Earnings Call Transcript - AEM Q2 2022

Ammar Al-Joundi, CEO

Thank you, and good morning, everyone. Welcome to the Agnico Eagle Mines second quarter conference call. I want to begin by expressing my gratitude to all of our employees for a great quarter. Strong quarters allow executives like myself and my colleagues to share good news, but we recognize that this success comes from the hard work of thousands of employees at our mines, in the communities, in support roles, and at the rock face, all working tirelessly as a team. We want to acknowledge and thank everyone for their efforts. Moving to page 5, I want to mention that there are some forward-looking statements to be aware of. The key takeaway this quarter is our strong operating results, featuring record quarterly production and excellent cost control, which is especially crucial in this inflationary environment. This translates to significant earnings and, in this case, record cash flows. We'll discuss the operating results and how the team achieved them safely and responsibly. However, the main message today is about the exciting progress we've made on our development projects and exploration results. While our operations are thriving, our development projects and exploration outcomes represent the future of the company for the next five to ten years; especially with Detour projecting a mine life extending over 30 years. In Detour Lake, we've announced a technical update, showing a 38% increase in mineral reserves and a ten-year extension on mine life. Both Detour Lake and Odyssey are performing well in development and exploration, with Odyssey on schedule and budget, expecting initial production as soon as the first quarter of 2023. In the Kirkland Lake region, progress continues, with Shaft number 4 expected to be finished by the end of the year and successful developments in the Amalgamated Kirkland evaluation. We’re also nearing the completion of the shaft at Kittila and beginning production in Amaruq underground this quarter. Goldex has just seen approval for the Akasaba satellite project to support both Goldex and LaRonde, along with ongoing development across several of our assets. On the exploration front, we have excellent results, particularly at Detour with a two-kilometer step-out hole showing continuity west of the current mine plan pit shell, and at Odyssey underground, we've observed a potential extension 225 meters to the west and a possible 1.7-kilometer extension to the east, demonstrating the potential of these large orebodies for continued development using existing infrastructure and teams in favorable jurisdictions. Additionally, there are promising exploration results from our other sites, including Hope Bay, Meliadine, and Kittila, with a more detailed exploration release planned for August. Lastly, we want to discuss merger synergies during this call as we promised and emphasize their importance in this inflationary context. We anticipate these operational synergies will help mitigate the cost pressures we are currently facing. Please proceed to the next page.

Natasha Vaz, EVP of Exploration Strategy and Growth

Thank you, Ammar, and good morning, everyone. So, slide 8 provides an update of the status of a few critical projects required to increase the mill throughput to 28 million tons per year. The graph on this slide shows the six main projects and the contribution in tonnage of each. So, the first four projects, the ones that are in blue are completed. This includes the introduction of drill and blast optimization, targeting mill throughput maximization in addition to choke feeding our primary crusher. The second bar is the replacement of the 75,000 ton per day limit with the annual permit for 32.8 million tons a year. So, back in 2020, when the 75,000 ton per day limit was in effect, there were at least 70 days where we achieved that daily limit and had to pull back the mill. So, having that 75,000 ton a day limit removed has had a significant impact on the throughput. We also converted our pulp lifters to a curved configuration from a radial configuration. And this switch has helped us increase our tons per operating hour, but also our overall throughput. The 610 conveyor refeed initiative has successfully been completed this year, Q1 actually to gain an additional 750,000 tons a year. So basically, every time maintenance is performed on the crushing circuit, our throughput is impacted. The goal of this refeed system is simply to top up the feed going into the SAG mills during the crusher downtime events. This has proven to be successful. We commissioned it in Q1, we're operating it in Q2 and the system is operating as per design. A main contributor to the 28 million tons per year increase is the installation of the screens on the secondary crusher. This specific project will add about 2.25 million tons per year. Basically, the secondary cone crusher is most efficient when the fines smaller than the desired crushing product are removed from the feed. By installing the screen, we're able to filter out the fines and it will make the crusher much more efficient. So, we have begun the installation of the first set of screens in Q3, and we expect to have both commissioned by Q4 this year. So, stay tuned. Finally, next year, we expect to add another 750,000 tons per year due to planned onetime improvements. The plan here is to improve how we analyze our downtime drivers, how we complete root cause analysis on breakdown events, and make adjustments to resourcing, planning, and scheduling. So, to summarize, all is going well. And we are on track to achieving our 28 million tons per year in 2025. And with that, I'll pass the call over to Eric Kallio, our EVP of Exploration Strategy and Growth.

