Agnico Eagle Mines Limited
Q4 2006 Earnings Call Transcript

Published: 22 Feb 2007

[Operator:]

Welcome to the Agnico-Eagle Mines year end 2006 Conference Call. At this time, all participants are in a listen only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference, please press *0 for operator assistance at any time. I would like to remind everyone that this conference call is being recorded this Thursday, February 22nd 2007 at 2

[Sean Boyd:]

Thank you operator and good afternoon everyone. Welcome to our 2006 fourth quarter and year end conference call. What we’d like to do today is go through the results, obviously, but give you an update on our project and some of the exploration. We have a series of slides for those of you who are on the internet, so we’ll take you through those. Before going into the slides we’ve got several Safe Harbor statements which involve forward looking statements, so please review those when you have a minute. We also have some Safe Harbor statements around the offer which is outstanding for Cumberland resources. Just to start off, I’d like to go through the corporate strategy of the company. It’s been straightforward, it’s been consistent. We’ve moved along in a very disciplined manner. We’ve put ourselves in a position to increase our annual gold output with existing projects, taking it to about 750 ounces by 2009. As you know we’ve got three new goldmines to begin production next year. We’ve also demonstrated our ability to grow our reserve base. We showed this quarter a 19% increase in our reserves to 12.5 million ounces. We are targeting a reserve position within the next 12 months based on drilling at our existing projects of about 14-15 million ounces. As far as acquisitions, again the strategy has been disciplined. It’s been straightforward. Our preferred growth is to look for acquisitions that, from a size point of view are small relative to our size, and we’ve been successful over the last couple of years in building our pipeline in that fashion. As you know in 2005 we completed the acquisition of Riddarhyttan Resources, which gave us the Kittila mine which is under construction. Pinos Altos was closed in 2006 which has given us a project that was in the last stages of feasibility. We’ve completed that and that’s out for third party review, and as you know we’ve recently announced an offer for Cumberland Resources. Again, that transaction, or that proposed transaction is very similar to the style that we employed when we made a bid for Riddarhyttan. So it’s something that we’re very comfortable with going forward, and what that transaction does is enhance an already strong growth story in gold production and in reserves. Our earnings and cash flow in 2006 are at record levels, and we’re just fortunate as a company to have the bulk of our assets in the provinces which are a great place to operate in, in terms of not only finding gold, but having a sound, steady cost structure to operate within. And part of the strategy is to maintain a very conservative balance sheet and in fact our cash flow allowed us to increase the cash position. We’re almost at $460 million in cash. So essentially we’ve got the financial and technical resources to achieve all of our production and reserve growth objectives. As far as highlights go, there were several highlights in the quarter, one being the increase in reserves by 19% to 12.5 million ounces which is not listed here. Also not listed is the 24 consecutive months, now it’s 24 consecutive months at LaRonde without an underground time loss accidents, so an extremely good performance by our employees and they should be congratulated on that, particularly when you think that we’re operating an extremely large underground mine and we’ve had two years without a time loss accident there. And another thing which isn’t on here, we announced in December a quadrupling of our dividend, and we’ve paid a dividend for 25 years, and going forward based on our production growth, our revenue growth, and our bottom line growth, we expect to benefit from…then we’re certainly looking to pay an increased dividend going forward. On the operating side, highlights; very low cash cost, extremely good earnings, a record quarterly cash flow of $84 million, strong cash position, and we’re moving our projects forward in a very, very steady fashion. Operating results regarding some of the details at LaRonde

[Operator:]

Thank you. Ladies and gentlemen, we will now conduct the question and answer session. If you have a question, please press the star followed by the one on your touchtone phone. You will hear a tone acknowledging your request. Your questions will be pulled in the order that they are received. Please ensure you lift a headset if you are suing a speakerphone before pressing any key. One moment please for your first question. Your first question comes from John Bridges of JP Morgan. Please go ahead.

[John Bridges:]

Good afternoon Sean, congratulations.

