Agnico Eagle Mines Limited (AEM) Q2 2006 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Agnico-Eagle Mines Second Quarter 2006 Financial Results Conference Call. [Operator Instructions]. I would like to remind everyone that this conference call is being recorded on Thursday, July 27, 2006, at 11:00 AM Eastern Time. I will now turn the conference over to Mr. Sean Boyd, Chief Executive Officer. Please go ahead sir.

Thank you, operator and good morning, everyone and thank you for joining our Second Quarter Conference Call. With us here in Toronto, was our full senior management team who will be available to answer your questions at the end of the formal part of the presentation. For those of you who are not logged in on our website we are conducting the call using a series of slides which you an access on agnico-eagle.com. As you know after reading the press release and seeing the results Agnico-Eagle continues a study progress towards a multi-mine gold production base which is backed up by continued record operating and financial performance, in fact the second quarter was our strongest quarter in the history of the company from the perspective of our ability to generate cash. As moving forward on the safe harbor statements, understand there is two of them there. As we move through those we will deal with the corporate strategy, our strategy is been very consistent we certainly recognize a couple of years ago that we needed to branch out from LaRonde and become a multi-mine company we’ve had a definite strategy to do that. And we continue on track to reach our objectives of tripling our gold production by 2009 to 750,000 ounces. We will continue to grow our resource as you know we already have a strong base of 10.4 million ounces with an additional 5 million ounces in gold resource which is subject to some aggressive drilling programs particularly in Mexico and in Finland and I am going to talk about those as we continue to explore those properties and look to add to our already strong reserve position. Our balance sheet was strengthen in the quarter with our equity issue but also we were net cash flow positive even after our construction and expansion expenditures, we are sitting with a cash position of $415 million with no long-term debt when you add that to our bank facility and our cash flow, our growth is fully financed. The big part of our strategy is also having a low political risk profile, so as we conducted our acquisition part of our strategy we focused on those areas that you can get permits, you can move projects forward. We will also continue to pay a dividend as part of our strategy, we paid one for 26 years, so that also remains a strong component of our strategy and also a non-precious metals forward sale approach which is consistent with the long history of a company remains a core part of our strategy. The second quarter in terms of highlights again another record performance from the company, record low cash cost approaching minus or thousand an ounce, certainly benefiting by from the byproduct revenues and from settlement gains that we achieved based on settling the concentrate shipments. Our earnings of 37 million or $0.32 a share continue to be very strong, offsetting that was a $0.06 foreign exchange loss and a $0.04 loss on zinc forward sales, those zinc forward sales expire in 5 months. So over the second half of the year we expect based on current zinc prices for those hedges to have a very marginal impact on earnings going forward. From a cash flow perspective, the working capital changes, we generated about $70 million, another record. And as we said at the start of the call that put us in a position where we are generating net free cash flow even after construction and expansion expenditures at our various projects. Cash position, we talked about that over $400 million with the growth fully financed. We announced three construction decisions on LaRonde II, Lapa, Kittila will provide an update on those. We were added to the S&P/TSX 60 Index based on the size of the company and the trading liquidity over trading over the last three months about 3 million shares are about US$100 million a day in trading value. On the earnings and operating results, as we said of the top record low total cash cost or from a production perspective, the Q2 was expected to be on gold production side a little bit lower than the rest of the quarters due to extracting lower grade blocks in the mining plan. However for the first half of 2006, our gold output is slightly above budget. We had higher metal recoveries and plan for all the metals, so that certainly helped on the gold production side or forecasting, continue to forecast 250,000 ounces of gold production for the full year which is consistent with our budget that we put out late last year. Silver production expected to be a little bit lower out of 5 million ounces, copper a little bit lower at about 75,00 tones. Zinc production expected to be 6% higher up to 77,000 tons. Our outlook for zinc, certainly listening to TEX Conference Call this week, TEX put out some slides on its own and certainly using some slides with the international lead, zinc study group and those slides indicate continued large supply deposit going forward in the 2007 and when this is combined with very low inventory levels for zinc, I think that those level for zinc price going forward which also goes well for our ability to be continue to generate very, very