Agnico Eagle Mines Limited (AEM) Q4 2012 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Agnico-Eagle Mines Ltd. Fourth Quarter 2012 Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, February 14, 2013, at 10:00 a.m. Eastern Time. I will now turn the conference over to Sean Boyd, President and CEO. Please go ahead.

Thank you, operator, and good morning, everyone, and thanks for joining us today to discuss our 2012 year and our fourth quarter. I know it's a busy day for everyone, so we'll get started and I'd just like to -- everyone to take note that there are forward-looking statements in this presentation, so just be forewarned of that. I'll start with the highlights of 2012. We ended the year strong. We produced 1,043,000 ounces at a cash cost of $640 an ounce, which exceeded our guidance, which was updated twice during the year of 1,025,000 at $660. We got there essentially from strong performance from all of our mines, in fact. When you look at LaRonde, their cash cost was on budget. Lapa, their cost per ton was on budget. We saw some really strong performance out of our larger mines, Meadowbank and Pinos Altos. And in fact, Kittila had better than budgeted cost performance as well. So we saw good cost performance and also good output coming across the board from our mines. As a result, we generated record cash flow, almost $700 million or around $4 a share and on the back of that solid performance, our production guidance going forward for 2013 remains unchanged. Essentially, we look at 2013 as a building year, which sets the stage for our next phase of growth. Two of the projects that have the most immediate impact on that growth are Goldex and La India. They're both progressing well. Both projects are expected to go into commercial production in the second quarter of 2014. In addition to those 2 projects, we should see steady ramp up in production at LaRonde. I'll get into some of the details as that deposit or that mine accesses more tons from the higher grade lower…

[Operator Instructions] Our first question comes from John Bridges from JPMorgan.

Just wanted to ask you about LaRonde, the difficulties there with the ramp up. You went through something similar with the bottom of the Penna Shaft some years ago. I just wonder what was sort of different to the plans that you had. What's been surprising you down there?

I think the challenge going back to the sort of middle part of the mine at the Penna Shaft is we did have some issues around one of our mining blocks back in 2003, which caused us to just slow down the development of the Level 215. This is sort of more general in nature and it relates more to lack of flexibility due to heat and congestion. And as a result of that, we're not seeing as quick a ramp up. We're sort of a year or so behind where we expected to be. This year, we did about 4,000 tons a day. We expected to be in the mid-4,000s, close to 5,000. So we were short about 600 to 800 tons a day. Next year, as we said, we expect to be at 4,600 tons a day roughly and then 5,200 tons a day in 2014 and continuing to grow that in 2015. So the challenge we have there is we can't throw more people at it. We can't throw more equipment at it. That would just increase the magnitude of the challenges around heat and congestion and flexibility. So it's really a lack of flexibility. The important thing there is we are getting the grade. So our grade profile is likely going to go up as follows: We were 2.4 last year and roughly 2.7 in '13, roughly 3.5 grams per ton in '14 and in '15, we expect to be a little over 4 grams per ton. The reserve grade here is now 4.5 grams per ton. It did go up. And so for the next few years, we're seeing increasing production but at below reserve grades in terms of mine plan, but we should see a years above reserve grade. So we don't want to push it. We're going at a pace that we're now comfortable with. But I think part of the issue is we probably overestimated our ability to ramp up in that lower part of the mine.

Right, right. Your fallback position previously was to go back up into the upper levels, which obviously you've mined out now. Do you have -- are you dusting off some of your resources in the immediate vicinity in case you continue to struggle?

We don't have a lot of flexibility in the upper mine left. Part of 2012, we did take a little bit more zinc and that's why our cash costs were roughly close to budget. We do have a sort of a contingency in our back pocket for '13, where we could go after some more zinc material, which would certainly help cash flow if we had some issues around getting the gold tons in the lower part of the mine. So we have built that in to our own internal plans, but the plan that we put forward was to do our tonnage of around 4,600 tons a day from the lower mine. We think that's achievable.

Our next question comes from Joung Park from MorningStar.

