Okay, hello everyone. Next we have another huge gold producer, the one with a little bit more geographical concentration than the last two. Agnico Eagle is by far the largest gold producer in Canada and in each of the Canadian provinces and territories in which it operates. Agnico is also the largest gold producer in Finland. While not the largest, also a very significant producer in Australia, and is a very important contributor to Australia's national gold production. This importance, of course, comes with many benefits. With me here today from Agnico to speak about these and many other things is Executive Vice President, Finance, and former Chief Financial Officer, Dave Smith. Dave, welcome to have you here in Barcelona. It's really nice to see you.
Thank you very much, Lawson. Thanks for having us.
I wanted to start off and get your view on the gold price. It's had a great start to the year. Where do you think it goes from here?
Yeah. I, I just listened to Mark Bristow talk about it, and I think he nailed it. Though I disagree a little bit. He thought that it doesn't have a lot to do with rates. I think in the near term, it probably does have a lot to do with rates. Mark also talked about the longer term and the money printing. One thing I would add to what Mark said is that I think COVID taught us that there's not only the ability of central banks to print money, but there's now actually the expectation that they will print money to solve all of our problems. I'm just a poor mining engineer, so I have to keep everything in simple terms. I think of it in terms of supply and demand.
If there's an infinite supply of something like paper money, then I guess the price heads towards zero. That makes something like gold, other hard assets too, worth much, much more because they're of course priced in that paper money. I think by the end of the year, we probably see an even stronger gold price than we have today. Then I think over the long term, it just bounces around but continues to head higher as it always has.
Bullish. There seems to be a theme this.
Yeah. Surprise, surprise, the gold mining companies are bullish.
Well, it's not always the case. We've had conferences where the gold miners are bearish on the gold price. Those aren't fun.
I never was. Always bullish.
I also wanted to get your thoughts on M&A. Obviously, you know, Agnico's last year completed a huge M&A transaction. You've done another this year, the partnership with Teck on San Nicolás. I mean, it seems you guys are sort of always doing some sort of M&A.
Mm-hmm.
You know, going forward, can we expect more of the same? And what type of M&A? Are we talking big transformational M&A like the Kirkland deal or more like the San Nicolás transaction with Teck?
Well, it's hard to say. As the former CFO of Agnico, I always joked that it was impossible to budget for M&A. I think it's your job to prepare the balance sheet to make sure that you can handle whatever gets dreamed up. Typically, Agnico's gone small scale, early stage. I think there are periods where buy is smarter than build, and I think the last couple years that was actually the case due to the inflation run up. Going forward, I think we have the ability to do anything. We don't have to do anything because we have a strong pipeline that will keep us busy for the next 10+ years. That's a luxurious position to be in, and of course, our balance sheet is pristine to support that as well.
The one thing I can say for certain about M&A is that it will be effectively in our backyard. Unlike Barrick and Newmont, we are not a global gold mining company. About 80% of our production comes from Canada. We like Canada. I think the importance of Canada is continuing to grow as people look at geopolitical risk around the world. We've got a great opportunity to, you know, keep growing within Canada, within our own projects, but also it's possible we'll do more M&A.
You touched on something really interesting there, which is, it was better to buy than build as a result of cost inflation. That actually worked out very well for Agnico. You guys were one of the few companies we cover that finished 2022 within guidance. I think, your acquisition of Kirkland Lake and the synergies that came along with that helped quite a lot. Just sitting here today, what is your outlook for cost inflation? Are you starting to see some pressures alleviating? On the other hand, I don't think all the cost pressures are alleviating. Where are you still seeing some of those pressures, and where do you expect things will go throughout the rest of this year?
Yeah. For example, I think cement is still elevated. Steel is starting to come off. Things like that. One of the great opportunities that we've had and we took advantage of is the weak operating currencies. We don't operate in the U.S. 80% of our gold production's in Canada, as I said, and the Canadian dollar is extremely weak. That is a huge benefit to us. We often get asked about fuel. Fuel's come down as well, so that's helpful. Our total exposure to diesel is only about $400 million per year. Not a big number. Contrast that to the Canadian dollar exposure that we have, which is about $4 billion per year through OpEx and CapEx.
A $0.01 here and there on the Canadian dollar, actually dwarfs most other inputs to the business other than gold. As a result, we had a very good first quarter. Gold production was strong, cost performance was strong. Versus our budget, we were about $30 per ounce lower than we expected to be, and about half of that impact was the weak operating currency, specifically the Canadian dollar. There's, there's a lot of components, of course. Inflation's not gone, but I would subscribe to the thesis that it's probably peaked.
Just getting back to M&A and asset transactions, are there some assets in the portfolio that could be potential divestiture candidates? You know, the question that keeps coming up for context is whether or not Australia is a core operating base for Agnico, particularly given, like, how successful you've been concentrating in Canada, also Finland, you're less concentrated in Australia.
It's another question that we're getting constantly. It's quite logical. As you say, Australia's kind of far away over there, not close to Canada. We've only owned it for a year, though it does have a declining grade profile in the coming years, coming from that super high grade of the Swan Zone. It's forecast to go back to normal, to 5 g- 6 g ultimately, which is what it always was as a grade. Something with a declining grade profile, therefore an increasing cost profile, and it's a one-off on a different continent, I think that's why, logically, people are coming to that. We don't know. I've made up odds that say I think it's probably 50/50 whether we sell it or keep it and use it as a base to expand in Australia.
Australia's a great mining country, and the team we have in Australia is absolutely excellent. You could go either way, frankly.
What's going to determine that?