strong cash flows out through 2007. LaRonde’s performance continued to be very steady in the quarter on the cost side we saw slight bump for the first half to about $60 a ton part of that is due to being ahead on our development up to about 700 meters ahead of development in the quarter, we’re forecasting $60 a ton for the full-year which is $2 above the upper end of our range that we put out earlier this year. From the tonnage perspective, our tonnage hoisted for the first six months is right on budget. Our dilution in the quarter was 12% versus a plan of a 11%, the dilution in the deeper parts of the mine where we’re extracting the lower level blocks is actually been better than planned and given that we’ve been able to maintain and contain our cost in a way that’s better than industry average combined with the ability to move and process tonnage at the plan rate. This mine is generating extremely high gross profits. In the first half of 2005 we generated 50 million at LaRonde in the first half of 2006, we generate a 149 million. Certainly benefiting from higher metal prices but also based on the consistent cost and tonnage performance at LaRonde, so that goes well going forward in terms of generating cash to continue to fund the expansion. In terms of the revenue, we’ve more than the doubled the revenue on a first full half and on a second quarter basis, we’ve essentially tripled our earnings, first half earnings were 74 million versus 23 million in the first half of ’05, $0.67 a share versus $0.27 a share. So, from an earnings perspective doing very well relative to our mid tier competitors. Financial positions strongest as ever been in the history of the company. Over the last 6 months we not only eliminated our long-term debt but we also raised equity that puts our cash position it over 400 million working capital over 500 million, we have available bank clients of a 150 million. So when we say the projects are fully financed you can see that from the balance sheet, very strong position going forward when you add back to our ability to generate (technical difficulty) pulse. On the reserves side the focus will be to continue to prove up the 5 million ounce resource position and added to reserve over the next two years. The focus there will largely be in Mexico where we have a resource in Pinos Altos of 2.1 million ounces, we have an additional resource at Kittila in addition to the reserve of 2.4 we have a resource of 1.1, so that was certain be the focus of our drilling campaigns to increase our already strong reserve position. Just moving in to the projects I think you know the pattern and the history, we like projects near infrastructure we feel that the projects we’ve acquired in the last year are a good match for their tactical skills. They have camp potential, lot of geological upside on them, we have large property positions in the database to assist in the ability to move and grow those deposits and added to that we have the largest exploration budget in the history of the company at $35 million. The biggest programs are focused on Finland and in Mexico and we will talk a bit about the targets and where we are spending our money and what we can see over the next couple of quarters. On the production growth side this slide does not include anything that we would anticipate coming from Pinos Altos upon completion of the feasibility early next year that you can see a steady growth in production. Now without Pinos Altos out to about 800, 000 ounces in 2011, Pinos Altos has a potential to add about a 150,000 ounces to that, so you can see in 2009 with Pinos Altos would be around 750,000 ounce mark. In 2013 when LaRonde II kicks into production and his full stride the production profile will approach a million ounces. On the capital expenditure side in 2006 working at about a 163 million we spent about 54 million to-date, remaining expenditures about 110 million be focused on Goldex about 60 million, LaRonde including LaRonde II would be about 25 million and Kittila would be about 20 million in Finland. When we look at 2007 and 2008 combined, about 550 million in combined CapEx if we add Pinos Altos there which would be about a $150 million we’re estimating based on our scoping study so, even with adding Pinos Altos about 500-550 million combined CapEx for those two years you can see that we are well funded based on our cash position our ability to generate cash and a bank facility if we needed. On LaRonde II construction is just getting underway, LaRonde II 3.6 million ounces in reserves. We are looking at about a 10-year mine life with average production about 320,000 ounces at a cost about $230 an ounce. Higher production in years 2013, 2014 when we get up to full production we expect initial production to start up in 2011. The focus of development currently as underground we’re developing on levels 203, 206 and 215 where we are doing a rock work there, ramping et cetera all the ways we’re generating right now is being used as back fill which helps keeps the cost down. In the quarter we acquired a service hoist, and in fact the production hoists who were used for the wings on LaRonde II as in fact the initial hoist that was used at the Pinos (ph) so we are again continuing to recycle our inventory of infrastructure that we have in northwestern Quebec again to keep the overall capital cost down. At Goldex, construction is well advanced we’ve been under construction for a year, we made a