Earnings Call Transcript - AEM Q1 2020

Operator, Operator

Good morning. My name is Sharon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Agnico Eagle First 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. Welcome to our first quarter 2020 conference call. This presentation contains forward-looking statements, so please be forewarned. I hope everyone is safe and well. During this remote session, I will direct the questions to ensure a smooth discussion as our senior staff is working from home and joined online. I want to dedicate some time to discuss our perspective on the COVID-19 challenges and our management strategy moving forward. As you may know, we faced significant challenges this quarter with seven of our eight operating mines operating at minimal levels. We'll discuss how we handled this situation and its impact on our people and assets. The health and safety of our employees and their families were our primary focus, and we managed this successfully. Even while operating at minimum capacity, we were able to prepare our assets and address various issues we encountered during Q1 to set ourselves up for a strong second half. Regarding our pandemic response, we have reiterated that we are a long-term business; thinking long-term is essential. While the pandemic is devastating and associated with significant loss, we believe that conditions will improve. The key is how we manage the business during this pandemic while looking beyond it. Things may never return to pre-pandemic conditions, as many protocols likely will remain in place for an extended period. We believe that the gold industry is better positioned than others to manage these challenges and ultimately return to a more normal state where we can leverage strong market prices for our products. We have emphasized hygiene, screening, and physical distancing in our operations. Our physical distancing issues are manageable because our close-contact situations are short-lived. We've also implemented testing measures for our employees in Nunavut and Finland and are involved in a pilot project for quick testing in Nunavut, which has received governmental approval. From an ESG standpoint, our operations are positioned better than many governments and communities to offer essential services and health support. For instance, in Mexico, our healthcare capacity at the mines surpasses that of local communities. We have more doctors and medical equipment available, so we can assist these communities effectively. We set up an isolation center at the government's request and are regularly providing food hampers to over 450 families in Nunavut, further demonstrating our commitment to community support. One notable aspect has been the differing perspectives governments have on mining—some view it as essential, while others do not. In Quebec, mines initially deemed nonessential were later recognized as high-priority, underscoring the need for mining to support community welfare through job creation and tax revenue. As we anticipate potential additional challenges, we must continue to advocate for the value of mining and demonstrate our ability to protect our employees and communities during this ongoing situation. Looking at the first quarter, we faced shutdowns at our Quebec operations, specifically nine days at two of our historically best cash-generating mines. We implemented measures in Nunavut to protect high-risk communities, which affected operations but were necessary for safety. We have restarted activities in Quebec and are ramping up in Nunavut, preparing the business for an anticipated strong second half. We are also focused on free cash flow generation, reducing our CapEx to between approximately $690 million from $740 million, and we have maintained our quarterly dividend at $0.20 per share despite operational impacts. In terms of operational updates, our top priority has been managing COVID-19 and ensuring the safety of thousands of employees across multiple communities. The last few weeks have been particularly busy, but the teams have done an excellent job managing operations at the asset level. In LaRonde, we completed planned infrastructure upgrades despite the operational suspensions. We recently achieved a production blast in the West mine area, and we’re exploring ways to increase mining rates nearby. At Meliadine, we repaired the feeding system for our crushing plant, which operated effectively before COVID-19 forced a reduction in activities. By gradually ramping up, we're working towards full operational capacity by the second half of the year. At Meadowbank, we've focused on catching up with maintenance and mining surfaces while continuing to manage the community dynamics effectively. Our exploration efforts are yielding encouraging results. We are identifying significant potential in our projects, such as East Gouldie in Canadian Malartic. We plan to tighten drill spacing to confirm continuity and upgrade resource classifications as we make progress. Financially, we faced challenges from temporary shutdowns and currency fluctuations impacting earnings. We drew down a significant amount on our credit line as a precaution. However, we repaid part of that and successfully navigated volatile market conditions, maintaining a stable credit outlook. In summary, our operations are recovering, and we're optimistic about meeting and exceeding our production targets in the second half of the year. I want to thank the teams for their hard work and dedication during these challenging times. I now invite any questions. Thank you.