Thanks for just all the detailed production forecast and all in sustaining cost disclosure, that's very helpful. So first question I had was what is the decline in production at Lapa going to look like? Is it going to be a slow drawdown or is it -- are we going to see production kind of halt abruptly after 2015?

Well, the current plan there is to maintain the current production rate for the next 2 years and then we fall from around 100,000 ounce level down to about 60,000 ounces, and based on the current plan, that would be it. But we're still actively exploring. We're following up targets, following up on some resource. We do have in our reserves about 400,000 ounces. We also have about 400,000 ounces in resource, which is not in a mine plan at this point. So we're hopeful that our exploration is going to prove that up. We get sufficient continuity that it makes sense to put it in the mine plan. So there is the potential to extend that beyond 2015.

Okay, I see. Second question I had was on Meadowbank, congrats on the continued good results there and it looks like you guys are going to be spending quite a bit of nonsustaining capital expenditures there. So I'm just wondering what that will be used for. Is that mostly to maybe extend the mine life there?

Yes, we're developing a separate pit called the Vault pit, which is about 7 kilometers away from the main mine. So that's what that number is. There's also in 2013 some additional work to do on our dike system. Then that starts to fall away in '14 and '15, and that's why we can see our net free cash flow going up from Meadowbank. So that's a general breakdown of the trend at that asset.

Our next question comes from Jeff Wright from Global Hunter Securities.

I had a couple questions on Kittila, in Finland, looking at the cost coming up and going deeper, do you think we should be looking more at the mine at the 2013 cost level, since 2012 was a record year there? And a second question with Finland. There was a fair amount of maintenance that was deferred in 2012, and spaced out. Is there going to be an extended maintenance period in Finland in 2013?

Yes, I'll answer those. On the cost side, we did have a really good cost year at Kittila in terms of cost per ton and we brought that down significantly from what it was prior to 2012 at around EUR 70 per ton. We have been forecasting for 2013, about EUR 80 per ton and that's to account for going underground. We've had good cost performance so far in the underground mine. If you actually look at Q4, which was EUR 70 per ton, about 2/3 of the tonnage came from the lower mine. And so I think that's an indication things are going pretty well at Kittila in terms of the transition to the underground mine. And in January, we averaged about 3,000 tons a day, which is what we were expecting from the lower mine. So we'll need a few more months from the full underground mine to see where those costs per ton in euros settle out. I think we're comfortable with our $80 number and we're hoping to try to do better there. In terms of the maintenance shutdown, I think the question was around the autoclave. We do have an extended shutdown built into our forecast for 2013. We were able to defer some of that work from last year but we feel we will do it and need to do it this year. So that's factored in and I think the timing of that is second quarter of 2013.

Okay. So we should be looking for that in Q2. Then quickly looking at Mexico, clearly there's a little bit of risk with the Creston heap-leach and while you play on going back and stacking ore is that something we should look at -- as a, clearly, a variable that it might take longer, it might -- clearly, safety is a concern at some level and we should just maybe be very conservative on that number for Creston for 2013?

Yes, I'll just get Tim Haldane to answer that.

I mean, we've given a midpoint guidance for Creston Mascota in 2013. The stacking that we're doing on Creston Mascota is on a different phase of the leach pad, basically an isolated leach pad. We could consider it to be a new leach pad. It's always a question with the heap-leach operation how quickly does the inventory build up and how does the ounce flow go. So we've given you the midpoint but technically, I'm not concerned about us getting that leach pad out.

Okay. So the 32,000 ounces is more of a midpoint and then once you're comfortable that all those issues are resolved, we'd get back towards -- closer to that 55,000 ounce levels going forward?

Yes.

Our next question comes from Stephen Walker from RBC Capital Markets.

Maybe just a follow-up question for Tim on the -- and I apologize if this has been dealt with earlier, I missed the first part of the call. But just the reasons why the leach pad at Creston Mascota actually moved or slumped. Did you ever determine definitively what the cause of that movement was?

