Jul 31, 2009
Operator
Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Agnico-Eagle Mines second quarter 2009 results webcast conference call.
(Operator Instructions). I’d like to remind everyone that this conference call is being recorded today July 30, 2009 at 11 a.m.
Eastern Time. I will now turn the conference over to Sean Boyd, Vice Chairman and CEO.
Please go ahead.
Sean Boyd
Thank you, operator, and good morning, everyone, and welcome to our second quarter conference call. We’re here in Toronto with our full team, all ready to answer your questions in the question and answer session.
What I’d like to do is go through a series of slides, provide a bit of an overview, some of them I’ll go through quite quickly. I know it’s a busy morning for everyone.
So we’d like to move through these in depth in the question and answer session. But just to sort of summarize where we are and where we’re going over the next several quarters, I think as you know we’re in the midst of ramping up a couple of our projects.
We’re in the midst of completing construction on a couple more. And that was a program we began several years ago to transform the company.
And what we’ve done as a result is we put ourselves in a position to move into an industry leadership position in things like cash flow per share, production per share, certainly on the cost side given the quality of these mines will be in the top range of good cost control performance. But what we also have done is we’ve neared the completion of building five mines at once.
We’ve also started that next phase. We also announced yesterday two of the four internal expansion opportunities have been given a go ahead.
We’re still working on studies of the remaining two. But the first two, as you’ll see in the presentation, has allowed us to show steady growth going forward all the way through to 2014.
So we’ve still got good growth ahead of us with the two of the four expansion opportunities given the go ahead yesterday. They are high rates of return, low risk ways that we can optimize our asset base.
And I think going forward what we anticipate is further exploration success particularly in places like Pinos Altos which will allow us to continue building satellite operations there and allowing us to add value from that asset base. But I’ll move through the slides now and we’ll get to the question and answer session, so that we can delve into each of the operations.
But just as far as an overview, we’re still in that growing production mode. We had record production in the second quarter.
We see continuing record production going through the next several quarters as we commission new mines and complete construction on Pinos Altos and Meadowbank. And, again, as we said at the start, we moved forward on two of the four external or internal expansion opportunities.
Our reserves we expect to continue to grow. We’re on target to meet our objectives as outlined to the market in terms of growing those reserves from the existing property position.
Our acquisition strategy will not change. We are still looking for smaller opportunities that have the potential to get bigger and really with the internal expansion opportunities as we said, we can grow this company over the next five years, and do it on a per share basis.
So things that we would be focused on would be things that would be coming and adding value beyond 2014. So we’d like to take a long-term view of things, get assets that we think have upside, get our team in place on those assets and let them go to work on building the deposit and doing the engineering and laying out a plan to build mines and extract value, just like we’ve done over the last few years.
Our costs continue to remain below industry averages. In the first half of the year.
We were around 320 US an ounce and we’ve also, Dave and his team have been busy expanding the credit facilities. And that’s given us very good liquidity as we start to get into a period of strong cash flow.
And that’s one of the things as we’re nearing the end of the construction phase, our capital expenditures dropped dramatically. So we want to position next year to generate net free cash flow which we’ll use to fund the internal expansion opportunities.
In terms of the production profile, again we had record production in the quarter. We had very good cash costs in the quarter at 326 an ounce anchored by LaRonde which had again a consistently strong quarter going forward.
Our full year estimates of 550 to 575 do not change based on the results that we experienced in the first half of 2009. In terms of cash flow generation, we had some moving parts there.
As we complete construction, we had paid down some payables. We had built up some gold inventory on some of the projects that have been commissioned.
So after working capital which is the number that’s on the slide, we posted a lower number but before working capital changes, the number in Q2 ‘09 was double the number that’s posted there which was after working capital changes. So we’re still generating strong cash flow from the operation.
In terms of the financial position, as we also indicated we’ve improved our liquidity position with expanded credit facilities. So we closed the month of June with 173 million in cash and available credit facilities of almost 400 million.
And left to spend going forward is about 240 million in the second half of ‘09 on CapEx. And as we move into 2010, we’re looking for a little over 200 million based on the expansion opportunities announced yesterday, so we’re in a position to generate net free cash flow and continue that steady growth going forward.
In terms of the reserve base, we touched on that. We’re still targeting the end of 2010 at 20 to 21 million ounces.