Eric Kallio, EVP of Exploration Strategy and Growth

Thanks, Natasha, and good morning, everyone. As planned, exploration at Detour continued at a very fast pace with the project and as mentioned by Ammar already included some very good results and overall progress of the project. Details for the program itself are shown on the current slide, which is the plan and long section of the project and as indicated, shows about 62,000 meters of drilling with most of this directed to a 2-kilometer strike length west of the pit and along the Sunday Lake Deformation Zone, which is highlighted here on the slide in blue. Assuming shallow westerly plunge, most of the hole target about 300 to 600 meters below surface and along this plunge line, that's shown in pink on the lower part of the drawing. In terms of results, everything we've seen is looking very good with some of the best being directly west of the pit, where we already announced several high-grade holes in Q1. As shown on the image, we now have added quite a few more holes with pretty much all interesting results in them, generally, broad zones and mineralization, sometimes up to 150 meters wide, and similar types of things as in the West Pit and Saddle, often containing a mix of wide bulk and narrow high-grade values. Although some other holes are a little deeper and possibly a little bit more suitable for underground, we unexpectedly also saw several others at quite shallow depths, which we think could also add to the overall pit potential. Additionally, we also received some very good results from some of our first step-out holes to the west, which not only confirmed the overall trend of the structures, but intersected high grades up to 32 grams, 32.3 grams over 4.8 meters, 2.2 kilometers west of the pit. Importantly, this and several other holes seem to have a little more quartz and visible gold than normally seen in the pit area, which would be very good for the underground scenario. Considering all this, we're very encouraged for the future and continuing with 12 drills on site, targeting 230,000 meters by year-end, and then possibly a new resource update. And when we do this, we think that we can have a very good chance of adding significantly more ounces to either the open pit or the underground. So, based on the current plan mill, we see that most of these new ounces would probably be added directly west of the pit and below, which would then still leave a lot of area to even further west for even more, and to depth for future additions. So overall, summary, everything coming along very well and excited for the future. With that, I'll pass it over to Ammar.

Ammar Al-Joundi, CEO

Thanks, Eric. To provide a broad perspective on Detour, we've significantly increased our gold reserves for the next 20 years, reduced costs, and enhanced the grade. We have also extended the mine's life by 10 years, increasing our output to about 3 million ounces from 2042 to 2052. Currently, this involves processing low-grade stockpiles, which is a standard optimization practice for mines. However, based on ongoing positive drill results, we anticipate discovering more gold and potentially extending the mine's life even further. This means that over the period from 2042 to 2052, we could replace the expected low-grade stockpile processing with higher-grade ore. This reinforces our belief that the Detour plan is merely a stepping stone towards a longer-term strategy we are developing. The project's potential remains significant. Moving on, it's important to note that Detour and Odyssey are the two largest gold mines in Canada. At Odyssey, we are achieving great results with 20 drills currently in operation—four underground, twelve at surface, and four regional. The underground project continues to progress on schedule and budget, and we are seeing excellent drill results that confirm our findings and extend our reach further west and east. At Kirkland Lake, we are anticipating the completion of Shaft number 4 by the end of this year. We still believe that we can start bringing in gold from the Amalgamated Kirkland deposit as early as 2024, showcasing the operational synergies we’re implementing by utilizing the Macassa mill for historic Agnico assets that previously lacked infrastructure. Additionally, I want to highlight the promising drill results at Hope Bay. Our vision for Hope Bay is to achieve an annual output of 303,000 to 350,000 ounces. We are currently focused on drilling, and the results so far have met or exceeded our expectations. Lastly, it's worth mentioning that all these assets come with existing infrastructure and established teams, which is crucial and increasingly important in the current environment.

