs and ounces produced.

Operator, Operator

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

Jackie Przybylowski, Analyst

I’d like to circle back to the Canadian Malartic underground project. Can you explain the ongoing geotechnical drilling, and is that indicating you have settled on a shaft location?

Dominique Girard, CFO

The shaft assessment is well advanced, about 90% there, including geotechnical evaluations for deeper resources. While we have a vision for potential resource extraction, we still need to assess how everything pulls together.

Jackie Przybylowski, Analyst

Can you elaborate on the automation success at LaRonde Zone 5? Do you see wider opportunities to replicate that success across your other mines?

Dominique Girard, CFO

Yes, we are using automation as a learning ground for operations. The successful initiatives at LZ5 will allow us to apply those insights to other sites, promoting efficiencies and more refined processes.

Sean Boyd, CEO

Regarding equity investments made recently, particularly in Maple Gold Mines and Rupert, we're always assessing regional opportunities in mining. We do not plan to increase the size of our equity investment portfolio significantly; it’s managed carefully to align with our strategic focus. Our latest investments are mindful of existing companies with strong potential in favorable geological areas.

Operator, Operator

Your next question comes from the line of Greg Barnes from TD Securities. Your line is open.

Greg Barnes, Analyst

Sean, it seems locking in your project pipeline is essential. It could be close to a year out before we see a clear progression.

Sean Boyd, CEO

Yes, we have a firm outlook for timelines. We prefer to be cautious and thorough with the projects we fundamentally believe will add long-term value. Decisions will be driven by project risks and quality metrics.

Operator, Operator

Your next question comes from the line of John Tumazos, Very Independent Research. Your line is open.

John Tumazos, Analyst

Could you explain the 37,816 ounces of pre-production underground at Malartic year-to-date? Was it related to a stringer development protocol?

Sean Boyd, CEO

That reflects the development of the open pit at Barnat, where we were producing ahead of hitting commercial production, which we achieved at the end of September.

Operator, Operator

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

Anita Soni, Analyst

Curious about the exploration budget increasing next year—how should we quantify that?

Sean Boyd, CEO

As we go through the budgeting process, we’re considering a potential 50% increase in our exploration budget, rounding up to roughly $50 million. This allocation will support projects that have wide-open intersections and could add value to the deposits. The focus will be to ensure that additional funding translates to resource growth.

Operator, Operator

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

Carey MacRury, Analyst

Regarding Malartic underground, are there particular risks that stand out to you aside from making calls on resources?

Sean Boyd, CEO

It’s a big project, and there remains much work to do. We want to ensure we’re not rushing into decisions. We are focused on delivering quality outputs when assessing the project’s developments.

Operator, Operator

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

Tanya Jakusconek, Analyst

To follow up on the Canadian Malartic underground, would it be appropriate to see extraction beginning from the decline at lower-grade ore while targeting more premium ore from East Gouldie in the later years?

Dominique Girard, CFO

Yes, that is what we anticipate. The ramp will function effectively in extracting lower-grade materials, and we plan on introducing shaft productivity as we move toward deeper ore zones.

Sean Boyd, CEO

We’re keeping open dialogues regarding our projects and how they align with our production goals. We are committed to realistic expectations about timelines and maintaining our standards. If there are no further questions, I’d like to thank everyone for their time today. Please reach out with any follow-up inquiries. Thank you.

Operator, Operator

That concludes today’s conference call. You may now disconnect.