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Made I n Ca nada Gold Mines - J une 12, 2012
Precious Metals Industry Earnings Outlook
Earnings per Share
12-18 Month Annual Earnings per Share Quarterly Earnings per Share
Price Target Rating Year One Year Two Year Three Year One Year Two
Company Ticker Price Prior Current Prior Curr FYE Year Prior Current Prior Current Prior Current Qtr Prior Current Prior Current
Agnico-Eagle Mines Lim ited (2f, 2g,
AEM US$41.25 -- US$42.00 -- SU Dec 2011 -- US$1.75A -- US$1.31E -- US$2.45E Q2-11 -- US$0.42A -- US$0.24E
7)
AuRic o Gold Inc. (2g) AUQ 8.84 -- 14.50 -- SO Dec 2011 -- US$0.68A -- US$0.76E -- US$1.41E Q2-11 -- US$0.17A -- US$0.15E
Kirkland Lake Gold Inc. (2g) KGI 12.68 24.00 22.00 -- SO Apr 2011 -- 0.29A -- 0.51E 1.57E 1.22E Q4-11 -- 0.06A -- 0.13E
Lake Shore Gold Corp. (2g) LSG 1.14 -- 2.00 -- SP Dec 2011 -- -0.03A -- 0.04E -- 0.16E Q2-11 -- -0.02A -- 0.00E
Osisko Mining Corporation (2g) OSK 8.45 15.50 13.50 -- SO Dec 2011 -- 0.04A 0.70E 0.43E 1.28E 1.22E Q2-11 -- -0.04A 0.06E 0.04E
Queenston Mining Inc. (2g) QMI 4.02 -- 7.75 -- SP Dec 2011 -- -0.11A -- -0.07E -- -0.04E Q1-11 -- -0.07A -- -0.03E
Source: Company notes and CIBC World Markets Inc.
All figures in Canadian dollars, unless otherwis e stated.
Important disclosure footnotes that correspond to the footnotes in this table may be found in the "Key to Important Disclosure Footnotes" section of this report.
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Made I n Ca nada Gold Mines - J une 12, 2012
Precious Metals Industry Earnings Outlook (Continued)
Cash Flow per Share
12-18 Month Annual Cash Flow per Share Quarterly Cash Flow per Share
Price Target Rating Year One Year Two Year Three Year One Year Two
Company Ticker Price Prior Current Prior Curr FYE Year Prior Current Prior Current Prior Current Qtr Prior Current Prior Current
Agnico-Eagle Mines Lim ited (2f, 2g,
AEM US$41.25 -- US$42.00 -- SU Dec 2011 -- US$4.07A -- US$3.13E -- US$4.46E Q2-11 -- US$0.95A -- US$0.64E
7)
AuRic o Gold Inc. (2g) AUQ 8.84 -- 14.50 -- SO Dec 2011 -- US$1.10A -- US$0.97E -- US$1.74E Q2-11 -- US$0.26A -- US$0.21E
Kirkland Lake Gold Inc. (2g) KGI 12.68 24.00 22.00 -- SO Apr 2011 -- 0.39A -- 0.89E 2.12E 1.81E Q4-11 -- 0.09A -- 0.24E
Lake Shore Gold Corp. (2g) LSG 1.14 -- 2.00 -- SP Dec 2011 -- 0.03A -- 0.14E -- 0.32E Q2-11 -- 0.00A -- 0.00E
Osisko Mining Corporation (2g) OSK 8.45 15.50 13.50 -- SO Dec 2011 -- 0.15A 1.22E 0.79E 1.84E 1.76E Q2-11 -- -0.02A 0.11E 0.08E
Queenston Mining Inc. (2g) QMI 4.02 -- 7.75 -- SP Dec 2011 -- -0.06A -- -0.07E -- -0.04E Q1-11 -- -0.01A -- -0.02E
Source: Company notes and CIBC World Markets Inc.
All figures in Canadian dollars, unless otherwis e stated.
Important disclosure footnotes that correspond to the footnotes in this table may be found in the "Key to Important Disclosure Footnotes" section of this report.
4. Ma de I n Ca nada Gold Mines - J une 12, 2012
Made In Canada Mine Tour
From June 4 to June 8, 2012, CIBC organized a mine tour to visit several mining
camps in the Abitibi region. We visited Agnico-Eagle’s (AEM-SU) LaRonde mine,
Osisko’s (OSK-SO) Canadian Malartic mine, Kirkland Lake Gold’s (KGI-SO)
Macassa mine, Queenston’s (QMI-SP) Kirkland Lake area projects, Aurico’s
(AUQ-SO) Young-Davidson mine, and Lake Shore Gold’s Bell Creek Mill and
Timmins West Mine. We show below a map of our tour.
Exhibit 1. CIBC Short Bus Tour
Source: Company reports and CIB C World Markets I nc.