Operator, Operator

Your first question comes from Fahad Tariq with Credit Suisse.

Fahad Tariq, Analyst

Hi, good morning. Thanks for taking my question. Just the first one is a clarification, the 480,000 to 500,000 ounces per quarter in the second half that incorporates any productivity losses. Is that right?

Sean Boyd, CEO

Yes, that's correct.

Fahad Tariq, Analyst

Okay. And then my other question, the second half of the year is obviously looking very good from a free cash flow perspective. You don't have any debt maturities. The revolver will get repaid. Just high level, what are some of the free cash flow capital allocation priorities?

Sean Boyd, CEO

Our focus remains on finding the right balance. We see that debt improves financial flexibility, allowing us to reinvest in our highest-quality projects rather than the entire pipeline. We are actively drilling some key projects to better understand their relative importance within the pipeline. We also aim to increase the dividend. Although the future is uncertain, we recognize the significant impact this situation has had on many individuals and industries, some of which will take a long time to recover. The mining industry, particularly gold mining, has the potential to rebound quickly in a more favorable pricing environment. The stimulus measures in the economy bode well for gold. While there are no guarantees, this situation reminds me of the late 1970s when gold prices surged unexpectedly, generating substantial cash for the industry in a short time. I witnessed this during my early days at Agnico when they had nearly as much cash as their market cap and initiated their first cash dividend. I expect gold to reach new highs in U.S. dollars, having already done so in many other currencies. The industry will perform well at $1,700 and even better at $2,000. At that point, it's essential that we as an industry maintain discipline to return most of that cash to shareholders. Paul Penna's decision to start the dividend back then, when it was uncommon, was a wise move considering the cash surplus. Even in 1980, we paid a special dividend. This will continue to be our focus if we are fortunate enough to sustain $1,700 or even reach $2,000 in the future.

Fahad Tariq, Analyst

Thank you.

Operator, Operator

Next question comes from Ralph Profiti with Eight Capital.

Ralph Profiti, Analyst

Good morning everyone. Thanks for taking my questions. Sean, it's good to see the sort of turnaround and things going well in the West area of LaRonde. If I can maybe ask a question as you sort of put some focus on this expansion at LZ5. We've seen the grades come down to about two grams a tonne in the last few quarters. I was wondering if that's sort of a good go forward assumption on some of the grades that we can associate with this potential expansion.

Sean Boyd, CEO

Yes, I think that's about where we are. We're not expecting a significant increase in grade. The strategy behind going there was not solely to extract 100,000 or 200,000 ounces for a quick profit. There are several hundred thousand ounces available that the previous owners left behind when gold prices were lower. This approach is reminiscent of our work at Goldex; we invested $90 million to reopen it after the challenges faced in 2011. Initially, we estimated only three years of mine life for that investment, but we anticipate it will yield 10 to 12 years. While we're not looking for a grade increase, our focus is on increasing tonnage, which will provide a strong return and good cash flow, especially with current gold prices. Additionally, we've had the advantage of testing our automated equipment in a simpler environment than LaRonde. The pandemic has emphasized the safety benefits of automation, allowing better protection for our employees and adherence to physical distancing. So, those factors have been advantageous for LZ5. Yvon, do you have anything to add regarding mining and increasing tonnage as we move forward?

Yvon Sylvestre, Senior VP of Operations

Yes, I think moving up in tonnage has been the biggest focus. I think we've rearranged the engineering team to focus on LaRonde at depth and basically understanding potential in that area. So, the group has been focused on some satellite zone higher grade satellite zones that are being left behind in the Barrick days. So, as we go further at depth, they're also integrating some of these ideas in future life of mine. We'll update as we get more information on those.

Ralph Profiti, Analyst

Okay great. Separate question on Kittila and the prudence of delaying the shaft expansion. I've seen in the couple of quarters towards late 2019 you sort of hit that 500,000 tonnes on a quarterly basis. So I was wondering, exclusive of the shaft expansion, do you think you can push operations there to get to that 2 million-tonne annualized rate without the expansion?