[Sean Boyd:]

Thank you.

[John Bridges:]

What are you looking for underneath Bousquet? What’s the model for that?

[Ebe Scherkus:]

Good afternoon John. What we are looking for is basically another massive sulfite zone. The drilling that we did from the level 215 exploration grip…We basically outlined a massive sulfite zone anywhere between 15-25% of banded massive pyrite with a minor amount of chalical pyrite. In other words the geological model is very similar to LaRonde and Bousquet. Stratographically, this particular zone appears to lie in the known frontier horizon. It’s south of the original Bousquet or LaRonde horizon. We’ve only been able to put in about three diamond drill holes. We’ve traced it over a vertical distance of about 300 meters or so. But right now, we’re at the end of the exploration drive on level 215. So it’s become increasingly difficult to drill. They’re long banana type holes in the neighborhood of about 2,000 meters. So, what we have proposed to do and this has been accepted, is to extend the level 215 exploration grip by about another 400 meters to the west.

[John Bridges:]

When did you discover this?

[Ebe Scherkus:]

We discovered this at the end of the third quarter last year.

[John Bridges:]

This sort of thing you were looking for so you didn’t have to do a wrong to a right?

[Ebe Scherkus:]

Sorry?

[John Bridges:]

You were looking to expand the depth potential and then go bigger at depth, weren’t you?

[Ebe Scherkus:]

No, this was just a routine coverage significantly to the west of LaRonde II. I believe that this was between these two zones and must be in the neighborhood of at least 500 meters if not more.

[John Bridges:]

So where would this be served from? Something out of the existing viscid shaft or would this…?

[Ebe Scherkus:]

Well I mean this is all just arm weaving here John. We don’t really know the size of this thing and even right now, the grades are not economic but just we’re using history. And normally when we have encountered mass sulfite mineralization of this type, there tends to be some sort of body lurking in the background.

[John Bridges:]

OK. Good luck.

[Ebe Scherkus:]

Thank you.

[Operator:]

Your next question comes from Tony Lesiak of UBS. Please go ahead. (Long pause) Mr. Lesiak your line is open if you would like to ask a question.

[Tony Lesiak:]

Hi, can you hear me?

[Sean Boyd:]

Yes.

[Tony Lesiak:]

Okay great. A couple of questions on the expiration side and reserve resource. Quickly, at Lapa I noticed the grade improvement of about 10%. Was that due to some additional drilling results or any change in geo-statistical assumptions?

[Ebe Scherkus:]

Basically drilling results.

[Tony Lesiak:]

OK, so you still might see a great pickup there once you get on the ground and get more confidence?

[Ebe Scherkus:]

That will always be the issue at Lapa until we finally start mining.

[Tony Lesiak:]

Okay, so we can estimate that you might see a bit of a pick-up there. And well, we have. One of our issues is that we really haven't got a whole lot of access underground. The drilling that we did do in the last quarter of last year is from the lowest level, I think that was 78 so they are very steep drill holes. So once we get the shaft down and the shaft completed we will be in a much better position to drill in the second half of this year.

[Tony Lesiak:]

Follow-up question on the reserve grade drop at LaRonde, can you explain that?

[Ebe Scherkus:]

We combined the LaRonde I and the LaRonde I, that's why there is an overall drop in grade. If you were to calculate from the same way from LaRonde I or the historical way at LaRonde II, the grades would be very similar as in the last year.

[Tony Lesiak:]

Ok because I just looked at the reserve that came up and you still haven't broken out there of your proven probable. And if you look at the grades they were down substantially.

[Sean Boyd:]

When the LaRonde I was checked it was marked (inaudible) speaking. At LaRonde I we're basically mining the gold-ore body. So when each year you extract 240,000 ounces, all the relative gold grading will drop because that's the part of the mine in zinc. That's right. Whereas the lower part we're accessing maneuvering around two prospectives of much higher grade and that grade didn't change.

