Agnico Eagle Mines Limited

Good morning. My name is Chris, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Agnico Eagle fourth quarter results 2018 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. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, please press the pound key. Thank you. Mr. Sean Boyd, Chief Executive Officer of Agnico Eagle Mines, you may begin the conference.

Good morning, everyone, and thank you for joining us this morning for our Q4 2018 update. Before we get into the presentation, in the slide deck is a couple of slides on forward-looking statements, so please take note of those. As we step back and look at the strategy, I think For us, it's just a natural progression as we move from a transition year in 2018 into 2019. And the goals are still the same, to go forward at a measured pace, manage our risks, and create a business that generates above-average returns and does it on a sustainable and self-funding basis. As we said, as we look at 2019, we're completing the expansion in Nunavut with Melodyne starting in Q2. and Amaruk starting in Q3. That sets us up for a record production in 2019, 2 million ounces in 2020, with the potential to go beyond 2 million ounces as we move beyond 2020. The nice thing about our positioning is we invested heavily over the last two years, largely in the Nunavut platform. Our CapEx is going to decline significantly in 2019. coming down from roughly $1.1 billion in 2018 down to about $660 million in 2019. As we move beyond 2019 into 2020 and 2021, we would expect to have a capital spending range of between $500 and $700 million, including sustaining of about $300 million. And that's largely dependent on the gold price, but also dependent on our project approvals of the internal projects that we have in the pipeline. So there's still analysis and work to still do before we get to the point where we're in a position to make a positive decision on several of those projects. And we'll talk about them in the presentation. From a risk point of view, we've built the business by managing political risk. So we're focused on going into jurisdictions that we can see ourselves operating for multi-decades. That really hasn't changed. The pipeline, as we said, has a lot of opportunities in it to add additional value. And so while we've been focused on building the Nunavut platform and while we're focused on delivering the two big projects this year, we continue to work on advancing several of those internal projects through a combination of additional exploration and also advancing several studies. One of the things we rely heavily on is we I've really built the company on going into situations early, drilling, and then building as we're heavily reliant on our in-house technical skills and experience. And I think what we continue to prove over and over that our build-our-own-minds approach works very well for us, so we're going to continue to focus on that. So this is really, from a strategic point of view, all about staying focused disciplined, sticking to a strategy that's worked well for us for years, moving at a measured pace, and striking the right balance between investing in our project pipeline, paying down the debt as it comes due, and also increasing the dividends. So we'll talk a little bit about the building blocks that make up that strategy. Turning to the fourth quarter and the full year results, another strong quarter in Q4, Good production, 411,000 ounces at cash costs of 608, so exceeded our expectations. That put us in a position for the full year to produce 1.63 million ounces, again exceeding guidance at very good cost. As we've said many times before, 2018 was the transition year. As we transitioned away from the deposits in the vicinity of the Meadowbank Processing Facility, into new production platforms in Nunavut that would see our production grow. But for a transition year, it was actually excellent. Because if you look at the actual production decline from 2017 to 2018, it was only 5%. So we were several years ago when we were looking at this transition, there was a potential for a sizable gap in production. And our teams did an exceptional job. We'll talk about that in a minute. on how we've got a nice smooth transition between Meadowbank and Amaruk. As we said, we've increased our guidance for 2019. We expect to produce 1.75 million ounces of gold, which is a record for Agnico Eagle, and we're doing that with unit costs in 2019 stable, but with slightly declining unit costs beyond 2019 as we ramp up production further. This has largely driven this growth off of the expanded platform in Nunavut, as we said, Meliodine. We expect to start production in Q2 of this year. We're commissioning the plant as we speak, and we would expect to be pouring gold this month. And again, we'll get into some of these details. We also have done a good job moving our amaranth deposit forward. Based on the fact that CapEx is coming down significantly, We're in a position as production ramps up materially in the second half of this year. We're in a comfortable position and a confident position in terms of being able to deliver that to the point where we are increasing our dividend today. And I think if you look at that, that's really consistent with our long track record of paying a dividend for over 34 years and also consistent with the last several years where Even though gold fell from $1,700, we did not eliminate our dividend. We did manage it lower, but this will be the third increase since the dividend bottomed at $0.32 a share. So we just take that as a sign of our confidence in the future of our business. Exploration remains a key value driver for us. It's an important component of understanding the quality of the project pipeline, so we're actively drilling on a big part of our project pipeline. We continue to see good results at places like Meliodene where we have encountered good grades outside of the known mineral reserve and resource outline. And our experience largely has been that we tend to create more value from an exploration standpoint once we get the production base established. And we would certainly expect that to happen at Meliodene given the size of the land package that's largely unexplored. That Amarook drilling continues to give us confidence in the underground opportunity there. In fact, we continue to grow the overall reserve and resource, which now totals over 6 million ounces. We added about 500,000 ounces to the open pit reserve, which extends the mine life there. And so what we're doing now as we focus on executing is to