Sean Boyd, CEO

I'll just start and then I'll get Yvon to fill in some of the details. The shaft project was impacted by COVID. It really wasn't a decision to suspend it outside of COVID. The shaft sinking contractor; the workers were Canadian. So we needed to make sure those Canadians got home as this thing started to ramp up. So the focus was on making sure they got home. Our team in Finland has been in touch with the Canadian ambassador to Finland to start working on a program to get the Canadian workers back so that we can get that project back on track. But Yvon maybe you can fill in some of the details?

Yvon Sylvestre, Senior VP of Operations

Yes. Specifically to your question; it’s a good point. Both the mill and the mine presently and probably until the end of 2021 will be in a position to get it up to that 500,000 tonnes per quarter. So that's a good thing. As we go further, the sooner the shaft is completed, the cost structure underground changes drastically. So there's a lot of focus on trying to complete this project as soon as we can, because of the magnitude of the cost reduction as we're starting to mine below like 500 and 600 levels the tonne-kilometer factors on the hauling are getting a little bit more challenging.

Ralph Profiti, Analyst

I see. That's good clarity. Thank you.

Operator, Operator

Next question comes from Greg Barnes with TD Securities.

Greg Barnes, Analyst

Yes. Thank you. Sean, Yvon, can you talk a little bit more about the saline water issues at Meliadine and the pace backfill and what you've done to address the issues that you talked about in Q4 results?

Sean Boyd, CEO

Yes. Regarding the pace of backfill, despite reduced activities, we maintained our mining operations. It was crucial for us to continue mining and processing, albeit at a slower rate. Currently, we are processing about 3,000 tonnes a day compared to our goal of 4,000. We've managed to address some of the voids and backfill, employing consolidated rock fill effectively. This has been an important achievement. As for saline water, the main focus is on securing the necessary permits. We are actively engaging with the authorities. Everyone recognizes that a pipeline is the optimal solution compared to trucking water, especially in the summer when those trucks create a lot of dust. We are collaborating with our Inuit partners and associations, as well as the Nunavut government at the federal level, to advocate for this project. We still anticipate receiving those permits later this year and expect to have the pipeline operational next year. We have storage capacity for two years, and while the initial cost is capital-intensive, the operating costs will be lower. This solution not only addresses environmental concerns but also improves our water management efficiency, which has become a significant issue compared to ten years ago. We haven't faced any opposition to this plan; there is a general understanding that this is the best approach, and we are just working through the permit process.

Greg Barnes, Analyst

Okay. Thanks, Sean.

Operator, Operator

Next question comes from Carey MacRury with Canaccord Genuities.

Carey MacRury, Analyst

Hi. Good morning, guys. Good morning, Sean.

Sean Boyd, CEO

Good morning.

Carey MacRury, Analyst

Maybe a longer-term question...

Sean Boyd, CEO

Carey, you may have to speak up a bit. We're having trouble hearing you.

Carey MacRury, Analyst

Okay. Is that better?

Sean Boyd, CEO

That's a lot better. Thank you.

Carey MacRury, Analyst

Okay. Yes. Maybe a longer-term question. You mentioned being potentially in a healthy gold price environment here. Just wondering how you think about your project pipeline beyond the Phase 2 at Amaruq and Meliadine? And are there projects there that you think can move forward, or do you think you'd need to supplement that with M&A at some point?

