Q&A with Agnico’s Sean Boyd

At a time when investor sensitivities to management miscues and misguided strategies are running high, Agnico-Eagle Mines (AEM-T, AEM-N) stands out as a miner that has stuck to its mantra of providing stable growth with low political risk . . . to say nothing of its record of having one of the longest standing and most consistently paid dividends in the industry.
After fielding technical questions from the analysts about the company’s stellar second-quarter results, Agnico-Eagle’s CEO, Sean Boyd, took some time with The Northern Miner to discuss the ­company’s direction and values on a more macro level.

The Northern Miner: Let’s talk about your exposure to the Far North in the context of balancing political risk against the pursuit of large deposits. Is the Arctic the last great frontier for finding large deposits while keeping political risk low?
Sean Boyd: It’s a good place to do business, but there are some challenges. There’s a lack of infrastructure and added costs related to logistics and support, but we do get good co-operation from regulatory bodies and from the community.
So overall our experience has been a good one. Although Meadowbank has been a technical challenge, it is still an important asset in our portfolio.
But I think you’re right about the upside. The Arctic provides a mining-friendly region with tremendous resource potential and we’re in the best position to take advantage of that, as there are not many other players up there.

TNM: Does Agnico enjoy a significant competitive advantage in the Far North?
SB: We are running the biggest mine up there [Meadowbank] and we have another important development project [Meliadine] where we are continuing to drill.
We’ve contributed to employment and investment in the region and given our experience, our connections and the solid reputation we have — that all gives us a competitive advantage.

TNM: Have you seen much infrastructure development in the time since Agnico has been in Nunavut?
SB: There hasn’t been a lot of change on the infrastructure side of things. You are essentially on your own. We had to build our own road from Baker Lake to Meadowbank, and we’re doing the same from Rankin Inlet to Meliadine.

TNM: Given the federal government’s stated eagerness to foster economic development in the Far North, have you had much help in terms of infrastructure spending from the Feds?
SB: They have budgetary constraints right now, but they are receptive to our concerns and they acknowledge our challenges.
Where they have been helpful is not in terms of money but in terms of policy. They recently made changes to the permitting act to streamline the permitting process.
So I’d say we’ve had good support from all levels of the government because of the economic benefit and the real benefit to the local economies. The prime minister was at Meadowbank for a day last year, and we were able to show him what we’ve been doing.

TNM: Are you looking to add to your Arctic portfolio?
SB: For now, we have enough on our plate in the Arctic. It’s about developing a broad spectrum of an asset base, and we have a good balance right now.
We are strong and growing in Mexico. It’s a very different type of business down there. It’s lower risk, less capex and quicker payback, so it offers good diversification for the portfolio in the North where projects have higher capex and bigger technical risks.
It’s just about balance, and I think now we have the right balance and we’re not looking for more exposure to the Arctic.

TNM: As a company that has paid a dividend for a long time, can you speak to the importance of paying a dividend in today’s market, especially given increased competition from ETFs?
SB: It’s more important now than ever. But dividends aren’t 100% related to a payout ratio, it’s just as much about the discipline it imposes on how you run the business. So investors are demanding from equity a growing measure of disciplined business with lower risk.
Investors can easily play ETFs, but they want leverage and they want it in a package with lower risk. So businesses that can fund themselves, and that can generate net free cash flow will be the most attractive.

TNM: How do you balance internal growth versus shareholder distributions?
SB: We’ve been around for 55 years, and we don’t get caught up in the idea that it is a race to be the biggest. We’ve built the company up in a measured way.
We don’t have a set formula for determining our dividend, some companies do, but we’ve never had it in 30 years.
When we do our annual budget, the first thing we make room for is the dividend. If we didn’t do it we wouldn’t have 30 years of paying it. It’s part of our DNA. It’s just how we think. We did it when gold was US$250 per oz. and we didn’t have hedge book, but we were still able to pay our dividend.
We’ve just stayed focused on our own formula, which is to avoid political risk, pay a dividend and not give away the upside to the gold price.

TNM: Would Agnico consider doing a share repurchase?
SB: Not at this stage. We are still in a net debt position due to building five mines. But we would look at that if we were in a net cash position.

TNM: What do you think will drive the gold price going forward?
SB: I’m bullish on gold prices. We had some seasonality issues and some weakness due to problems with the Euro leading to strength in the U.S. dollar. But the issues around U.S. debt have not been addressed at all, and that will eventually undermine the U.S. dollar.
Essentially governments have to continue with liquidity policies, which are a necessity to try to establish some growth in the world economy. And we’re seeing voters vote against austerity and for growth. That makes a politician’s life easier, because someone else down the road will have to deal with [the mounting debt].

TNM: There’s been much talk about the poor valuations that gold miners have been receiving relative to the gold price, leaving aside possible reasons for the situation. What do you think will lead to gold companies being fully valued?
SB: The key thing will be moving away from declining gold prices and into an upward trend.
And that should coincide with gold companies getting better at making themselves into a more disciplined and measured business.
Things can really take off, because the timing will be that gold prices will move up as businesses focus on generating returns. But the initial catalyst will be the move in the gold price.

TNM: Given the current environment of low equity valuations, why haven’t we seen more mergers and acquisitions activity?
SB: There are only a handful of buyers and hundreds of sellers.
So there will be deals, but they will be focused on what a particular company’s needs. It won’t be growth for the sake of growth, but it will be consistent with the buyer’s strategy.
As for Agnico, just because we’ve said we’re focusing on growing our assets, that doesn’t mean we don’t continue to look for smaller-stage, high-potential projects. We don’t have a set target, but we have an evaluation team looking at things — and that’s ongoing.