Agnico-Eagle – LaRonde, The Aging Cornerstone
As Agnico Eagle has progressed from a single asset company to a multi-national,
multi-asset gold producer, LaRonde has been relied upon for cash flow to fund
Agnico-Eagle’s growth. The recent shaft extension has allowed access to higher
grade ores and deeper reserves so that the mine will continue to p roduce for
many years to come. Our visit to the mine encompassed a ride in the new
internal shaft and a visit to the mill. General impressions were of a well run, first
world operation. Much of the discussion revolved around the likelihood of
LaRonde’s ability to beat guidance this year, which we explore in more detail
below.
Agnico-Eagle’s flagship LaRonde mine has undergone several upgrades over its
24-year operating history, including the expansion of throughput capacity to
7,200 tonnes per day (tpd) completed in 2002. Through early 2010, the mine
performed to nameplate capacity, after which throughput levels persisted lower.
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The 7,087 tpd achieved during Q1/12 may signal a rebound to 7,000 tpd plus
levels. We currently forecast production of 155,000 ounces on average grades
of 2.3 g/t.
Exhibit 2. LaRonde Gold Production And Cash Cost
180 1,200
160
1,000
140
Production (000 oz)
120 800
Cash Cost ($/oz)
100
600
80
60 400
40
200
20
0 0
2011-Q1 2011-Q2 2011-Q3 2011-Q4 2012-Q1 2012E-FY
Source: Company reports and CIB C World Markets I nc.
Over the past three years, the company has invested in a 2.8 km internal shaft
for access to the deeper ore of the LaRonde Extension, which represents the
next avenue of growth. With commercial production up this shaft declared in
Q4/11, this year’s production will benefit from grades 30-35% higher.
The company has guided to full-year production of 150,000 to 165,000 ounces,
on approximately 60% ore volume contribution from LaRonde Deep, with overall
throughput expected at sub-7,000 tpd over this transition period. We think that
the top end of production guidance is achievable if normal throughput levels can
be maintained at average grades of 2.2 g/t or higher.
Exhibit 3. LaRonde Mill Throughput And Average Gold Grade
7,200 2.5
7,100
Mill Throughput (tonnes per day)
7,000 2.0
6,900
Grade (g/t Au)
6,800 1.5
6,700
6,600 1.0
6,500
6,400 0.5
6,300
6,200 0.0
2011-Q1 2011-Q2 2011-Q3 2011-Q4 2012-Q1 2012E-FY
Source: Company reports and CIB C World Markets I nc.
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Price Target Calculation
Our $42 price target is derived from using a cash flow multiple of 9.5x our 2013
estimate of $4.46/share based on a gold price of $2,000/oz. The 9.5x cash flow
multiple represents our expectations that AEM’s valuation should compress
slightly from 11.2x 2012 CFPS currently, but hold at premium levels relative to
average group multiples. We felt that AEM’s ability to deliver on its recently
revised production outlook would dictate the extent to which the company could
regain the premium multiple it once enjoyed, and think the solid Q1 results are
likely an initial building block towards restoring investor confidence. The 9.5x
target multiple would see AEM trade at a discount to higher growth Goldcorp
(GG-SO), given its flatter production profile, but still at a premium to Newmont
(NEM-SP) and Barrick (ABX-SP). We think many investors believe the worst is
over in terms of negative surprises, and we would tend to agree. At some point,
however, we still think relative valuation should still come in to play for
investors, tempering upside potential for the stock.
Our price target implies a P/NAV multiple of 2.0x our $21.22/share NAV estimate
using a $1,500/oz. gold price and 5% discount rate. This NAV multiple represents
the highest multiple afforded any of our coverage universe due to the low political
risk associated with the jurisdictions in which AEM operates. There is some
potential for this multiple to contract, particularly if production falters.
Key Risks To Price Target
The greatest risk to our price target is our forecast for bullion prices to average
$2,000/oz. in 2013. Our price target is based on mine operations continuing
without interruptions. Mining is an inherently risky business, where technical,
political, and human issues can influence operations. In some cases, these can
be significant, such as ground condition failure, changes in foreign regulations,
or labor unrest. For AEM, Canadian dollar exchange rates p lay a significant role
in the cost structure of the operations, as do by-product base metals credits.
Movements in these elements could affect our price target for the shares .
Osisko Mining Corporation – Fighting Fires
Our visit to the Canadian Malartic site was well timed following the re -
commencement of full scale operations within the previous week following the
mill fire that temporarily disabled the #4 cyclone bank. We had expected to see
operations running at full steam and we were particularly looking forward to
seeing the first secondary crusher in operation. However, a tear in the conveyor
belt had temporarily stopped the first secondary crusher.