[Tony Lesiak:]

OK. So there were no zones that were dropped out of the reserve at all?

[Sean Boyd:]

Oh no. No, that's just natural mining.

[Tony Lesiak:]

OK. And just if you could give us a breakdown of the depth in the underground, maybe just in percentages for Kittila?

[Ebe Scherkus:]

In terms of ounces we'd be looking at somewhere in the neighborhood of 850,000 ounces in the open pit and the remainder would be underground.

[Tony Lesiak:]

OK, great. Thanks very much.

[Operator:]

The next question comes from Mark Smith of Dundee Securities. Please go ahead.

[Mark Smith:]

Yeah, hi. Just a really quick question. On taxes…I'm just wondering, could you give me an indication of what you're looking at? Will the tax rate go forward and how much you have left that will be applicable?

[David Garofalo:]

Yeah, our expected tax rate in 2007 will be about 40% and I say about 2/3 of that or sorry about ¾ of that will be differed and will be backed mining duties from cash tax we're going to be paying this year. And we have income pools filled with about $700 million US. So we won't be paying income tax for quite a while but we are assessable on a mining duty.

[Mark Smith:]

OK. So basically your forward it's going to be about 75% differed.

[David Garofalo:]

Yeah. At least for the next few years while we use up the income tax pools.

[Mark Smith:]

Yeah but then you've got a new pool coming from the new construction, right?

[David Garofalo:]

We do and that will mitigate some of those mining duties, but we will still be paying cash money duties.

[Mark Smith:]

OK. Is there any pools that you picked up with the Cumberland acquisition that are applicable inside of the Northwest territories or some that are in the Northwest territories?

[David Garofalo:]

Well generally those resource pools get streamed. There might be some hard assets that tend not to get streamed or that don't get streamed but I think, I suspect that the vast majority are tax pools or cash pools so they will be streamed against the Meadowbank asset.

[Mark Smith:]

OK. Alright, thanks very much Ted.

[Operator:]

Your next question comes from David Stein of Sprott Securities. Please go ahead.

[David Stein:]

Hi guys, actually my question has been answered already so I'll let you keep going.

[Operator:]

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

[Steve Butler:]

Good afternoon guys. You had said your mine set costs were $63 million Canadian. Can you comment as to how much accelerated development does that go into your cost per fund and (inaudible)?

[David Garofalo:]

The breakdown would be roughly $2.5-3 million and $1.5 per ton of the accelerated development that we experience.

[Steve Butler:]

OK. And was it correct in the, I missed part of the comments Sean or my dyslexia just set in more fully, is it $17 million of the capitalized of the $40 million that will be capitalized? $17 million?

[Sean Boyd:]

Roughly, yep.

[Steve Butler:]

Another question, as your gold recovery dropped, I mean a little bit, given the little bit bump in grade I would have expected recoveries to be slightly higher and I think we're targeting ultimately 94% of reserve basins. But can you comment there what happened? I mean it's not a big deal…

[Sean Boyd:]

Uh, we just cut some minor issues in the mill. We had some problems with our on-screen analyzers so we were running manual or by the seat of our pants till we got the unit repaired. It's the original one and it's no longer in production so spare parts were hard to come by. So that was the main reason, but it's up and running again.

[Steve Butler:]

OK. Did you guys comment, I know it’s preemptive, on your completing and releasing Pinos Altos, but what are your thoughts on through-put rates for Pinos Altos?

[Sean Boyd:]

Ah, we are currently based on the scoping study. We've examined 3,000, and the feasibility we have now used the 4,000 as a parameter but now with a significant increase in the overall tonnage we're evaluating other tonnage fro through-puts. But the 4,000 is about the median that we used.

[Steve Butler:]

OK. Thanks very much guys.

[Operator:]

You're next question comes from Catherine Gignac of Wellington West. Please go ahead.