Well, we put most of our effort into mitigating the movement, to make sure that movement stopped and also getting Phase II ready, putting in...

Is this is a geotechnical issue? I guess, what I'm asking is if this is a geotechnical issue, then the materials stacked on Phase II, is there a potential for it to move? I'm just saying, I mean, it's unusual and again, we talked about this in the last call but it's unusual to see movement in a heap-leach pad unless there was a design or a geotechnical issue, a design error, a geotechnical issue that just hadn't been picked up in the material being stacked.

Well, yes I think you've got that right. The Phase II is designed with that in mind, the early stacking of the ore that we put on Phase II is going to be coarser, more free draining than the...

Okay. So potentially it was moisture buildup within the stack itself and then that ponding resulted in movement. Okay, that makes sense. With coarser material it should leach better and be more stable. Just on Pinos Altos. Sean, as you transition into underground ore, the higher grade underground ore, can you give us a sense of what the grades are going to do over the next couple of years, if you would. And then just comment on the hardness of the ore underground. I noticed that you've obviously been able to get that plant to operate in excess of 5,000 tons a day, which is very nice, but will you be able to sustain that as you go forward if the ore is harder or does the ore get harder and you can't sustain 5,000 tons a day?

I'm going to jump in that one, too, it's Tim again. The hardness of the underground ore doesn't seem to be any different than the open pit, so we'll sustain the 5,000 tons a day. And as far as the underground grade goes, it tends to be a little bit higher silver grade. And the reserve grade, it's in the appendices to the press release but similar to the open pit grade or similar to the grade we've been mining recently.

Okay, perfect. Then just one last question. Just circling back on Goldex. Just if there's an update on the Québec Ministry of Mines, I believe, is continuing with an investigation and there's an ongoing or there was an outstanding lawsuit if I'm not mistaken. Can we get an update on both of those or where they stand?

From the Québec Ministry side, there's no investigation. From the lawsuit side, the U.S., we moved to dismiss the U.S. action and it has been dismissed. We have -- that dismissal is now being appealed and that's where we are there. In the Canadian class action, there's no update there at all.

Our next question comes from Anita Soni from Crédit Suisse.

I guess, my question has really been asked -- sorry, asked and answered already with respect to the sustaining capital at Meadowbank. So that was with -- you're doing work on the dike system and then you said it falls away in 2014 and '15?

Yes.

And additionally, the vault pit, does that also trend down or will that take a couple of years for you to develop that pit?

I think the vault is over 2 years. Yes, 2 years, yes.

So similar -- sorry, what was the relative split between the 2?

Do we have that, Dave, the split between vault and...

The dike system.

We'll get back to you on the split between the 2.

Our next question comes from Greg Barnes from TD Securities.

Sean, I know you're working on the feasibility study on Meliadine but what's a medium-sized mine?

What's a medium-sized mine?

Yes.

4,000 to 5,000 tons a day.

And ballpark CapEx?

Yes, it's tough to say. It's early. It's -- Meadowbank was $800 million or so. This is going to be more expensive than Meadowbank, so north of $1 billion.

Okay. And I know you've said in the past that you're looking at phasing into Meliadine. Is the 4,000 to 5,000 tons a day the first phase that would be then expanded over time? I know over the multimillion ounce resource stuff. Is that the way we should be looking at it?

Yes, yes. Potentially, I think what we're really trying to determine now is whether we can link a Normeg-Wesmeg with the underground Tiriganiaq that could have a meaningful impact on the underground mine and its production ability. We're sort of targeting in terms of annual ounce output in that sort of 400,000 ounce range. And we're trying to figure out what's the optimal mix between open pit and underground as we start.

Does the 4,000 to 5,000 tons a day get you to that 400,000 ounce?

Yes.

It does, okay.

Yes.

[Operator Instructions] There are no further questions at this time. Please continue.

Thank you, operator, and thanks, everyone, for your attention. I know it's a busy day and if there's any follow-up questions, please feel free to give any of us a call here. We'll help you out. Thanks again. Bye.

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