Dominique Girard, COO

Hi, Lawson. In terms of ground conditions at Odyssey, they are excellent, very good comments from the team. We're reaching our meters. We're on schedule and on budget. We're still heading to have the first ounces coming in Q1 next year. Everything is going as planned there.

Dave Smith, CFO

Thank you, Ammar. Of course, the tremendous operating results have resulted in a fantastic financial result as well. The Company has a tremendous balance sheet, $2.2 billion of available liquidity. I would add, Ammar already mentioned that we had $225 million of debt repayment this year, leaving us with net debt at the end of June of $434 million. We have a light maturity schedule coming up for the next several years with a 100 or so million due each year. And that gives us the opportunity to continue to pay a stable and growing dividend. And for the first time, we initiated our NCIB, our share buyback program, only did $22 million worth. But it is certainly something that has always been intended to be the variable component of the buyback. So, we will analyze that in the second half of the year and see what we'll do there. We are also very proud that Fitch has upgraded our credit rating to BBB high, BBB+ and with a stable trend. So, we are acknowledged as having a great balance sheet certainly by third parties. And I think we are in a fantastic financial position. Of course, inflation is a topic these days; everybody is talking about it. And you’ve seen in our results that we’ve been able to mitigate the inflation through optimization at the assets as much as possible, realizing the synergies, but also some success in our hedge book as well has helped insulate us. And all of that resulted in us leaving the cost guidance unchanged for the year. And that wasn't easy to do. But we are very proud of all the teams including the finance group for chipping in to help out with this result.

Ammar Al-Joundi, CEO

Thank you, Dave. Moving on to page 13, I want to congratulate Dave and the finance team for their efforts, particularly with the synergies, hedging, and cost control initiatives. Regarding synergies, we committed in February to provide quarterly updates, and we’re following through with that. We have a summary available. I won’t delve into it deeply, but I must say the team excelled in our press release by detailing our progress and projections. Overall, we are ahead of schedule and have achieved more synergies than we initially expected. I can confidently say that we have not only met but exceeded our goals for corporate synergies, prompting us to raise our guidance significantly. For operating and strategic synergies, we are maintaining our guidance. Although we are slightly ahead of our projections internally, we will stick to our guidance for now. This is an important and positive development. However, I want to emphasize that our guidance does not include these synergy figures. We are optimistic that some of these synergies will help counteract the inflation we're facing in our operations. As we move to page 14, before we open the floor to questions, I want to reiterate that our strategy remains consistent and straightforward. It focuses on strong operations in favorable regions with low costs, emphasizing high margins and per share metrics. We aim to leverage our existing assets in top jurisdictions recognized for their geological potential and the capability to operate multiple mines for decades. We have discussed Odyssey and Detour, both of which are not only premier mines but are also in outstanding jurisdictions. When looking towards production in the 2050s, it is reassuring to be operating in a stable environment. Additionally, we rely on proven leadership with a track record focused on per share value. I want to highlight Sean, who has been deeply involved in our strategic discussions. We frequently engage as a team, and this collaboration has been extremely valuable. On the ESG front, it’s integral to our identity. With a team of engineers, we are enthusiastic about exploring opportunities to further reduce greenhouse gas emissions, and we will provide more details on our strategy in this area later this year. Lastly, we have a long-standing history of returning capital to shareholders and maintaining capital discipline. I’d like to conclude by emphasizing that our narrative shouldn’t just focus on production but also include the development and exploration projects. We aim to advance our pipeline responsibly, enabling us to grow production per share while returning capital to shareholders and strengthening the balance sheet. Now, operator, we will turn it over to questions.

Operator, Operator

Your first question comes from Fahad Tariq of Credit Suisse. Please go ahead.

Fahad Tariq, Analyst

On Detour Lake, you mentioned in the presentation that there is potential to maybe increase the throughput beyond 28 million tons per year. I know it's early, but any sense of whether that would be a capital-light type of expansion opportunity?

