Good morning. My name is Kim, and I will be your conference operator today. At this time, I would like to welcome everyone to the Agnico Eagle Second Quarter Results 2018 Conference Call. There will be a question and answer session. Thank you.
Mr. Sean Boyd, you may begin your conference.
Thank you, operator, and good morning, everyone, and thank you for joining our Q2 2018 conference call. We'll be going through a series of slides, and I'd just like to make you aware that there will be forward looking statements in this presentation. So there is some disclosure on that in the slide deck. Just to get a set sort of on our thinking, our mindset, where we are midyear 2018 in this transition year as we transition from mining the deposits in the vicinity of Meadowbank and moving to a much larger and broader platform in Nunavut. We remain focused on adding value through the growth in our production base, largely in Nunavut, while keeping the risks in our business low.
Specifically, we remain focused on the execution of the Nunavut Growth Plan moving those projects forward. And we also remain focused on exploring our existing assets near and around our main deposits to grow our reserves and our resource base and also focused on the project pipelines that we expect to come in post building out the Nunavut platform. But as we look at the operations, we continue to see operations that in a transition year are performing well from a production point of view. As a result, we've increased our full year guidance. Our gold reserves and our resources, we expect them to continue to grow this year based on the exploration results that we're getting in and around our existing mines, which are showing extensions outside of currently known mineralization.
Those expanding reserves and resources will support the production growth that we will see over the next several years. We're on track to hit our target of 2,000,000 ounces in 2020, and we'll talk about that. And that's important because that will drive our growth in cash flow per share and free cash flow as the capital that will be required to be spent in the business to sustain and grow production beyond 2020 is significantly less than the amount we've been spending in 20 17 and will spend in 2018. So we'll update you specifically on the projects, but we continue to make very good projects or progress at our key growth projects. In terms of the pace of our growth, I think that's important because what we've been able to do is put together a collection of assets that are well matched to our technical skills and our experience.
And it's important to work those projects at a manageable pace with realistic targets. And when we combine that approach with the broad range of skills, it gives us a, what we call, a high quality, low risk stroke story, low political risk, low execution risk, and that will remain the focus as we move through the balance of this year and move into next year when we see our production begin to grow again. As far as Q2 goes, generally as expected, as we said, from a production and from a cost standpoint, payable production a little over 400,000 ounces. Our costs came in roughly at the midpoint of the guidance as a result of the strong second quarter. As we said, we've increased our full year production guidance to 1 point 58,000,000 ounces.
We expect, based on second half projections, to see a slight decrease in our total cash costs as we move through the second half of twenty eighteen and then as we move in to 2019. A particular note in the quarter, as we said, was moving some key projects forward. As expected, we received our water license A, which has allowed us to begin construction of the Whale Tail pit. And that timeline is tracking very well to have production coming out of the Whale Tail pit in the Q3 of 2019. And at Nelibean, we continue to make excellent progress there, both in surface construction, in underground development and also we've got some new news on the exploration front because for the first time in 3 years, we've resumed exploration drilling in and around the Neliadweep deposit.
We also received a permit at Akasaba. That's a satellite deposit for Goldex. That allows us to leverage off of the Goldex and Lalonde infrastructure. So reviewing the timeline for the integration of that project. And we've also, in the quarter, declared commercial production at the LZ-five zone at Elan.
And the landfill mine life, we've been able to extend further into 2018. And both of those situations, again, are allowing us to leverage off of infrastructure and skill sets at LeMond to add incremental value in those regions where we've been for many decades. As we said on the operating side, on our operating results, we're tracking above the initial guidance on full year production. As a result, we raised the guidance, and we're tracking roughly at the midpoint of the cost guidance. In the quarter, we saw significant contributions coming from both La Ron and Canadian Malartic.
That was important because they partly offset the lower production and the higher unit cost that was expected at Meadowbank as we complete the last year of mining at the deposits in and around Meadowbank. We generated good cash flow per share, and our cash flow per share numbers are right in line with the consensus. As far as how we're positioned financially, we closed the quarter with over $700,000,000 in cash. We've got fully undrawn credit lines of $1,200,000,000 So we're well positioned to complete the build out of our next phase of growth in Nunavut. Specifically on the assets, as we mentioned, LaRonde made a major contribution not only to production but also to cash generation and operating margins.
The grades were over 5 grams per tonne. They produced 85,000 ounces at a total cash cost of $3.95 an ounce. So we can see the impact that the lower part of the La Ron mine is having not only on production costs but also on cash generation. We continue to drill the lower part of the ore body. We'll be systematically adding additional levels as we move forward over the next several years.