Sean Boyd, CEO

Since 2005, we have built our business through various smaller deals and are currently focused on evaluating single asset projects, though we don't feel any urgency to acquire anything at this time. While some suggest this is an opportunity to be proactive and aggressive, we do not share that perspective. Our project evaluation remains disciplined and measured as we try to understand our holdings better. We believe there is likely a buildable mine at Upper Beaver, but we need to consider its fit within our overall strategy. We are also keeping an eye on the drilling results from our neighbor's operations, as that area has considerable potential. The question of where to position that asset needs to be addressed eventually, and our exploration team has had a long-standing interest in it, dating back to when Charlie Page was involved with Queenston. The current gold price is advantageous, but the project must have standalone viability. We must assess it alongside other projects like the underground operations at Malartic. Two years ago, we were not optimistic about East Gouldie, but its potential has grown significantly. This could extend the life of Malartic considerably. When considering East Gouldie along with Odyssey and East Malartic, there is potential for a substantial underground mine, but we need drilling to clarify this. Our priority is to focus on the pipeline and better understand it, especially LaRonde, and whether new zones are developing at depth. Given the favorable geological conditions, it's possible that our drilling could extend further east. While we are exploring options, we prefer a strategic approach over rushing into building phases. We are open to adding other projects at a reasonable price but need to thoroughly evaluate our own pipeline first. Consequently, our approach will remain cautious and measured.

Carey MacRury, Analyst

Okay. Great. And maybe just on Malartic. Any advance on the discussions around the royalties there that you can comment on?

Sean Boyd, CEO

No, we just put that on hold. I think the position that both Yamana and Agnico are taking is that we need to consider how it looks under the current conditions, without assuming that those conditions could change. The advantage of owning it 100% for the partner is that you control every drill hole, allocate every budget, and decide how much to spend and at what pace. You have experienced underground mining companies handling it, so we will progress at a sensible pace, but we will drill it. We need to tighten the facing, but despite being early in the process, our team is optimistic about it.

Carey MacRury, Analyst

Okay. Thank you.

Operator, Operator

We have a question from Tanya Jakusconek with Scotiabank. Please go ahead.

Tanya Jakusconek, Analyst

Yes, good morning everyone. I wanted to return to Nunavut, specifically for either Sean or Yvon. Could you provide some insights on your reduced workforce? I'd like to know how you're planning to meet the requirements needed to ramp up to capacity for the second half at each site. Additionally, how are you going to achieve this with manpower and how are you reallocating some of the jobs?

Sean Boyd, CEO

We currently have 400 to 500 employees with varying skill levels, but only a smaller number are engaged in critical mining tasks. Many of these positions could be filled by contractors, and we typically bring on additional staff during the summer. These roles usually require minimal training. While we aim to have our Nunavut workforce return, we have a plan in place to manage staffing needs in the meantime through contracts. We've initiated this process, anticipating it might take until this summer for the Inuit workforce to feel comfortable coming back. We're regularly communicating with them about this situation. Yvon, could you provide more details on this?

Yvon Sylvestre, Senior VP of Operations

Yes. Well, I think like you have to look at it from each operation standpoint. At Meliadine, there's not too much concern going forward ramping up because like we're already at roughly about 75% of normal workforce at the site and adding personnel underground mainly. We're in a position that we'll find through contractors some resource in that area. So not too concerned at Meliadine; the challenges will be more because the proportions of Inuit on the operation side of things is more predominant at Meadowbank. And so far we're more like at 55% of workforce up there. But the construction industry can supply a lot of contractors for heavy equipment and operation. What we're seeing is we don't expect the Inuits to return probably for a few months at least. And now as we ramp up in tonnage we're going to be basically getting employees from that group of contractors out there to supply us.

Tanya Jakusconek, Analyst

And just so that I understand that in the press release you mentioned that you've stopped to only underground project. Are you stopping and redirecting the employees there to underground at Meliadine? Is that how it's working?

Yvon Sylvestre, Senior VP of Operations

No, actually. Well, yes and no. Some of the manpower has been either returned home. The maintenance team has been brought back to the site to focus on the backlog. It's a mix of factors, but we will adapt; we will likely resume some minor development work towards the end of the second quarter, moving into the third and fourth quarters.

Tanya Jakusconek, Analyst

Okay, Sean, I've been trying to grasp this, and you touched on it a bit. With the new health and safety measures and social distancing, I'm looking to understand the long-term effects on cost structure and productivity in the mining industry. I've been asking all companies this question. I know you're researching this, but could you provide some qualitative insights on what has been your biggest challenge in this area and what you see as your best opportunity?