production decision last July from the midst of extensive construction both surface and underground, we’re getting extremely good performance in our underground development. We continue to stockpile LaRonde surface and a Goldex 1.6 million ounce reserve and another 200,000 ounce in the resource. We’re looking at average production of about 170,000 ounces starting in the second half of 2008. Capital costs of US$135 million, we spent about $35 million to-date after the first year the project is on time, its on budget in terms of the Canadian dollar budget announced would be some upward buyers on the US dollar CapEx based on where the exchange rate is gone on the US Canadian dollar side. Moving forward on Lapa we are getting extremely shaft sinking performance we’ve average about 3 meters a day, when we are not excavating stations 1.1 million ounce high grade reserve of over 10 grams per ton. We’re anticipating production in Q4 of 2008 at a 125,000 ounce a year for about 7 years at $210 cash cost, 19 million in CapEx Shaft sinking as we said is going extremely well, the shaft is currently at 820 meters, so there is 540 meters to go. At the rate of this performance we will be in a position in the fourth quarter to begin drilling the deeper zone at depth with that deeper access will begin to follow up a down depth potential of the Lapa deposit. Moving on to Kittila, it’s a 2.4 million ounce reserve currently with an additional 1.1 million resources. And the deposit remains wide open at depth and there are several other targets that need to be followed up along the entire 15 to 20 kilometer strike length we are looking for production by mid 2008 averaging about 150,000 ounce a year at a cash cost to 250 over 13 year mine life. Capital cost of builds, Kittila is $135 million in the quarter, we completed road access to the site, the power lines in place were currently requiring foundations for several, the surface installation and clearing all burden from the main pit area. The drilling focus in 2006 will certainly be on the main zone below 500 meters where it’s wide open, we are also drilling to the north. Along this trend where there is a potential news own shaping up and we are also beginning to step out program along the entire 15 to 20 kilometer structure. So we hope to have more results on that exploration as we move through the second half of 2006. On Pinos Altos it’s a 2.1 million ounce resource currently of gold over 50 million ounce resource of silver, that’s an extremely large property which we given you a diagram of, on the slides about 11,000 acres. We up to now been really focusing the drilling on the small sort of south eastern section of the property, there is a lot of structures that need to be followed up with drilling work as we move to the north and as we move to the north west. There is very good targets up in the north and north west and we announced, in June $23 million exploration program, part of the focus will be going out over that large property position which large scale drill program and following up on the very prospective targets that are contained on that large property position. Feasibility study is anticipated to be completed in the second quarter of 2007, work is ongoing on that feasibility study from a metallurgical standpoint, environmental standpoint, mine planning work is also underway. We are contemplating in the scoping study, 3,000 ton a day operation of open pit in underground, we’ve been successful interacting with experienced mine builders, that have experienced building mines in Quebec that are leading that effort. We are estimating capital cost to be about 150 million in the original scoping study. There is four rigs on site to drill, we are looking for 2 to 3 more rigs, we are expecting to start ramp that division in October to begin a new ramp, that ramp is important because it allow us to drill for depth extensions of the zones and these zones are wide open. As far as our current drilling, we’ve lifted on that slide, we had some good great holes as we move to that, as we move a little bit deeper. There are several assays pending, and we feel over the next two quarters we’ll have more news based on that $23 million drill program out of Pinos Altos. As we summarize, we’re in the early stages of our growth story to become a multi-mine international gold producer, that growth story is backed up by record earnings and cash flows coming out of LaRonde in the first half of 2006. We’re anticipating strong earnings and cash flow as we go forward. We have projects in hands that have the potential to triple our gold production by 2009 and increase at further stale as we complete the full expansion of LaRonde II. Our existing projects with the resource base of 5 million ounces on top of the reserve position of 10.4 million ounces give us the potential to increase our gold reserves at a 14 million, 15 million ounce range and we will move to that number based on an aggressive drill program and we’ve got $35 million planned in 2006, a lot of it focused in Mexico on that large property package as well as Finland where we’ve got a number of drills going on that large position as well. So, we’re looking for continued resource to reserve conversion from those projects and hopefully expansions of the overall resource envelope as we continue to drill that large property position. Operator that concludes the formal part of our presentation and we would be happy to take questions.