Ammar Al-Joundi, CEO

Natasha, did you want to...

Natasha Vaz, EVP of Exploration Strategy and Growth

Sure. Hi, Fahad. Yes, we are considering the option of expanding the mill. We have three separate alternatives in mind: low-grade screening and ore sorting, pebble low-grade sorting, and possibly an HPGR. We are just starting the studies, so there is a lot of work to be done. Therefore, we do not have an estimate for CapEx at this time.

Ammar Al-Joundi, CEO

We don't have an estimate, but relative to other alternatives, it always requires the least capital when expanding on existing infrastructure. The three aspects that Natasha mentioned are relatively minor. We don't have the numbers yet, but in the context of a project of that scale, the amount of capital you invest is quite small compared to the returns. Additionally, it's important to consider that it's risk-adjusted capital. It's not just about the amount of capital; it's about the associated risk. You will never achieve better risk-adjusted capital than by expanding existing infrastructure.

Fahad Tariq, Analyst

Understood. Okay. Now, switching to Macassa. You mentioned the possibility of incorporating the Amalgamated Kirkland deposit at the Macassa mill. How should we consider that in 2024? Will it replace Macassa ounces, or will it be used to fill excess capacity at the plant in case Macassa doesn't ramp up as anticipated that year, despite the productivity improvements?

Ammar Al-Joundi, CEO

This would be incremental using excess capacity in the mill.

Fahad Tariq, Analyst

Given the productivity gains you've experienced this quarter, and considering your previous mentions of possibly reverting to diesel equipment to enhance productivity over the next few years, is it likely that there will be no excess capacity in 2024?

Natasha Vaz, EVP of Exploration Strategy and Growth

We will be examining this further. Macassa has performed well this quarter. Significant progress has been made in the last six months to a year on continuous improvement efforts in operations. So far this year, we are noticing increased availability of our electric trucks. There is still much work to do, but we are experiencing an increase in availability. We are also observing higher availability and utilization of our equipment fleet, as well as improved ventilation. The situation is stabilizing. We aim to enhance throughput, but we will need to wait until we revise our life-of-mine plan and provide annual guidance to see how AK fits into this approach.

Ammar Al-Joundi, CEO

Yes, Fahad, you're completely correct. Our goal is to eliminate any excess capacity in the mill. We aim to increase the mining rate, and we are already aware of opportunities to enhance throughput at the mill. Your questions are relevant. Ideally, and this is what we are striving for, the mining rate will fully occupy the mill at both Macassa and Amalgamated Kirkland, and we also have potential to expand the mill.

Josh Wolfson, Analyst

Thanks. I was looking to sort of drill down a bit more on the comments about positive grade reconciliations for Detour and Amaruq. Is there any detail you can provide on what the, perhaps, percentage impact of that was, maybe what the factors are and the ability to see that continue? Thanks.

Ammar Al-Joundi, CEO

Andre, would you like to take that question?

Andre Leite, Analyst

Sure. With regard to Detour, we are observing a positive reconciliation that ranges annually from 4% to 6% in terms of grade and tons. This improvement results from our ongoing efforts to enhance grade control at Detour, along with historical trends we have seen from the model we released in 2020, which has matched that range over the last three to four years.

Unidentified Company Representative, Company Representative

Regarding Amaruq, we had been expecting something specific, which has always been our understanding. The shallower part of the deposit had a lower grade, but as we drilled deeper in both IVR and other areas, the grade improved. We were positively surprised by this, as it happened earlier than planned. This has resulted in accessing higher-grade material a couple of months sooner than we anticipated this year, and we expect this trend to continue. We were actually planning for a much stronger second half and anticipate that the trend of higher grades will persist going forward.

Josh Wolfson, Analyst

And one more question. The topic of the Kittila permit that's outstanding, I'm just wondering if there's any more information on what the issues are. And then, in the event that throughput remains 2 million tons, what would be the expected production impact for the next two years for the existing guidance?

Unidentified Company Representative, Company Representative

Yes. We are currently evaluating the decision of the administrative court. Currently, we intend to continue the same throughput while discussing with them. We're going to know more in the Q3 about that.