We found that it is one thing to hear about a mill construction through press
releases and analyst calls, but it is another to be in the mill and listen to
operations staff discuss the challenges of construction. The number of times we
heard “Largest in the world…..”, “Serial number 001….”, “Never been used
commercially before……”, was somewhat disturbing. While we believe that
eventually all the commissioning issues will be ironed out, it will take longer than
our (and management’s) initial estimates. The installation of the second
secondary crusher has been delayed until later in July, and management does
not expect to release updated guidance until after this second seconda ry crusher
has been installed. The second pebble crusher installa tion will follow in
September. For now, we are revising our 2012 production estimates lower, but
we recognize the capability for a “barn-burner” quarter at some point in the near
future as higher grade ore (from near the old workings) can be fed to the mill.
We had originally modeled this “barn-burner” in Q4/12, but we are now adopting
a more cautious approach. Exhibit 4 illustrates the trajectory of production
estimates over the past eight months.
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Exhibit 4. The Trajectory Of CIBC Estimates Over The Past Eight Months
Q1/12* Q2/12 Q3/12 Q4/12 2012
OSK original est. 33,165 50,000 60,000 60,000 50,842
Ore Milled
CIBC est May/12 32,582 26,374 48,913 53,804 40,418
(tonnes per day)
CIBC est June/12 32,582 26,374 39,130 43,478 35,391
OSK original est. 1.28 1.35 1.26 1.28 1.29
Head Grade (g/t
CIBC est May/12 1.05 1.10 1.20 1.35 1.20
Au)
CIBC est June/12 1.05 1.00 1.03 1.10 1.05
OSK original est. 88% 85% 85% 85% 86%
Recovery CIBC est May/12 91% 89% 87% 86% 88%
CIBC est June/12 91% 89% 87% 86% 88%
OSK original est. 109,112 168,532 189,810 193,721 661,175
Gold produced
CIBC est May/12 91,178 75,541 151,044 184,769 502,532
(oz)
CIBC est June/12 91,178 68,674 103,717 121,658 385,227
* - CIBC numbers represent actual Q1/12 numbers achieved
Source: Company reports and CIB C World Markets I nc.
It is very important to note that, with the exception of higher power costs as
more effort is brought to bear on the ore, the Canadian Malartic depos it remains
structurally sound. Recoveries have been proven, and the block model is
reconciling well with current mine experience. It is our belief that a few years
from now, Canadian Malartic will be producing >500 kozpa consistently and
start-up difficulties will disappear into the annals of Canadian mining lore. We
are enthused by the long term prospects for Canadian Malartic, but we believe
that there is still some downside risk to the stock, particularly when Q2/12
production figures are announced. Positive production guidance (particularly if
higher grade ore is fed to the mill in 2013) could provide an updraft to the stock,
but this will only happen after the second secondary crusher is brought on-line,
and this will likely only happen after Q2/12 results are published.
During the tour, we also had the opportunity to watch a blast. Discussions while
waiting for the blast reinforced the challenges of operating near a town, even a
mining-friendly town like Malartic. There is a very limited window for blasting to
ensure that the nearby population is not unduly disturbed. After waiting for
confirmation that the wind was coming from the right direction and that all
personnel were clear of the pit, 650,000 tonnes were blasted, and a slight
murmur was about the only sound that we heard in the administration building.
In all, we would assert that Osisko has done a good job in balancing the needs
of the local community (where one in three households contain a mine
employee) and the production of gold.
In addition to our lowered estimates for 2012, we are slightly more conservative
in 2013 with estimated production now at 600K oz. vs. our previous e stimate of
625K oz. which ultimately reduces our cash flow forecast. Furthermore, we are
reducing our target cash flow multiple from 8.5x to 8x to account for increased
downside risks from the continued delay in stabilizing operations at Malartic. We
are reducing our price target from C$15.50 to C$13.50 but retaining our Sector
Outperformer rating.
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Exhibit 5. The World's Biggest Loader At Canadian Malartic
Source: CIB C W orld Markets Inc.
Price Target Calculation
Our $13.50 price target (down from $15.50) is derived using a P/CF
methodology. A multiple of 8x is applied to our 2013 CFPS estimate of C$1.76
and then net debt of $0.51 is subtracted. On a P/NAV basis, a $13.50 price
target represents a multiple of 1.3x the operating assets less net debt. The cash
flow multiple reflects our expectation of a pure gold multiple for a sizeable
single-asset operation in a mining-friendly jurisdiction, offset by the risks around
the ongoing challenges with the start-up of Malartic. We continue to rate Osisko
Sector Outperformer.
Key Risks To Price Target
The greatest risk to our price target is that gold bullion prices do not average
our forecast of US$2,000/oz. for 2013. Our price target is based on mine
operations continuing without interruptions. Mining is an inherently risky
business, where technical, political, and human issues can influence operations.
In some cases, these can be significant, such as ground condition failure,
changes in foreign regulations or labor unrest.
Kirkland Lake Gold – Upgrading Infrastructure
We visited the Macassa mine for Kirkland Lake Gold, spending a significant
amount of time underground while taking a quicker tour of the mill at surface.