Thank you. [Operator Instructions]. The first question comes from John Bridges with JPMorgan. Please go ahead.

Congratulations on the numbers, are you struggle little bit to actually get to what clean number there, there is so much going on in there, I see you got some pretty fancy reported realize process things like that. I wonder if you could sort of just walk us through some of the unusual elements of the quarter?

Hi John, its Dave.

Hi, Dave.

There are couple of things that I would consider non-recurring one of which was the foreign currency translation loss which arises from the consolidation of a subsidiaries in our, I should say the entities in Canada and in Europe that what we have the large deferred tax liabilities and have to be translated at the current rate every quarter, so you are going to have movements in that every quarter and that’s would cause that. The other non-recurring item is the zinc derivative loss, the other items I appreciate you say that they are large. I don’t think they are non-recurring those the settlement gains and market-to-market gains on our inventories. Those will be recurring and they have been recurring since really we have been producing concentrates of LaRonde and that arises because we have to invoice whatever the current price is and then at the end of the quarter we have to mark-the-market the inventories using the 30 day average at the end of the quarter plus we have settlement gains versus what the inventories were previously recorded at when we have final settlement. So with that sort of thing I would consider part of the business and non-recurring, I don’t consider that unusual items at all.

Right, do you get a number for that, I try to (indiscernible).

Yeah I would say its spoke about between mark to market and final settlement gains probably about 20 million in the quarter.

Okay. Anyway congratulations again. It was very strong.

Thank you.

Your next question comes from Michael Fowler with Desjardins Securities. Please go ahead.

Good morning just, on can you -- I think – I guess can you sort of comment on the rock mechanics of all of the various projects there even what you’ve been finding recently?

Oh I think I will start will LaRonde II which is probably the biggest project, I would think from a rock mechanical point of view we really haven’t had any significant issues, what excites me is what sort of -- helps me be positive about LaRonde II as I look at some of our deepest mining levels down to level 224 below the bottom of the penta (ph) shaft and our budget for the year-to-date was 7% dilution and we are currently averaging around 5%. So we are really not having any ground issues also with respect to development, the large part of the development is in the lower part of the mine and as we’ve mentioned we are about 700 meters ahead of schedule and a lot of that development is in the deeper horizons of the mine. So I think from a geomechanical point of view, the fact that our dilution has declined that our development has accelerated, that boards very well for LaRonde II in terms of lap up with our under ground development that we did whereby we exposed the ore, where we drilled it off we were pleased to find that there were no major false or discontinuities that would break or disjoint the vein structure, it was very continuous very vertical, it’s in the shear zone, so we got the answer so that we wanted from Lapa. Goldex we did some recent stress measurements just to be able to confirm our geomechanical studies of this large envelope that we hope to extract and the figures came back better than what we had anticipated. So that should be a plus with respect to dilution going forward at Goldex or it should be better than we incorporated in our financial model based on hard data obtained from the mining horizon at Goldex. Suurikuusikko the more we build it up or keep that rather the more we drilled it off we had originally, we were a bit concerned about some of the disjointive nature of the, echelon structure of the mineralized zones within the larger shear zone but the more we drilled it up, the more we’ve been able to interpret, but the zones are in fact a lot more continues that we had originally anticipated 2, 3 years ago, So from a mining point of view the ore body looks a lot more continues on the hanging wall and footwall the rocks that we seen from core so far, that goes well for mining conditions from Kittila as well.

Okay, so bottom line good news.

I would say so.

Okay just Sean or David, just in terms of just to confirm I guess at the end of the issue, you will not forward so any of your zinc going forward, is that correct?

