Agnico-Eagle Mines Limited: FY2009 Form 20-F Summary
Business context and reporting period
Agnico-Eagle is a Canadian-based international gold producer with operations in Canada, Finland and Mexico and a development-stage operation in Nunavut. The filing covers the fiscal year ended December 31, 2009, with quarterly data for the fourth quarter and full year. Financial statements are presented in U.S. dollars under U.S. GAAP.
Goldex operated for a full year, while Kittila and Lapa achieved commercial production in May 2009 and Pinos Altos in November 2009. Meadowbank was under construction and reached commercial production in March 2010.
Key financial and operating metrics
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Mining revenue | $613.8 million | $368.9 million | +66% |
| Income before taxes | $108.0 million | $96.0 million | +13% |
| Net income | $86.5 million | $73.2 million | +18% |
| Basic EPS | $0.55 | $0.51 | +8% |
| Operating cash flow | $115.1 million | $121.2 million | -5% |
| Capital expenditures | $657.2 million | $908.9 million | -28% |
| Cash, short-term investments and restricted cash | $163.6 million | $99.4 million | +65% |
| Long-term bank debt | $715.0 million | $200.0 million | +258% |
Gold production increased 78% to 492,972 ounces from 276,762 ounces. Realized gold price rose to $1,024 per ounce from $879. Precious metals represented 87% of mining revenue, compared with 78% in 2008.
Production costs increased to $306.3 million from $186.9 million as new mines entered production. Reported total cash costs increased to $347 per ounce from $162 per ounce in 2008. Total cash costs and minesite costs per tonne are non-U.S. GAAP measures and should be evaluated with the related reconciliations.
Income before taxes benefited from stronger gold production and prices but was reduced by a $39.8 million foreign currency translation loss, compared with a $77.7 million gain in 2008. General and administrative expense increased to $63.7 million, including $27.7 million of stock-based compensation. Amortization increased to $72.5 million from $36.1 million.
Material changes versus the prior comparable period
- Gold production expanded materially following the ramp-up of Goldex and the start-up of Kittila, Lapa and Pinos Altos.
- Revenue growth was primarily attributable to increased gold production and a 16% increase in realized gold prices; silver and zinc production declined.
- Operating cash flow declined modestly because higher operating profits were offset by increased receivables and inventories associated with the new mines.
- Investing cash use declined to $587.6 million from $917.5 million, while financing cash flow remained approximately $559.8 million and was driven primarily by net bank debt drawdowns of $515 million.
- Mining properties, plant and mine development increased to $3.58 billion from $3.00 billion. Total assets increased to $4.25 billion from $3.38 billion.
- Gold reserves increased 2% to 18.4 million contained ounces, including replacement of the 492,972 ounces mined. Kittila reserves increased approximately 25%, while Lapa reserves declined by approximately 120,000 ounces after mining and reserve revisions.
Liquidity, debt and commitments
At December 31, 2009, the Company had drawn $715.0 million under its $900 million unsecured revolving credit facilities and had approximately $162.5 million available, after considering letters of credit. Financial covenants were met at year-end. Reclamation provision and other liabilities totaled $96.3 million.
Contractual obligations totaled approximately $979.1 million, including $715.0 million of credit-facility repayments, $134.9 million of undiscounted reclamation obligations, $61.6 million of purchase commitments and $58.2 million of lease obligations. Outstanding letters of credit for environmental, restoration and other purposes totaled $85.3 million.
The Company expected 2010 capital expenditures of approximately $478 million, mandatory commitments of $55 million and estimated operating cash flow of $518 million. Management stated that available cash, working capital, operating cash flow and undrawn credit capacity were sufficient to fund 2010 commitments, excluding the later proposed notes offering.
Guidance, outlook and unusual items
- 2010 gold production was estimated at 1,057,200 ounces, more than double 2009 production, with total cash costs of approximately $399 per ounce.
- Expected 2010 production included approximately 300,000 ounces from Meadowbank, 180,000 from LaRonde, 164,000 from Goldex, 147,100 from Kittila, 115,000 from Lapa and 150,000 from Pinos Altos.
- Management expected amortization of approximately $164 million, interest expense of approximately $30 million and an effective tax rate of approximately 40% in 2010.
- Commercial production at the Creston Mascota deposit was expected in early 2011, with anticipated production of approximately 50,000 ounces of gold annually over a five-year mine life.
- On March 19, 2010, the Company announced non-binding commitments for $600 million of guaranteed senior unsecured notes with an expected weighted average yield of 6.59%; proceeds were intended to repay amounts under the revolving credit facilities. Closing was expected in April 2010.
- The 2009 effective tax rate was reduced by a $21.0 million deferred tax benefit related to the Canadian U.S.-dollar functional-currency election and a $13.5 million net tax benefit related to the 2008 flow-through share offering.
- There was no available-for-sale securities impairment in 2009, compared with a $74.8 million write-down in 2008. The Company recorded a $10.1 million gain on securities sales in 2009, compared with $25.6 million in 2008.
Principal risks and contingencies
- Results are highly sensitive to gold and byproduct metal prices, foreign exchange rates, energy, labor and other input costs.
- LaRonde and Goldex generated approximately 71% of 2009 gold production and approximately 90% of operating margin, creating concentration risk while newer mines ramped up.
- Production forecasts depend on successful commissioning and ramp-up at Meadowbank, Kittila, Lapa and Pinos Altos and completion of the LaRonde extension.
- Kittila experienced autoclave availability and recovery issues; Pinos Altos was constrained by clay minerals and tailings filtration capacity; Lapa experienced dilution and lower-than-expected grades.
- Meadowbank faces logistical, weather, supply-chain and personnel risks because of its remote Arctic location and limited annual shipping season.
- Mining operations are exposed to geological, geotechnical, seismic, equipment, environmental, permitting, labor, political and regulatory risks. Mineral reserve and resource estimates may not translate into economically recoverable ounces.
- Debt facilities contain financial covenants, restrictions on additional indebtedness and limitations on dividends and asset dispositions. A covenant breach could restrict borrowing or accelerate repayment.
- Reclamation and closure obligations are estimated liabilities subject to changes in mine plans, environmental requirements, water treatment needs and regulatory conditions.
- The SEC does not recognize Canadian “measured,” “indicated” or “inferred” mineral resources, and reported reserve and resource estimates may not be comparable with those of U.S. issuers.
Investor verification checklist
- Verify the reconciliation and comparability of total cash costs per ounce and minesite costs per tonne to U.S. GAAP production costs.
- Assess whether 2010 production and cost guidance was achieved, particularly Meadowbank commissioning and ramp-up at Kittila, Lapa and Pinos Altos.
- Review the final closing, pricing, covenants and use of proceeds of the proposed $600 million senior notes offering.
- Test liquidity against the $715 million credit-facility balance, maturities, letters of credit, reclamation obligations and the planned capital program.
- Reassess reserve sensitivity to gold and byproduct prices, exchange rates, recovery rates, dilution and operating-cost assumptions.
- Review mine-specific operating issues, including Kittila autoclave recovery, Pinos Altos filtration capacity, Lapa dilution and the technical risks of the deep LaRonde extension.
- Consider the effect of the unusually low 2009 tax rate and the expected increase to approximately 40% in 2010.