Sean Boyd, CEO

Yes. I think the greatest challenge is that many of these plants are quite large, which allows them to operate while adhering to physical distancing measures. The main pressure points in the mines occur at the entry because of limited access and entrances, particularly during the screening process. We have managed this by staggering shifts so that fewer people arrive at the same time to check in with security. For instance, at Malartic, there are multiple trailers where individuals must go through screening and answer questions, which also requires staggering entries. This system can be managed without significantly increasing costs, although employees must adapt to a different shift schedule. The main issue in the underground mines is related to the cage area. In the future, we will continue to stagger entries to avoid having too many people, like 150 at LaRonde, arriving at once in the morning. While we are staggering shifts, the capacity in the cages is only half of what it used to be. Going forward, we need to evaluate if we can improve productivity and make better use of the cages by implementing face protection such as masks or shields, since the close contact is brief, not lasting for hours. We are exploring ways to optimize the use of the cage systems in the future. However, this will take time, so it's difficult to quantify right now. The real opportunity we see is related to assessing our workforce as we have been in a building phase, adding personnel and not fully analyzing our operations. This situation has allowed us to reassess and reintroduce processes carefully. We are optimistic that we can achieve the same productivity with a smaller contract workforce, which could be a significant opportunity. While it's hard to quantify now, we believe these challenges are manageable. Our team has done an excellent job not only in designing solutions specific to our mines but also collaborating with peers in the industry to demonstrate to the Québec government that we can excel in hygiene, screening, physical distancing, and testing. We believe many of these practices should continue as they enhance employee comfort. We expect to have a clearer understanding of this situation by June and can provide more information then.

Tanya Jakusconek, Analyst

Yes. I would assume that any additional cost you might incur will be offset by benefits from your foreign exchange and fuel hedges. Would that be a fair statement?

Sean Boyd, CEO

Yes. I think that that's one thing that when we've looked at it with the treasury department is that though it's not just the Canadian dollar, but it's all it's the peso and it's the euro, which has moved in a positive direction and the diesel price relative to what we had budgeted and expected. What we've really tried to do is just protect levels better than the budget numbers. On the FX side, we do it with zero-cost collars. So we still have that participation up. That can make a difference of $40 to $50 an ounce. So that can have a meaningful impact on the unit costs as we go forward.

Tanya Jakusconek, Analyst

Okay. We look forward to more information on that Sean. But I agree with you. I think of all industries, the mining industry with all its health and safety measures already in place before COVID-19 is one that is very adaptable to what we have to do. Thank you.

Sean Boyd, CEO

Yes. I believe that as an industry, we need to show not only our owners but also our employees, communities, and the government that we can take the lead in this. If we maintain our essential status, it will position the industry very strongly, especially as other sectors are likely to face challenges. The gold industry is currently benefitting from good prices, which could improve further, and is able to operate close to normalized levels relatively quickly. When looking at it comparatively, the returns from gold mining should appear quite favorable. As general investors and resource funds begin to see inflows again, it is important to note that these shares are still not widely held, especially considering the significant amount of capital in the U.S. This presents an opportunity for us to run responsible businesses that remain disciplined even as gold prices rise, which will enable us to generate higher returns and increase dividends; this is our path to success. While there are no guarantees, this is certainly a focus for us as we consider our strategy and tactics.

Tanya Jakusconek, Analyst

Yes. Looking forward to that second half margin expansion. So looking forward to that.

Sean Boyd, CEO

Thank you. We'll leave it at that. We have our AGM today, which is virtual. So we've got a few things to do before that. But thank you for your attention. What we've tried to do is because we've been working at home, we have the opportunity to get our teams together fairly quickly to respond to inquiries. As we move forward and if you'd like a one hour one-on-one to talk about some of these things in more detail, more than happy to do it. So again, wherever you are, hopefully, you're safe and your family is doing well, and we look forward to engaging in person at some time down the road. Thank you.

Operator, Operator

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