Yeah that position expires at the end of the December of this year and we are currently not looking at any derivate mechanisms, we have looked at them prior to deciding and doing an equity issue we were looking at port structures, which were prohibitively expensive.

Okay, thanks very much.

Thank you.

Your next question comes from Mark Smith with Dundee Securities. Please go ahead.

Yeah hi, two quick question I guess it goes for David, the 35 million in exploration expenditures for 2006, what portion of that is expense versus Lapa?

That’s all expenses, the reason its going up so much is because we’ve added the Pinos Altos program which is 23 million.

Okay.

That has to be expense till we deliver back with these ability study.

Okay gotcha, and next question and perhaps I don’t know if you can answer this or now, what portion of the Q2 sales are pending Q3 settlement?

Well if you look at the matters of settlement balance on the balance sheet is just under $100 million, so essentially about a quarter by year sales at anyone time are outstanding and where these final settlement.

Okay, so is it something around 12% to 15% of Q2?

I would say in fact, virtually 100% of Q2 is outstanding because concentrates typically take 3 to 4 months for final settlement. So virtually everything you produce in the current quarter settles in the future quarter.

You know, the best way to deal with this were trying to get the numbers as to we use the Q2 production numbers and then allocate Q3 prices and then have the difference between them.

Yeah, whatever your assumptions are, yeah, I mean, I guess that will be a quick and early way to do it.

All right thanks a lot David.

You’re welcome.

You’re next question comes from Chantal Gosselin with Genuity Capital. Please go ahead.

Hi, good morning. My first question is relating to LaRonde II. Ebe, you mentioned that you started the bulletining for the wins and that very little ways to be hoisted [to surface. I know you only have a couple of month now started, but do you see that continuing in the second half of 2006. And what would you expect for 2007 in terms tonnage you are seeing. Anticipate any little impact from that development on your production.

Well, the benefit with LaRonde II are the current development that we have ongoing on level 206 and 215. So a lot of this, we are mining below those horizons Chantal from level 224 ups. So a lot of that gets recycled into that, into those strobes. Also going forward we do have a mid shaft dump in the penta shaft, so we do not have to, even if we do have to hoist it, we do not have to hoist at the surface, it gets dumped into the whole backflow system. And in terms of the actual quantities of waste expected, we’re going to be most of the rock work for the hoist rooms and ramps etc., have that completed probably by the middle of the next year. So, I don’t have the exact figure, Daniel, do you the figure of total waste.

No.

But I think in terms of what we are generating, it isn’t an issue like, I know the issue you are thinking about is being bottlenecked at the bottom of the shaft. But that’s why we had two levels, 206, 215 and while we install the mid shaft dump, because we expected this might be an issue, so that’s how we dealt with it.

So you don’t anticipate any negative impact on your…

No we don’t, that’s the last thing we would want and that’s how we’ve accommodated the situation.

Okay. My second question is more general, maybe for Sean. You’ve grown the company from one mine to five mine I guess in a very little period of time. What’s your vision going forward, do you want to have a certain target size for the company or you want to focus on capitalizing on your current asset and price consolidate in those same district?

We don’t have a magic ounce target for the company. I think our focus is more on maximizing our asset basis in the districts we’re currently operating in so we would deal our, sort of areas of operation being obviously North America including Mexico and Europe. So we would certainly be trying to maximize that. We’re in a position now, where we know the industry is consolidating, we feel no pressure to have to do something, we’re currently not actively working on anything, but we continue to look as part of our normal corporate development activities. So we will take a very discipline approach to growth like we have over the last couple of years. So even when we were feeling somewhat pressure to expand beyond LaRonde, I think we still maintained a very discipline approach to what we do, and we’ll just continue to take that approach going forward.

Thank you.

Your next question comes from Chris Potter with Northern Border Investment. Please go ahead.

Hi, if you look at the forward gold price say at December of 2009 and currently about $750 which is about the time you think you’re going to reproducing about three times as much gold as you currently are? Have you guys look there what your cash flow per share might be at $750 and say in our run rate of 750 and a 1000 ounces a year?