The one factor that sets Macassa apart from the other assets visited on the trip
is that the expansion at Macassa revolves extensively around the upgrade of
older infrastructure at the mine, as opposed to the strategy taken by other
companies that use a more capital intensive approach by constructing
significantly more new infrastructure. A key part of the upgrade of older
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infrastructure at Macassa is the increase in hoisting capacity. The mine is
currently skipping ore at approximately 900 tpd, while the company’s goal is to
eventually increase the hoisting capacity to 3,000 tpd by May 2013 (or the start
of F2014), to support an expansion of the mill capacity to 2,200 tpd also by May
2013.
Kirkland Lake Gold is aiming to increase production to between 180,000 -
200,000 ounces in F2013 (or year beginning May 2012), from ~100,000 ounces
of production in F2012. The increase will be dependent on the company meeting
several deliverables, including a significant increase in the hoisting capacity by
August 2012. From our discussions with management, since the installation of
the Maryanne Hoist, several issues have had to be further investigated, including
prevention of overheating of the sizable AC hoist.
Another key deliverable, in part due to older ventilation infrastructure at the
mine, is the switch-over to battery-powered trucks and mining equipment
underground (from diesel-powered equipment), which will help lessen the load
on the older ventilation system, which can be costly if an upgrade is needed.
Given that Macassa will be one of the first mines to fully utilize battery-powered
equipment underground, we could expect some teething issues to surface. While
on site, we were informed that the first battery-powered truck should be arriving
shortly.
Another key discussion point during the trip wa s the cut-off grade used for the
reserve/resource update released at the end of May 2012. Noticeably, the cut-
off grade for reserves had been revised from 0.15 oz/t (from the previous 0.30
oz/t) resulting in a accompanying decrease in the reserve/resource grade of the
Macassa/South Mine Complex (SMC). For example, the reserve grade at the
SMC decreases from 0.74 oz/t in C2010 to 0.64 oz/t in C2011. There are a
number of reasons for the decrease in the cut-off grade, to better reflect the
economics of the deposit given a higher gold price assumption. All in all, we are
not concerned about the slight decrease in overall grade: 1) the reserve grade
continues to support the long term goal of achieving a head grade at the mill of
0.30-0.40 oz/t; 2) Macassa/SMC continues to be one of the highest grade gold
deposits in Canada; 3) The inclusion of some of the lower grade mineralization
corresponds to the expected decrease in cost per tonne as throughput increases.
We show Kirkland Lake’s gold production and total cash cost sensitivity to
throughput and grade below.
Exhibit 6. Gold Production (In Thousands Of Ounces) Sensitivity To
Throughput And Grade
Throughput (tpd)
170.00 1,000 1,200 1,400 1,600
0.34 119 143 167 191
Grade (g/t)
0.36 126 152 177 202
0.38 133 160 187 213
0.40 140 168 196 225
Source: CIB C W orld Markets Inc.
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Exhibit 7. Total Cash Cost (US$ Per Ounce ) Sensitivity To Throughput
And Grade
Throughput (tpd)
796.62 1,000 1,200 1,400 1,600
0.34 $979 $918 $857 $795
Grade (g/t)
0.36 $925 $867 $809 $751
0.38 $876 $821 $767 $712
0.40 $832 $780 $728 $676
Source: CIB C W orld Markets Inc.
Given the smaller stopes, and the relatively sensitive ground conditions in areas
of the mine, Kirkland Lake will need to maintain a sizable and skilled work force
to support its expansion plans. As of April 30, 2012, Kirkland Lake had a work
force of 906 employees, with the goal of increasing that number to >1,200 to
support the expansion. The high grade nature of the deposit allows the company
to pay its employees competitively, and indeed in our conversations with miners
along the Abitibi, we gather that in some cases Kirkland Lake could be paying as
much as a ~20% premium compared to competitors. The miners are needed to
support a planned doubling of the active working faces from the current level of
between 20 and 30.
Price Target Calculation
We have lowered our price target to $22 (from $24) after changes to our
financial assumptions. Our price target is derived by applying a cash flow
multiple of 7x to our F2014 estimate of $3.14/share, us ing our forecast gold
price of US$2,000/oz. for that period. The $22 price target is supported by a
P/NAV multiple of 1.5x to our $14.70/share net asset value (NAV) calculated
using a gold price of US$1,500/oz. and a 5% discount rate.
Key Risks To Price Target
Our price target is based on mine operations continuing without interruptions.
Mining is an inherently risky business, where technical, political and human
issues can influence operations. We consider the following as risks to our derived
price target:
Commodity Prices: All mining companies are impacted to varying degrees by
changes in commodity prices. Rising or falling commodity prices have a direct
impact on earnings, cash flow, and NAV. Commodity prices also impact
operating, capital spending, and exploration decisions, which may have longer-
term impacts. The greatest risk to our price target is our forecast for bullion
prices to average US$2,000/oz. for 2014.
Development Risk: During a project’s development phase, certain events can
lead to unforeseen delays or cost overruns, which could drastically change a
project’s economics. Macassa and the SMC are ongoing developments for
Kirkland Lake Gold (KGI–SO).