Drilling, frankly. If there's hints of Swan Zone 2.0 super high grade, I think that's something we'd like to hold on. We're probably a year or two away from really deciding. You know, if somebody comes in and knocks our socks off with a tremendous offer for it, I guess we would listen.
Is there's quite a bit of drilling planned for this year.
Right.
A few 1,000 m, a few 100 m?
Yeah. I don't know the meters, but, there is loads of drilling going on because, of course, when you have that type of super high grade, it, really does change everything. There are, there are sniffs. A lot of the drill holes I see are, you know, ounce, 2 ounce per ton type stuff, which is absolutely fantastic. There's no continuity yet like we had in that Swan Zone.
Gotcha. That's very helpful context. A question that I sort of asked Barrick about, which was just labor availability, and it's more on the skilled labor front and at both contractors and within Agnico. Like, you've alluded to some of the advantages you guys have because of your dominant position in Canada. Just what are you seeing in terms of finding skilled labor, both on the contractor side and hiring directly into Agnico?
Yeah. We're not, we're not immune to any labor pressures, of course. I do understand that we, relative to our peer group, use less contractors and do more ourselves. Because we have literally thousands upon thousands of employees within that Abitibi Gold Belt in Ontario and Quebec, and it's non-union, we can move people around. A good example of that is, for example, shaft sinking. We're sinking a shaft at the Odyssey project at Malartic right now. We're using people that just finished sinking the shaft in Finland, bring them over to help on the new shaft. We're using people that just finished a shaft at Macassa. I think we've been a little bit better off than some because we do most of our construction ourselves.
Mm-hmm.
Much less reliance on contractors.
Yeah. That's a consistent theme.
Mm-hmm.
I wanted to canvas the audience to see if there's any questions and do it sooner rather than later. I'm not seeing any questions right now, so what I wanted to do is actually touch on the balance sheet. I mean, congratulations on completing the acquisition of the other 50% of Canadian Malartic. It's been a great asset for Agnico. You now have full control of it. On the balance sheet side, you put $1 billion on the balance sheet in order to do so. The total debt now stands at about $2.3 billion. I believe your net debt position jumped to $1.6 billion. It's a little higher than Agnico's had in the past.
With that as context, I mean, does debt repayment become a capital allocation priority, or are you just comfortable with this current level of debt?
Absolutely comfortable with the current level because while it is a lot of gross debt, the company is much, much larger than it used to be. Our current forecast for net debt to EBITDA for year-end, for example, is about 0.24, so extremely conservative balance sheet. To quote Sean Boyd, our Executive Chairman, one of the reasons we've been around for 66 years is because we've never taken on too much financial risk, and we won't. That being said, debt repayment is a priority because I would like to make that balance sheet ultra-conservative again so I can use it as a tool for the next M&A. A big part of our job, the way we see it, is to create per share value. The fewer shares you have, the easier it is to create that per share value.
I think using some debt does make a lot of sense, frankly, as long as you can pay it back very quickly. To that point, out of the $1 billion that we drew on the lines for the other half of Malartic, we've already paid back $200 million. We did two term loans totaling $600 million to increase the overall liquidity of the company, that leaves about $200 million, exactly $200 million drawn on the lines at the moment. We'll have that paid off by the end of the year at these gold prices. Yeah, get that balance sheet ready for whatever's next by paying it down.
What would that mean for capital return and the dividend and potential increase in the dividend? Does that sort of take a back seat while you're focused on the debt or?
No, not at all. We have the capacity to continue paying that dividend at these margins, that's sustainable and we don't have an equation on the dividend. It's literally just a line item in the budget. In fact, when we talk about generating net free cash flow at Agnico, we're actually talking about it after the dividend. It is literally just an assumption in the budget that we'll continue to pay the same rate. Our policy is to pay the same rate until we raise it. Now, it has gone down in the past. You know, if gold falls off a cliff like it did in 2013, we did have to respond with a reduction in the dividend. We are a committed dividend payer, paid one for 39 consecutive years.
We've added to that, we just renewed our NCIB, the share buyback program. It's authorized up to another $500 million. The total potential return of capital this year through the dividend, which is about $800 million, combine that with the $500 million, so $1.3 billion potential return of capital.
Okay, the way you phrased that what makes me wanna ask the question, do you anticipate being active on the $500 million?
It is meant to be opportunistic.
Okay.
I guess we'll see. We only last year, we only did $70 million on it. This year we've only done $5 million on it, so it's not an urgent thing. I like it philosophically because it does help speak to that per share value part.
Okay. I wanted to come back to Odyssey and Malartic and the assets that you've now consolidated and own 100% of. We're expecting an update from you guys on Canadian Malartic, including Odyssey, sometime in June with an internal study, exploration update, a new exploration plan going forward. Can you give us a flavor of what we might get there?
We're continuing to drill there, and that deposit just continues to grow and grow and grow. Very important to us. Detour and Malartic are far and away the two largest gold mines in Canada. Some of the largest gold mines in the world, in fact, and both of them are continuing to grow. The update will be on the construction. We're about 50% complete on the construction of the Odyssey Project. Shaft sinking is underway. We've already blasted the first stope underground at Odyssey. I think it's about 50,000 ounces production this year and 80,000 ounces next year. It's already producing, already ramping up, and we're advancing quickly on a deposit that just continues to grow.
In the case of Detour and Malartic, I wouldn't be surprised if both of those assets are operating 50 years from now, just the way they continue to grow. Sorry, 70 years.
That's amazing.
Yeah.
Dave, thanks for being here. Everybody, please join me.
You're welcome.
Thanking Dave.