And as you remember, some of our best drilling is on the lower part of the mine on the western side of that deposit. So that should be important for production and unit cost as we move into the lower part of the mine. And as we said, LaRonde Zone 5 hit commercial production. And what was important about LaRonde Zone 5 is the use of the new communications technology to test automated equipment. So we're looking to employ that at Laurent.
And we have the pleasure today here in the room to have a team from LaRonde that put the concept together about automated equipment using the LTE technology, and we're here to accept an award that we give annually to the best idea coming from the site to improve our business. So congratulations to the team at LaRonde for that technology. And that will be important as we open up the lower mine to manage costs and become a more efficient in that part of the mine. I talked about the launch of Zone 5. The opportunity there is really not just to bring the smaller zones that we're working on now, that is the base case.
The opportunity is to prove the concept in the original feasibility because there's several hundreds of thousands of ounces on that property, which we'll be focused on analyzing to see if we can also bring that into the mine plan over time. And we mentioned LAPA just never seems to go away. Not that we want it to go away, they keep doing an exceptional job of both taking advantage of already built infrastructure and skills and allowing us to add additional ounces. And we're expecting them to add about 15,000 more ounces from the original guidance earlier this year. And that's one of the reasons why we're confident in setting new full year 2018 production target.
Canadian Malartic, we also mentioned that as being a major contributor in the quarter. They set several records, 2 of which are quarterly record gold production and also a quarterly record for average daily throughput at the mill, which averaged almost 58,000 tonnes a day. To recall, 4 years ago in 2014, when Manon and Liquefel acquired the asset, the throughput rate was 48,500 tonnes a day. So the team at Canadian Malartic has done an exceptional job steadily each quarter optimizing that mine and taking advantage of efficiencies and turning it into a significant cash flow generator for both Yamana and Agnico. We're on track for the Barnat extension.
The construction work is proceeding as planned. We also continue to do exploration work at both the Odyssey zone and the East Midartic zone. And we're continuing to do that work to determine the extent of the mineralization and then to figure out the appropriate next steps for both Odyssey and East Malartic. At Goldex, the focus, as we said, was on acquiring the permit for Akasaba, which we did in the quarter. But we've also been focused on drilling at depth at Goldex, drilling Goldex, the Deep II and the Deep III zone and also the sub zone.
We've got drill holes in the quarter that suggest that those zones can continue to grow. And we've also been our drilling has also suggested that the currently smaller but higher grade south zone has the potential to expand. And that could be important given the grades, and we haven't done a lot of drilling there in the past. So that's certainly open for expansion. At Meadowbank, as we said, it's the final year of mining.
At Meadowbank, essentially from the bulk pit, which was always a bit lower grade. The production and cost, we expect them to slightly improve in the second half. But essentially, at Meadowbank, we had in Q2 about a 26% decline in grade year over year in the quarter. Our processed were down 15%. All of this is expected in that final year.
Production was down 36,000 ounces. Our unit costs were up about $3.60 per ounce. And so as we said, the offset to that was part of Iran and Meadowbank. So as we look out from as we sort of go back a couple of years, the expectation was that we would have had a significant production gap at Meadowbank between Meadowbank and Andaluit. The team has done an exceptional job squeezing out additional tons at Meadowbank, of extending the life at Meadowbank that we process in Meadowbank stockpile into 2019 to smooth that transition between Meadowbank and Amaruq.
So everything going as we expected. At the Amaruq site, the important milestone there was the receipt of the Type A water license. That's now allowed us to begin the site construction and rollover burden waste stripping. That time line, so the tracking as expected in terms of permits and beginning the construction, Everything is tracking according to the original plan, which is start up in Q3 2019, also tracking close to the budget. What we've been doing as well, waiting for the permit to develop the pit has been extending the ramp.
The ramp's now been advanced to a total advance of 4 78 meters down a vertical depth of about 60 meters. So that ramp is important to do some drilling to determine the extent of the mineralization in both the Whale Tail area and the D zone area. And drilling in the quarter does suggest that we can extend the size of both the Vale Tail and B zones from under them. We've got drilling outside of the known mineral resource, and we're going to continue to follow-up with drilling as we move through the second half of this year. As we said at the start, we continue to make excellent progress at Eliadeen.