Operational Risk: Operating issues are inherent to all mining activities.
Unstable ground conditions, as an example, can lead to production shortfalls,
cost increases, and/or resource reductions (temporary or permanent). The
impact on our estimates would depend on the nature, as well as the severity, of
the operating issue.
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Exchange Rate Risk: Kirkland Lake Gold is exposed to C$ movements against
a product that is sold in US$, which, depending on fluctuations, could affect our
price target.
Permitting Risk: Permits are essential for all development projects and mining
operations. Delays in obtaining or refusal of critical permits can have significant
ramifications on the valuation of a project or operation.
Financing: While Kirkland Lake Gold is well funded for its current plans, there
can be no guarantee that financing will be available to complete building a mine.
Markets for both equity and debt financing have been better for gold companies
than almost any other sector, but this may not be true in the future. Capital
requirements for ongoing development at Macassa and the SMC will be high but
so far the company has basically been able to self-fund its expansion plans. We
expect that as production moves above 150,000 oz. and the expansion nears
completion, the prospect for free cash flow will increase significantly. A
requirement for outside funding could jeopardize our price target.
Queenston Mining – Moving Forward
On our mine tour, we observed an increasing number of questions on the
expected sinking of the shaft at Upper Beaver, and costs related to the
preliminary economic assessment. As Queenston moves forward with the
project, we believe the engineering aspects will become increasingly more of a
focus area.
As an exploration company, Queenston is conducting advanced exploration on a
number of targets within the Kirkland Lake and Cadillac mining camps of Ontario
and Quebec, respectively. QMI holds rights to the largest continuous land
package along the Porcupine-Destor/Cadillac-Larder Lake fault zones that
collectively have produced over 40M oz. of gold in the past. The company has 3
primary targets for advanced exploration all within the Kirkland Lake project,
namely the Upper Beaver, Upper Canada and Bidgood properties (see Exhibit 8).
With each of the primary deposits being open for expansion in several directions,
we expect resource growth within the primary deposits will reach at least
700,000 oz. in 2012.
Exhibit 8. Queenston's Kirkland Lake Project Land Package
Source: Company reports.
The company’s primary focus is advancing the Upper Beaver project to
production. A Preliminary Economic Assessment was completed for the project in
Q1 that indicated the project has robust economics and the company intends to
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begin development of an exploration shaft in 2013. The project hosts several
targets including the two porphyry zones that comprise the current 1.5M gold
equivalent ounces. We expect a revised resource for the project in H2 that will
include nearly 2 years of drilling and will expand the total resources by at least
30%. The company also discovered a new zone of near-surface mineralization in
late 2011 that could significantly increase total ounces at site in the future and
improve overall economics. To date both the deeper porphyry and the near-
surface zones remain open for expansion and we expect addition to resources to
continue.
The company is also expected to produce a revised resource estimate for the
Upper Canada project in H2. The project hosts a combination of open pit and
underground targets that remain open for expansion. The Upper Canada site is
approximately 8km to the southwest of Upper Beaver and we expect that future
ore extracted from Upper Canada could be processed at Upper Beaver reducing
the overall capital cost to develop the asset.
Price Target Calculation
We calculate our price target of $7.75 for Queenston by applying a 0.8x multiple
to our 5% discounted NAV calculated at US$1,500/oz. gold. Our NAV is
comprised of a DCF component from the Upper Beaver, Upper Canada, and
McBean-Anoki deposits combined with the EV/oz. value applied to the resources
estimated at the AK and Bidgood properties. In addition, we incorporate a value
of $150 million for further exploration upside from potential resource expansion
at all properties and for the potential sale of assets in the Cadillac project in
Quebec. Finally, we add net cash and cash equivalents into our valuation.
Key Risks To Price Target
We highlight a number of factors that could affect our projected price target.
Resource Expansion: There is a significant risk that our estimates for the
number of ounces and grade defined in future resource estimates may not be
realized. Our valuation is based on expansion of the current resource estimates
and the amount of ounces extracted through open-pit and underground mining.
If either of these assumptions vary from what may be realized in the future, our
NAV may be negatively affected.
Gold Price Movements: We have demonstrated that our valuation is
significantly influenced by the gold price. Although we expect the Kirkland Lake
area projects could generate positive cash flow even at gold prices below
US$1,200/oz., our NAV estimate could be substantially lowered with a reduction
in the price of gold.
Capital Requirements: We have established capital expenditure estimates for
a number of projects based on the evaluation of similar-size projects in a similar
geographic area and incorporating an estimate for inflation over several years.
We believe that our estimate accurately reflects the actual requirements that will
be incorporated into development of the Kirkland Lake area projects; however,
the early stage of the projects could lead to unforeseen costs that negatively
affect our valuation.