continue to work on various options and studies on the underground opportunity that exists at Amaru with the potential to have an overlap with the open pit mine at some point in the future. And we'll have more details on that later this year. In Mexico at Santa Gertrudis, we have almost 1 million ounces now in resource outlined at that project. We continue to move that forward, and we'll have more news on that as we move through this year on what our plans are at that project. Drilling has also not only given us some clarity on our projects, but also continued to allow us to post another year of reserve and resource growth. Our total ounces increased by 7% to 22 million ounces, and our grade increased by 8% to 2.7 grams per ton. So a big part of the production growth over the next few years is really driven off of higher grades being delivered to the processing facilities, and that's what's allowing us to have a good cost forecast going forward on a unit cost basis. Just a little bit more detail on the operating results, as we said, better than expected Q4 production cost performance, really driven by strong results of La Ronne, Canadian Malartic, and Pinos Altos. Financial highlights, we did have a large headline loss due to impairments. And from the perspective of the assets involved in that, the largest charge was a $250 million impairment at Canadian Malarctic, and that was really a reduction of the goodwill component that was booked on the acquisition in 2014. That goodwill does not get amortized under IFRS, so ultimately over time you have to reduce that goodwill. That does not reflect where we are on that asset. In fact, we see the potential to add additional ounces at Odyssey and East Malartic, but that work wasn't at the stage that we could put significant value on it at this point in time when we looked at the impairment test around Goodwill. At La India, we had a reduction in Goodwill of $40 million again on the acquisition. That was completed back in 2011. And at Barcania, we had an impairment of $100 million. Now, that's largely because that project does not reach our hurdle rate at this point. We haven't totally given up on it. We're continuing to drill it and look for ways that we can improve the situation. But it just made sense that we took an impairment on that project in 2018. As far as our financial position, it remains strong even after coming off a significant construction phase. over the last two years, where we spent over a billion dollars in capital in both 2017 and 2018. And as we said, our CapEx declined significantly in 2019, down by over $400 million from 2018, while the gold production grows, particularly in the second half, where we expect to be free cash flow positive. Moving to the project pipeline, There is an opportunity, as we said, to go beyond 2 million ounces when we move beyond 2020. So we're focused now on analyzing those opportunities from both a rate of return perspective, but also from the perspective of the potential to positively impact our business as we move forward. Part of that work includes additional drilling and also includes updating studies. I'm not going to go through the entire list, but I think La Ronde presents an interesting opportunity as we go deeper at that mine. You can see that we added 800,000 ounces of high-grade gold in the year, averaging 7.9 grams per ton, and that's largely on the western side of the deeper part of La Ronde where we've had some of the best drill holes we've had in the history of that deposit. We also continue to drill the Zone 6 horizon where we had early indications of maybe a reappearance of a mass of sulfide lens. So there's a lot of drilling and study work ongoing at La Ronne. And as we go deeper, certainly the risks increase. That's why we're taking our time to lay out a solid plan to go below 3.1 kilometers. And as we do that, we want to know the full extent of the mineralization down there and if there is a separate horizon in Zone 6, so we'll continue to drill that and provide updates as we move forward. I would point out that Canadian Malarctic, we will be moving forward on an underground ramp. We continue to grow the resource. We continue to do a study on that opportunity, so we would be in a position later this year to provide more clarity and colour on how that will progress. As we said, it's too early to put a lot of economic parameters around it at this point, and we're still actively drilling that area. Let's move on to the sort of longer-term projects beyond 2023, and a lot of them are the same, and some of them are, in fact, just going deeper. For example, at Canadian Malarctic, the initial study will be done down to a depth of about 600 meters. We certainly see from drilling that there is mineralization below 600 meters, So it's a matter of doing more exploration work and then updating studies on looking at the economics as we think about going deeper in an underground scenario at Canadian Malarkey. Curtin Lake is a project that has over 5 million ounces of reserve and resource. We continue to drill it and we also continue to study it. And that's an opportunity that we'll have more news on as we go forward. and probably by the end of this year and that amaru that's the one that has the most potential to have a significant impact on production uh bringing in an underground simultaneously with an open pit at some point as we move forward and we're actively studying those options and we'll have more information on that before we close out this year i'll quickly go through the operations and then we'll open it up for questions starting with laronde and lz5 Good performance in the quarter. Really good operating margins continue to be generated at Leron. Looking at over the next three years, we expect to average with Leron and LZ5 pretty close to 400,000 ounces a year over the next three years at good costs. As you can see in the quarter, Leron produced gold at under $500 cash costs. So they've done an exceptional job as they go deeper in that mine, as they access better grades. in the lower part of the deposit. At Canadian Malarctic, we talked about that. They've also done an exceptional job. If you look at record production from record tonnage from good grades, they've made good progress on the burnout extension there. They should average over the next three years similar production levels to what they did in 2018. So good solid production, good cost performance, And the key going forward for us is to understand the underground opportunity there. And in order to do that, we need to do more drilling. And