Josh Wolfson, Analyst

And then sorry, just regarding the existing guidance, what was the throughput assumption for the next few years?

Unidentified Company Representative, Company Representative

2 million tons per year. Yes, no change versus the existing permit.

Jackie Przybylowski, Analyst

I want to follow up on Fahad's questions about Detour. I know you've provided the life-of-mine plan, which is very useful. However, it seems to include stockpiles or the main source of ore in the later years. Can you discuss the upcoming exploration and the evidence of continuity between the main pit and the Saddle Zone? If successful, how might this impact the overall mine plan, particularly regarding the grade throughout the life-of-mine? Thank you.

Eric Kallio, EVP of Exploration Strategy and Growth

Exploration is currently primarily focused on the west extension and exploring deeper areas. We have drilled most of the Saddle and West Pit regions at similar intervals to those in the Main Pit, which should allow us to assess open pit potential. Moving forward, we are likely to use closer spaced drilling, which could benefit the underground operations, as we have observed that higher-grade materials are located in smaller lenses. Therefore, while there is limited exploration in the pit area, the focus will be on determining if we require a higher level of detail.

Ammar Al-Joundi, CEO

Jackie, I may not have fully grasped your question. However, if you examine the low-grade stockpiles, I believe the figure is around 0.35 grams. If we proceed with some additional exploration, even with what we currently have closer to 0.97, that could significantly increase production in those years, potentially tripling it. This would bring us nearer to our targets, especially if we incorporate some underground workings. We've provided some preliminary figures, which remain quite general. If you can enhance the throughput through underground mining at about 5,000 tons a day, with grades between 2 and 3 grams, you can see how this could help us achieve the desired target of approximately 1 million ounces. Again, these figures are very preliminary, but the idea is that as you discover more gold similar to what is already in the mine plan, you can effectively extend the mine life by replacing low-grade milling with higher-grade material.

Jackie Przybylowski, Analyst

Thank you. I appreciate your response, but I want to ensure I fully grasp the answer. Regarding the open pit mineable ore, the Main Pit and the Saddle Zone are already well defined. Could you clarify where the potential exists for adding new open pit ore? Is it toward the west?

Eric Kallio, EVP of Exploration Strategy and Growth

The west is definitely one of the key targets. This could involve either open pit or underground mining, depending on how close it is to the surface, along with the widths and grades obtained. We are still in the process of exploring the depths below the West Pit and Saddle, so there is additional drilling to be conducted there. We also have some inferred resources within the pits that could potentially be converted. Additionally, we are examining areas beneath the North Wall and in the North Pit region. There are several potential areas to consider.

Ammar Al-Joundi, CEO

It's important to note that the open pit and underground operations do not have to occur one after the other. Ideally, we would aim to have the underground work happen simultaneously with the open pit operations. Is that clear?

Dave Smith, CFO

Yes, sure. So, the most important input we have after gold is the Canadian dollar. And we're about 30% hedged in 2023 already on the Canadian dollar at much better than budget rates. The budget rate is $1.25, and this would round out to about $1.29 so far. We actually believe that we'll have the opportunity in the short term to continue to add to that position. It is effectively an insurance policy. We don't know for sure what the Canadian dollar, U.S. dollar, et cetera, are going to do in the future. But it does give us some comfort on our cost guidance when we have hedges at better than budget rates. So, I think one of those opportunities is kind of right now, and we'll continue looking at that going forward. People are always asking about diesel. It's a much smaller impact. It's only about 300 million liters per year. The current spot rate is about C$1.20-ish per liter. And we are 26% hedged for 2023 at actually worse than budget rates, but much better than spot rates. So, not a bad position there, too, but a much, much smaller input than the Canadian dollar. That is for sure.

Ammar Al-Joundi, CEO

Thank you, everyone, for joining the call and for your assistance. The key takeaway is that we had a strong operational quarter, but the real focus is on the development projects and exploration that will drive the company forward for years to come. Have a nice long weekend, and thank you for your time.