Financing: Queenston has sufficient funding to continue exploration for the next
two to three years based on our exploration spending assumptions. If the
development of an exploration shaft at Upper Beaver is delayed, current
finances would allow exploration to continue beyond two years. We also expect
that Queenston will be able to sufficiently finance development o f the project to
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production by means of a share issue and securing debt. As we expect
Queenston will need to secure debt to develop the project, there is no guarantee
that financing will be available through debt in the future. We also cannot
guarantee that there will be sufficient demand to warrant a substantial issue of
shares in the next two to three years. We have assumed that equity financing
will be available within a specific price range.
AuRico Gold – Eureka?
By far the most impressive asset we visited was the Young Davidson mine.
Putting valuation aside for the moment, this was a mine where the work
environment was relatively comfortable, all the equipment was new, and more
importantly, everything was working well.
Although production is still pre-commercial, the mill is already above planned
tonnage (over 7,000 tpd on occasion), and recoveries are above 80% already.
Recoveries are expected to be a little over 90% when the flotation circuit and
regrind circuit are brought on-line, and the achievement of >80% recoveries
without these circuits bodes well for this property. While it is still too early to say
for sure, there is a distinct possibility that Young Davidson could beat 2012
guidance, and this asset is already shaping up to be one of the better start-ups
for this year.
Most tour participants were impressed by the stage wise approach to the
underground mining. This approach has conserved capital but maintains
development several years ahead of mining to ensure a (relative ly)
uninterrupted mining plan. There is a short six week interruption in a couple
years to connect the final portion of the shaft into the existing infrastructure, but
there will be sufficient stockpiled open pit ore to ensure that the mill remains
full. Underground ore will start to be trucked out of the mine from the UBZ
mining block in late 2012. This is a 1,000 m haulage and will not significantly
impede development work being carried out below. This gives higher grade and
boosts underground experience without introducing s ignificant risk.
Exhibit 9. Long Section Showing Location Of UBZ Mining Block
Source: Company reports.
Much of the underground operation has bee n open for decades with little to no
ground support. There have been no significant ground control issues during
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this time. Combining the competent rock with paste backfill should ensure that
there is no fall of ground, similar to what happened at Goldex.
One of the challenges still being faced by AuRico is staffing the underground
mine. As can be seen in this report, there is a huge demand for skilled
underground workers in the Abitibi. There are still less than 200 workers at
Young Davidson, and a full complement of employees at this facility will be over
300 people. While pay will be an important consideration when attracting
talented employees, we believe that a well-ventilated large operation with
relatively simple mining and solid management will be a strong draw,
particularly in the longer term.
Price Target Calculation
Our C$14.50 price target (unchanged) is derived using a P/CF methodology. A
multiple of 8x is applied to our 2013 CFPS estimate of $1.74 and then net cash
of $0.12 is added. A 1.00 US$/C$ exchange rate is then applied. On a P/NAV
basis, a C$14.50 price target represents a multiple of 1.4x the operating assets
plus net cash. We continue to rate AuRico Sector Outperformer.
Key Risks To Price Target
The greatest risk to our price target is that silver and gold bullion prices do not
average our forecast of $35/oz. and $2,000/oz., respectively, for 2013. Our
price target is based on mine operations continuing without interruptions. Mining
is an inherently risky business, where technical, political and human issues can
influence operations. In some cases, these can be significant, such as ground
condition failure, changes in foreign regulations, or labor unrest.
Lake Shore Gold – Turning Around?
We had a chance to tour the Bell Creek Mill and the Timmins West Mine, both in
the Timmins area. Ore mined at Timmins West is processed at the Bell Creek
Mill, which is located approximately 40 kilometers to the east. The Timmins West
Complex consists of the Timmins mine and the Thunder Creek mine, each
contributing about half of the total tonnage.
Our visit started at the Bell Creek mill, which is currently undergoing an
expansion to increase mill throughput from 2000 tpd to 3000 tpd, while
improving on ore handling. Given the level of construction activity at the mill,
some investors argued that it might not have been the best time to visit the mill.
Indeed, the company is currently embarking on several projects at the mill,
including the installation of a new SAG mill to replace a secondary crusher, the
installation of new leach tanks, and a future realignment of the existing ball
mills. The mill expansion project should be completed by Q4/2012.
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15. Ma de I n Ca nada Gold Mines - J une 12, 2012
Exhibit 10. The New SAG Ball (Converted From A Ball Mill)
Source: CIB C W orld Markets Inc.
During our site tour of the Timmins West Mine, we had a chance to visit stopes
at both the Timmins mine and the Thunder Creek deposit. The company’s goal is
to have 3 active stopes at each deposit at any given time. Using mainly long
hole stoping mining methods, the stopes can reach sizable proportions with one
test stope we visited in the Thunder Creek deposit reaching ~65,000 tonnes,
showcasing rock competency at the mine. That said, future stopes will likely be
in the range of ~25,000 tonnes to further improve on stability.