The sea lift is underway. The first barge arrived in early July. Surface construction has gone extremely well. Site construction at the end
of June is
74% complete. We've actually finished the mine the small price service building, which includes the mine dry in the offices. That was turned over to the team in the Q2 of 20 18. In the plant, we've actually done substantial work on mechanical and piping and electrical and instrumentation work to the point where eventually we're just waiting for the larger key components to be offloaded off of barges so that we can get them installed. So we're tracking extremely well to start commissioning that plant in the Q1 of 2019, which sets us up nicely for production from the original plan in Q2 of 2019.
We are also well positioned given the advances we've been making in underground development. While we've been building on surface and developing underground, we've also been compiling a stockpile of development ore. And when we combine the development ore that we have stockpiled and continue to stockpile over the next few quarters, combine that with the mining blocks that we expect to extract in the Q4 and in the Q1 of next year, we will have a sizable stockpile available to us when we start up the plant in the Q1 of 2019. And I think what's also got us quite excited besides the progress we've been making on construction and development is exploration. As we mentioned earlier, we had stopped exploration at the Meli Dean deposit over the last 3 years.
Just been focused more on moving the project forward from currently known reserve and resource. And I think what that's telling us is that we expect the deposit to continue to grow. So in the second half, we'll continue to follow-up drilling. We're looking for additional extensions of that, as we said, zone mineralization at depth. The deposit is wide open.
So our job now is to, as we get it up and running, is continue with an active exploration program to determine how big that structure is. In Kisla in Finland, the expansion is progressing on schedule and on budget. We're also focused at Kittila on improving the reserve picture. It's already our largest single reserve base. Our focus on drilling this year is to convert more of that large resource into reserves for the end of the year.
So we continue to encounter mineralization outside of the known envelopes, and we should not only see an increase in reserves but potentially an increase in resource. Moving to the Southern business at Pinos Altos. We're moving towards almost entirely underground mining operation at Pinos Altos. That's associated with the higher cost structure. To help offset that, we're focused on developing a few satellite zones in the gear vicinity of Pinos Altos infrastructure.
At Sintra, we continue to do work also at Cabuero, and we're drilling Reyna de Plata. So these will be 2 or 3 additional satellite deposits that we will bring into the mine plan over the next couple of years. At Crest and Muscilla, same strategy, focus on near surface mineralization in and around the deposit, both at Bravo and Madronio to extend the mine life at Crest and Lascota. And La India, essentially the same strategy as well, looking at areas like El Deolito, which was acquired a couple of years ago, we've been active in exploring in and around the Landia deposit. We'll be adding additional sources of ore, largely to extend the mine life at India.
So they've made good progress there. Just quickly, in summary, as we said at the start, the objective is to stick to the strategy. It works. Just focus on bringing these growth projects in on time and budget, focus on the platform in Nunavut, which we think has the potential to be a major contributor to Agisolegal for many, many years. We know Melerene is going to grow.
But I think importantly, what that platform does combined with the other production bases, including the large production bases and the activity, has put us in a really good position to begin to generate some significant net free cash flow next year because our CapEx is expected to come down from peak levels in 2018. So what I'd like to do, operator, is open up the line and take some questions.
Your first question comes from David Houghton from CIBC. Your line is open.
Hi, good day, Sean. Thank you very much for the update. With Malartic, very good to see the rates exceeding the 55,000 tonnes a day. What should we be thinking about as a sustainable throughput at that operation?
I think the 56,000 is a pretty good number to focus on at this stage going forward.
Okay. And does that alter in any way when Barnett comes on?
Perhaps, yes. The Hohoa system refined as to be potentially softer in burnout, but at least another big thing. But we just hope that opportunity allows perhaps that's a good question in that area to maintain that throughput rate.
Okay. Excellent. Over to LaRonde, the gold grade and particularly the zinc grade was ahead of expectation. What should we be looking at for the remainder of the year, do you think?
Pretty similar to what you saw in the second quarter. We continue to mine some zinc ore from the Atoporchaleza mine, which we will continue throughout the rest of the year. And as we continue to develop the Western Tier grades profile that we've seen in Q2 will pursue.
Okay. And the throughput rate there, should we be thinking similar to what we had in Q2, which is a bit of a dip compared to recent quarters?
Yes. Well, we had a 1 week shutdown. We had a maintenance shutdown and a unplanned sawmill shutdown in the quarter. So I think we should model on Q1 rates.
All right. And last question for me over to Ketela. Still mining and processing below reserve grade of 4.2 grams. What should we be thinking about for the grade there? And when would we expect for the grade to move into the 4 plus kind of category?