[Catherine Gignac:]

Hi Steve jumped the gun. He asked the same thing I was going to on Pinos Altos. Umm spending $26 million for the (inaudible), it's intriguing and I'm also intrigued with you being in Mexico? Could you fill us in a little bit more in terms of the justification for that because you've already got a large land package? What you see for the potential there going forward?

[Ebe Scherkus:]

The ground that we picked up is basically, we have a theory of a collapsed caldera and so the ground we picked up, we feel, is an extension of the caldera. So it's a little of arm waving Catherine, but we never know. Also it's in a favorable background within a stones throw of other deposits so the ground was available and so we picked it up. And in terms of strategy going forward, well naturally we are actively examining other situations in the Mexico, predominantly Northern Mexico, maybe Sean you want to mention some more thoughts?

[Sean Boyd:]

The way we looked at putting the company together is that when we decide to go into a part of the world, we take a long term view. Like we've done in Quebec where we've been mining and been involved there for over 30 years. So likely over time we would like to build off of our base in Pinos Altos. And the first way to do that is try to get some more exploration grounds, to try to get our exploration teams to go to work. One of the ways that I don't think is well acknowledged from perspective is our ability, our team's ability to find gold. They certainly demonstrated that ability at LaRonde, at Lapa, at Goldex, at Kittila in the early stages. Our focus is part of a strategy not only to build a pipeline of projects, but also to build a very consistent, focused exploration programs together in and around our major assets.

[Catherine Gignac:]

And you have done that very well. Congratulations on a good quarter and a good year.

[Operator:]

Your next question comes from David Christie of TD Newcrest. Please go ahead.

[David Christie:]

Good afternoon guys. Just quickly, and more on Pinos Altos. Of the $26 million how much is getting spent on more grassroots exploration drilling? Other than more intel?

[David Garofalo:]

If you're looking, what we did last year we and the board fixed a $23 million budget. That budget will be finished in June and the program was to drill under-budget at 51,000 meter. And the program was 25% and was for outside of the system.

[David Christie:]

Yeah, so the 25% of this year is what you're going to spend on outside?

[David Garofalo:]

Yes.

[David Christie:]

OK. And what about at Kittila? What are you spending there?

[Ebe Scherkus:]

Ah Kittila? We're spending $6 million there and I would think about half of that would be outside of the mining lease and about half of that would be within the mining lease.

[David Christie:]

OK. This is really the first time you've stepped out of either project?

[Ebe Scherkus:]

Yes. David. With, as Sean mentioned, we hired an exploration manager and we currently have three drills on the exploration program at Kittila exploring to the North. So they are following up on some of the geo-chemical anomalies we just found. Also, we're drilling deeper down, by deeper down I mean 100 meters at the base to be able to follow up on some of the values that we encountered. Drills are naturally production oriented within the mine lease to close in some of the gaps for production purposes.

[David Christie:]

Perfect. Thanks a lot, guys.

[Operator:]

Your next question comes from Mike Jalonen of Merrill Lynch. Please go ahead.

[Michael Jalonen:]

Well, hi Sean, guys. I was just wondering, the slide that shows your CapEx, you have a breakdown there of Pinos Altos there and Meadowbank potential, but what about the other vein, the projects for ’07, ’08, 09? Is there a breakdown for them? Or a rough breakdown?

[Sean Boyd:]

Yeah, in the December 12th press release, Mike, for ’07, provided a detailed breakdown by project of the 336 base CapEx for this year.

[Michael Jalonen:]

OK. ‘08’s in there too?

[Sean Boyd:]

I can give you all the other numbers later if you’d like.

[Michael Jalonen:]

OK. Thank you.

[Sean Boyd:]

Yeah.

[Operator:]

Ladies and gentlemen, if there are any other additional questions at this time, please press the * followed by the 1. (Operator Instructions). Mr. Boyd, there are no further questions at this time. Please continue.

[Sean Boyd:]

Thank you, Operator and thank you everyone. I know it’s a busy day and a busy couple of weeks as everybody’s reporting and we’ll let you go and thanks for participating.

[Operator:]

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