From our observations and consistent with previous information disclosed by
management, starting in Q2 the head grade at the mill is expected to improve
from the Q1/2012 head grade of 3.4 g/t, which was in part impacted by a
significant amount of development work in the quarter. We expect head grade to
better the reserve grade of the deposits, or at ~5 g/t, in coming quarters.
Given the large land package of Lake Shore Gold, we also spent a significant
amount of time on the exploration potential of the company. Areas of focus
included the Gold River Trend, where recent exploration results highlight the
potential for additional mineralized trends to north and south of Gold River
Trend. The other key highlight is that deposits in the Gold River Trend are
located approximately 4 km from south of the Timmins West Mine shaft,
creating possibilities for operational synergies.
Beyond the mine, one of the key questions on Lake Shore Gold lies on the
financial front, as 2012 is expected to be a year of significant capex
investments, including $93 million for the development of the Timmins West
Mine and $67 million for a 50% mill expansion and other improvements. We
show below the expected cash outflows and inflows for the company in 2012.
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16. Ma de I n Ca nada Gold Mines - J une 12, 2012
Exhibit 11. Expected Cash Outflows And Inflows For LSG In 2012
Sources of Cash $ millions
Cash and bullion inventory (January 1, 2012) $66.2
Franco-Nevada royalty & equity investment $50.0
Gold Loan $35.0
Standby Line $35.0
Operating Cash Flow $75.5
Total sources of cash $261.7
Uses of Cash $ millions
Timmins West Mine expansion, including mine & mill $160.0
Advancement of Bell Creek Mine $18.0
Exploration $15.0
Corporate G&A $10.5
Financing costs $5.0
Total uses of cash $208.5
Source: Company reports.
Price Target Calculation
Our $2.00 price target is derived by applying a cash flow multiple of 6x to our
2013 cash flow estimate of $0.32/share. Our price target implies a cash -
adjusted P/NAV multiple of 1.1x our $1.76/share NAV estimate using a
US$1,500/oz. gold price and 5% discount rate.
Key Risks To Price Target
Our price target is based on mine operations continuing without interruptions.
Mining is an inherently risky business, where technical, political, and human
issues can influence operations. We consider the following as risks to our derived
price target:
Commodity Prices: All mining companies are impacted to varying degrees by
changes in commodity prices. Rising or falling commodity prices have a direct
impact on earnings, cash flow, and NAV. Commodity prices also impact
operating, capital spending, and exploration decisions, which may have longer-
term impacts. The greatest risk to our price target is our forecast for bullion
prices to average US$2,000/oz. for 2013.
Development Risk: During a project’s development phase, certain events can
lead to unforeseen delays or cost overruns, which could drastically change a
project’s economics. LSG has plans to increase throughput at its Bell Creek mill
and has a number of development and exploration-stage projects in Thunder
Creek, Bell Creek, Fenn-Gib, and Thorne (GRT).
Operational Risk: Operating issues are inherent to all mining activities.
Unstable ground conditions, as an example, ca n lead to production shortfalls,
cost increases, and/or resource reductions (temporary or permanent). The
impact on our estimates would depend on the nature, as well as the severity, of
the operating issue.
Exchange Rate Risk: LSG is exposed to C$ movements against a product that
is sold in US$, which, depending on fluctuations, could affect our price target.
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17. Ma de I n Ca nada Gold Mines - J une 12, 2012
Permitting Risk: Permits are essential for all development projects and mining
operations. Delays in obtaining or refusal of critical permits can ha ve significant
ramifications on the valuation of a project or operation.
Financing: While LSG is well funded for its current plans, there can be no
guarantee that financing will be available to complete building a mine. Markets
for both equity and debt financing have been better for gold companies than
almost any other sector, but this may not be true in the future. We have
assumed that not only is financing available, but also that it is equity financing
(to avoid the problems of hedging requirements asso ciated with debt financing)
and at specific prices that may not be realized.
The CIBC analysts covering these companies visited the mines between June 5
to June 8. CIBC paid for the airfare from Toronto to Val d’Or and also from
Timmins back to Toronto. CIBC also paid for all local transportation and
accommodations.