No, we haven’t forecast that you can plug in your sort of own assumptions based on our, we provided a fair amount of information on our production profile. We provided a fair amount of information in detail on the expected cash cost associated with each project, but you would also have to make some assumptions on byproduct pricing as it relates to LaRonde because that also has an impact on cash flow. So, that the debt is there and we’re not going to get into projecting sort of cash flows at 750 gold, obviously with that type of growth, with that growth biased towards gold and a 750 gold price given our anticipated cost structure on a per ounce basis we should be generating very, very meaningful cash flows and that’s certainly a big part of our strategy to be in a position to do that.

Thank guys.

Right.

Your next question comes from Steve Butler from Canaccord Adams. Please go ahead.

Guys just a quick question on Lapa in June when you updated the Lapa reserve, do you actually increase the grade but the ounces fell just slightly from I think 1.17 down to 1.1 million ounces. Can you just elaborate, as you know the grade went up but obviously the tons fell perhaps where did you lose in tonnage there and will there be synopsizes on underground exploration drilling that Lapa issue or do you really wait for later when things are more fully built there? Thanks.

Okay Steve, that’s a very simple answer, in the original interpretation on the western end of the deposit we had originally thought that we would be able to mine transverse, there were two parallel vein structures and we thought we could lump the two together in mine transverse. So as a result of that in the mining plan there was internal dilution and that have the impact of reducing the grade so when we drifted along the vein structure and we intersected both of them we came to the conclusion that it would be too dilutive. So as a result in the new reserve estimate we took out that in the internal dilution and we would mine both of these zones using longitudinal method, so it had the impact of reducing tonnage and then of course some of the ounces associated with it. And so by being more selective the grade went up to over 10 grams.

Okay, is there also an impact there in terms of the sampling you did on the 28 or 25,00 tons through the sample tower et cetera and then any positive reconciliation factor or we still deceive perhaps some of the future.

Basically what the sampling tower did was confirm the higher grade, which we then used to calculate the new ore reserve and the new mining plan. So it did come in higher what we did we compared it to drilling results, we compared it muck sampling results where we had and basically we found out that the -- with the exception of chip sampling which was very wise but the tower sampling came back positively was a significant increase in grade.

Okay.

I don’t think going forward we have incorporated some of that in the present mining plan and reserve estimates. So I don’t think you would able to anticipate an additional say 15% to 30%.

Okay and we have any focus on drilling there in the near term or is it all focused on the development?

Well I think as Shaun mentioned earlier in the fourth quarter we are looking at drilling at the bottom of the shaft and that’s why we currently have some of our resource based on current shaft performance we expect to get pretty close to the target area, where we will be able to drill from a station and do a lot more drilling to be able to update or refine that resource and see what we actually have some of those drill holes, original drill holes from surface were over 5000 feet long. So we will be in a better position as far and that certainly is our intent and objective.

Okay thanks very much.

Ladies and gentlemen, [Operator Instructions] Your next question comes from Mike Curran with Royal Bank. Please go ahead.

Good afternoon gentlemen. I think probably the question for Dave and I think he did preached earlier it was regarding the taxes in Q2 being higher but obviously a lot of that was most deferred and I didn’t really catch going forward was that to be say that was a one time or should be looking for a much stronger tax rate or higher rates but a lot of that deferred going forward?

We are projecting tax provision of around 40% of earnings before tax going forward. We will become mining duty assessable, per income mining duty assessable this year, that’s about 12% of that 40% that been said we are spending quite a bit of capital to that, which will help some of that cash cost but we do expect to pay some mining duties this year. And in fact in the second quarter 7 million ended at 26 million provision was current, was accrued and it may go up and down over the course of the year as we spend the capital.

Great. Thanks a lot.

Mr. Boyd there are no further questions at this time. Please continue.

Thank you, operator. And just want to thank everybody for attending our Q2 conference call and we look forward to keeping up-to-date on the progress we will be making on our projects and certainly on the exploration given our $35 million budget. Thank you very much.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating you may now disconnect your lines.