there's several horizons that we need to understand. There's a sizable resource there. So that's one that we have enough information on at this point to invest in an underground ramp to open it up and access it. But it still requires more drilling and more study to determine how we're going to deploy capital with our partner, Humana, at that project. GoldX is a steady producer. It has opportunities to go after a smaller, higher-grade south zone. It also has opportunities at the Akasaba West project, which we've put on hold. That's just part of an effort to work within a defined capital spend number. And although it meets our hurdle rate in terms of the potential impact to the business, it's still relatively small. So our capital of $660 million this year is focused on larger projects that have a bigger potential impact, but it will be a project that will come into production at some point in our future. At Meadow Bank, I made reference to the transition. Actually, this was an exceptional transition and an exceptional plan that involved a lot of good thinking, but most importantly, a lot of teamwork, because really what you had is you had a – basically a dozen drill holes in 2013 with the first drilling done in August of 2013. And literally six years later, you've got a mine starting up. So that's an exceptional job with the Meadowbank and the Amaru teams. And what the Meadowbank team did was also continue to squeeze out cash flow at Meadowbank. So you can see in 2019, we have additional production coming out of the Meadowbank deposit. So that was an exceptional job because it basically did not have any adverse effects on the workforce, which was important, which would have impacted the communities if there was a serious gap in production. So effectively, not an easy transition, but a relatively seamless transition through a lot of good work and good thinking. Amaroq, moving to that, as we said earlier in the presentation, When you look at the combined size of that from a reserve and resource perspective, over 6 million ounces with 2.5 million ounces in reserve and the mine plan from the open pit perspective, as we said, we added about half a million ounces to gold reserves at open pit depths. Now we're evaluating the potential, as we said, to open up an underground opportunity there, but also to optimize the pit, because if we're going to go underground, then that allows us to do less stripping in the pit and become much more efficient in the allocation of capital and the return on the pit. So we'll have more details on that as we move through 2019. Meliodine, we talked about it at the start. It's ahead of schedule. It's below budget. That largely drives the increase in the guidance for 2019. As we said, they're commissioning the plant. As we speak, we expect to have gold poured at Meliodine before the end of this month. Things are going well there also from a mining perspective. What's happening in the plant now, I'd say we're delivering over 2,000 tons a day of what we would call mid-grade ore in the sort of five gram range. And as we go through the next few weeks, we'll be delivering into the mill what we would call higher grade material above seven grams. So again, things have gone well. and that's why we have confidence in raising our guides this year to 1.75 million ounces. And we continue to drill it, and we see intersections that suggest that the deposit at Turganiak will continue to grow. At Kitala, we're making good progress on the shaft and the mill expansion. In 2019, we're going to reline the autoclave, so we have about a 60-day shutdown. So even factoring that in, We're still showing record output overall in 2019 from a company-wide perspective. So it's a good year to do the autoclave relining, which happens every four to five years. Moving to the southern business, as we also mentioned, Pinos Altos had a good year. It's a good cash flow generator, good solid production, very good cost performance. It's still a key cash flow generator to us. It's shifting gears in a way as it – moves into the development of several satellite deposits to augment the underground operation. That's a way where we've been able to leverage off of exploration results, good mine building skills, and existing infrastructure. So the team continues to look at ways where they can extract value from the investments we've made, not only in infrastructure but in people over the last several years. At Crest and Muscota, That's been a big success over the last several years. It's coming to an end there, so a thank you to that team for doing a good job over the last few years, generating a lot of cash flow for us with a modest investment. And La India, although we did have an impairment of goodwill, it's not a function of the asset itself being impaired. In fact, it continues to produce good quantities of gold at good cost, generates good cash flow, and there are additional satellite opportunities that exist at La India to extend the mine life, and there's still a lot of solid drill targets that we're going to be exploring with a significant budget over the next little while. So just before I open it up for questions, a quick summary. As we said, from an operational standpoint, 2018 was a strong year as we once again exceeded our production forecast, and we did it at lower than expected unit costs. While we were doing that, we were growing reserves. We were improving the quality of those reserves as the grades increased. We successfully advanced our Nunavut projects, and as we said, that really sets us up nicely in 2019 to produce record amounts of gold at stable costs with the ability to continue to grow production beyond 2019 as we get a full year of production from our Nunavut platform. And we would expect, based on the quality of that production, to be able to keep our costs under control and see a slight decline in unit costs and all in sustaining costs. What we expect this to do is to obviously drive increased cash flow, but more importantly, cash flow per share. And what that will allow us to do will allow us to fund our project pipeline with internally generated funds. It will allow us to reduce our debt as it comes due and increase our dividends. So, operator, on that, I'd be happy to open up the line for questions.

Certainly. At this time, I would like to remind everyone, in order to ask a question, press star followed by the number one on your telephone keypad. Again, that's star one. I'll pause for just a moment to compile the Q&A roster. Your first question comes from Fahad Tariq with Credit Suisse. Your line is open.