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18. Ma de I n Ca nada Gold Mines - J une 12, 2012
Agnico-Eagle Mines Sector UnderPerformer
AEM-NYSE 6/12/12 $41.14 Alec Kodatsky, (416-594-7284) alec.kodatsky@cibc.ca
12- To 18- Month Price Target: $42.00 Chitimukulu Musonda, (416-594-7462) chitimukulu.musonda@cibc.ca
Precious Metals Terry Tsui, (416-956-3287) terry.tsui@cibc.ca
Sector Weighting: Overweight Barry Cooper, (416-956-6787) barry.cooper@cibc.ca
All figures in US$ million, unless otherwise stated. Gold price assumption in yr 2011 @ $1575, yr 2012 @ $1800, and yr 2013 @ $2000
Risk adjusted discount rates vary from 8% to 15% depending on the location of the asset and its technical challenges
Multiples EV/NAV* EV/NAV^ 2012 PCF 2013 PCF Investment Thesis
Agnico - Eagle 1.8x 2.4x 14.2x 10.0x Agnico-Eagle's growth profile has been impaired by the Goldex incident for this year but continues in
North American Average 0.8x 1.2x 9.1x 5.8x the out years. Its development projects in safe jurisdictions however start-ups have been difficult and
Large Cap Average (>$10B) 1.3x 2.2x 8.4x 6.1x thus past trading multiples are likely to compress significantly. Multiple contraction has been occurring
Mid Cap Average ($2B-$10B) 1.1x 1.5x 12.7x 7.9x as the growth transforms from dream to reality of real cash flow but may accelerate as a management
Small Cap Average (<$2B) 0.6x 0.9x 5.5x 3.4x premium is removed from the share price. In part the multiple compression will be partly offset by
* Using: $1500/oz And 5% ^ Using: $1500/oz @ Risk Adjusted Discount Rates increased financial performance for the company and thus a softer landing might be predicted. AEM
P/NAV Sensitivity $1,200 $1,400 $1,600 $1,800 remains a core holding within a broad gold portfolio and an excellent way to mitigate some of the
Agnico - Eagle 3.8x 2.2x 1.5x 1.2x inherent risk associated with companies that are active in regions of the world where there is
North American Average 1.6x 1.0x 0.7x 0.6x uncertainty. The company may have some rebuilding to do with investors who may have felt the
Large Cap Average (>$10B) 2.0x 1.4x 1.1x 0.9x technical risks associated with the company's development projects were being minimized.
Mid Cap Average ($2B-$10B) 1.8x 1.2x 1.0x 0.8x
Small Cap Average (<$2B) 1.3x 0.7x 0.5x 0.4x
Key Financial Metrics EV ($mln) EV/Prod+ EV/2P* EV/R&R^ Production Profile
Agnico - Eagle $7,626 $8,282 $358 $275
North American Average $6,503 $330 $172 1,200 800
Production 000s Ounces
Large Cap Average (>$10B) $9,445 $440 $298 1,000 700
Mid Cap Average ($2B-$10B) $5,944 $284 $149
$/oz Cash Cost
600
800
Small Cap Average (<$2B) $3,561 $243 $131 500
+ 2012E Production * Current Proven & Probable Reserves ^ Current Reserves and Resources 600
400
Income Statement 2010A 2011A 2012E 2013E 400
300
Gold Price Assumption 1225 1575 1800 2000
200 200
Zinc Price 0.94 1.00 1.00 1.00
Copper Price 3.21 4.00 4.00 3.75 0 100
2008A 2009A 2010A 2011A 2012E 2013E 2014E
Silver Price 18 35 35 35
CDN$/US$ 0.97 1.02 1.00 0.95
Total Production Cash Costs Total Co-product costs
Production (000s ounces) 988 985 921 1000
Total Cash Costs/oz (by-p) 451 593 625 604 Production (2012E)/Modeled Resource Detail
Total Cash Costs/oz (co-p) 657 714 760 716 Asset Production* Cash Costs^ 2P M&I
Capital Expenditures 482 445 555 Pinos Altos 182 314 3103 840
Meadowbank 286 965 2201 1317
Revenues 1517 1817 1828 2118 LaRonde 155 193 4891 6504
Expenses Goldex 0 0 0 2091
Operating Expenses 678 876 952 979 Lapa 100 765 502 258
D,D&A 193 262 244 252 Kittila 145 782 5177 1026
S,G & A 114 108 125 125 Total 921 625 15,874 12,037
Exploration 55 76 105 105 * Gold (000s oz) 2P: Proven & Probable Reserves (000s oz)
Other Expenses 63 64 61 52 ^ Net of by product credits (if applicable) M & I: Measured and Indicated Resources (000s oz)
Total Expenses 1102 1386 1487 1513
NAV Breakdown Using Gold Price of: $1,500
Income Before Tax 415 431 341 605 Ownership Discount Rate US$ Millions Per Share
Income and Mining Tax 127 116 78 138 Cash 221 1.32
Deferred Taxes 48 49 42 53
Net Income 240 266 222 415 Operations
LaRonde 100% 5% 838 4.98
EPS 1.48 1.75 1.31 2.45 Goldex 100% 5% 0 0.00
CFPS 3.43 4.07 3.13 4.46 Kittila 100% 5% 967 5.74
Lapa 100% 5% 211 1.26
Shares Outstanding 162 169 169 169 Meliadine 100% 5% 513 3.05
Pinos Altos 100% 5% 1,083 6.44
Asset Locations Meadowbank 100% 5% 512 3.04
Creston 100% 5% 192 1.14
Other Exploration 100 0.59
LaRonde Kittila Total Assets 4,638 27.55
Lapa
Meadowbank
Goldex
Debt 920 5.47
Reclamation 145 0.86
Total Liabilities 1,065 6.33
Pinos Altos
NET ASSET VALUE 3,573 21.22
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