Well, we've had some development delays mostly in the rural area. We had some higher grade stopes at 2 or 3 higher grade stopes in a sequence that was supposed to be mined in Q2 and Q3 that have been basically delayed in Q4 and Q1 in next year. I think you should be modeling the guidance rate for the year as started in Q4.
Thank you, Efrain. That's fantastic.
Your next question comes from Stephen Walker from RBC Capital Markets. Your line is open.
Just a follow-up to David's question, excuse me. Zone 5, I know historically when LAC and Barrick were mining, there was a significant positive reconciliation or at times there was good positive reconciliation. Are you seeing evidence of that? I know it's relatively modest production into 2019, but are the grades holding up as expected?
Well, so far the grades have been on target. We've seen some periods where Bright has little bit exceeded expectations. Recovery has certainly exceeded expectation at this stage, but so far pretty well everything is on production models.
Great. Thanks for that. And Sean, just to step back, talking about free cash flow, and I think we've all got that modeled into our forecast 2019, 2020. With respect to returning capital to shareholders, in 2013, there was dividends of $0.88 a share and clearly that declined as gold price declined and you're kind of back up to $0.44 a share. I realize it's a Board decision as to what the return of capital may be in future periods.
But do you have a view where you'd like to target the dividend? And at what point we could kind of get back up to the $0.88 or possibly above that level on an annual basis?
That's clearly gold price dependent. But I think if we look at the history here, 35 years of paying a dividend consistently, even after 2013, not eliminating it, reducing it. But then since then, since it was reduced, we've moved it up each of the last 2 years, albeit small, but we still did move it up sort of signaling our confidence in the plan to grow production and grow cash flow. So it's certainly a focus of the Board, certainly a focus of the team when we're looking at capital allocation. If you ask us, we never really sort of have these specific numerical goals that if we don't sort of get there, we feel that it's been a bust.
But I would say that the one number that we certainly all like to get back up to a beat is that $0.88 a share. So that we keep that in mind as we look at our budgeting, as we look at capital allocation to the pipeline.
And I think that's one
of the things about the pipeline which ties in a bit to this question is that we're spending a lot of time prioritizing the pipeline. We do have the permit at Akasaba. Doesn't mean we're going to rush and start the building because we're doing our budget, and we have an envelope in mind on capital that we want to spend for next year and the year after. So that's got to fit in and the dividend would sort of play into that, the concept of returning to shareholders would play into that discussion. So we're hoping that it can trend up.
We feel confident it can based on where the business is headed, but the gold price would be a determinant of that.
Thank you very much for that, Sean. That's very helpful.
Your next question comes from Terry MacRury from Canaccord Genuity. Your line is open.
Hi, good morning. Sean, you mentioned some of the exploration that's happening underground at Amaruq. I'm just wondering if you could touch on exploration from an open pit perspective. Is there any confidence that you'd be able to increase reserves or resources from an open pit view this year?
Yes. It's Anik speaking. And we already have rigs on the site, 8 rigs. And we have all good results on the western part of
the zone.
And depending on the design, what is the economy, could be new ounces coming from that deposit could increase in the future. But we have good number right now.
Okay, great. And then just wondering on the workforce as Meadowbank is going to wind down and Amuric ramps up. Is it more or less the same workforce? Are there changes going to be happening there?
Well, the workforce that is at Meadowbank will essentially be the same, although there has been some transfer from Meadowbank to Medellin. So that's proceeding as planned. On the Medellin recruitment side, I think we're following the plan as far as staffing up both the mill and the pit and the underground mine operation stopped and service. And so far, we're tracking very well and getting more crew on foot.
And you also mentioned the stockpile. How big a stockpile do you think you'd have before you start up the middle there
in terms of months of production or weeks?
Well, at this stage, by the end of January, we could be in a position to have about 200,000 tons of high grade stockpile in service.
What sort of grade?
Around 7 or 8 tons.
Okay, great. Thank you very much.
There are no further questions at this time. I turn the call back over to Mr. Boyd.
Thank you, operator, and thank you, everyone, for joining us on the conference call. We would like to remind you that we do have a site visit planned to Neliadine September 6. That's sort of one full day. Leave early in the morning from Toronto, return that evening. So that's an opportune time to come up and see the progress that we're making and will make through the summer as we offload the barges and get some of the key components installed in the processing facility and the power plant.
So thanks again. If there is an interest, contact Ryan or Ria or Melissa, and we'd be happy to have you join us. Thanks again.