We continue to be focused on per share growth in reserves and that’s why we’re focused on an acquisition strategy that’s based on buying things that have potential, buying them early, and allowing our exploration team and our mine building group to work those projects and build value that way, and that’s still the main focus there as we go forward. And I think we’re looking to have an exploration update in September, and that will give you a better sense of what we’ve been doing at places like Pinos Altos and our success in finding satellite deposits.
We’ll also update Meadowbank where we’ve had some success as well, and we’ve been very active at Kittila and we’ll provide an update on that in September. In terms of production, on the slide on production you can see the steady growth up to 2014 with the addition of the Goldex expansion and the addition of the Creston Mascota at Pinos Altos.
So we’re looking at production exceeding 1.4 million ounces as we enter 2012 through to 2014. This is the industry leadership position we’ve talked about on the several slides.
On gold production per share, we move up close to Barrick and Newmont who have always consistently been at the top of the charts. If you look at their trend now, they’re trending either down or flat and our trend based on the construction success and the mine building success has trended up sharply to put us up in the top position in the industry.
On cash cost, in the second quarter we were among the best in the industry averaging about $312 an ounce. And on cash flow generation using analyst estimates which are as recent as July 14, we’re showing very strong cash flow growth next year in 2010 putting us among the leaders again in the gold business in terms of cash flow per share generation which is important; that’s really what it’s all about from our perspective, per share generation of cash flow.
That’s going to allow us to reinvest proceeds into solid opportunities that we have internally or that we choose to bring into the fold, bring into the pipeline, and also allow us to not only continue the 27-year track record of paying a dividend but increasing that dividend as we move forward. On capital expenditures, we can see a significant drop from ‘08 to ‘09.
We’ve spent more than half of the ‘09 allotment. We’ve got 240 million left to spend, a little over 200 million in 2010 in a period when we’re generating a lot of cash flow.
So we’re finally in a position after that heavy construction phase to begin generating net free cash flow. We’ll move through the operations quickly.
We’ll start with LaRonde. It continues to be the star performer.
Excellent performance continues there. We average 7,200 tons a day.
Our cost per ton was a little over CDN$70 per ton, cost per ounce around $100. Not only have they done a great job in terms of output and cost, but they’re also doing a tremendous job on the construction side.
Everything remains on schedule with the extension and the shaft sinking. We expect to be complete with the shaft sinking in the fourth quarter of this year and start changeover and begin underground development and we’re on track to start pulling initial tons from the LaRonde extension in 2011.
Goldex, again, steady performance. We’ve achieved our design capacity, have operated in the quarter at almost 6,900 tons a day, cost per ton right on target there at CDN$24 a ton.
So, the first half production of 71,000 ounces is at about $350 an ounce, so a very good performance at Goldex to the point, where we feel comfortable announcing an expansion there, high rates of return, 76% rate of return IRR on an investment of $10 million to basically increase the crushing capacity. And we expect to be at a rate of about 8,000 tons a day in 2011.
So again further optimization at Goldex with this expansion, but we’re also looking at increasing the mine life there. We’ve got a zone that we’ve known for several decades there, but we feel we can develop and bring it into production profile and that contains about 250,000 ounces.
So while we’re increasing the throughput, we’re also extending the reserves there by developing a zone that we’ve known for several years. A little bit more detail on the expansion at Goldex in one of the slides.
We’ll move through to Lapa. We’re still in the ramp up phase in Lapa and the tune-up phase.
Our tonnage in June averaged almost 1,300 tons a day. So we’re moving towards our goal of getting to about 1,500 tons a day.
So we’re still fine tuning. We’re still optimizing there.
What we’re seeing early is a bit more dilution than we had anticipated. So we’ve got the technical group that’s done a lot of work at LaRonde looking at ways that we can minimize that dilution going forward.
We’re not concerned about it because of the skill set of the technical team there, but it’s something we’ve seen in the second quarter. Finland, we’ve made some good progress on the metallurgy and we’ve got Jean Robitaille here, so he can field any questions on that when we get into the question and answer session.
We processed about 2,000 tons a day in the quarter. So we’re ramping up to the eventual target on this part of the mine building of 3,000 tons a today.
In June we processed about 2,300 tons a today. Our mill recoveries in June were 65%, so we’ve made some significant improvements there through our test work, through changes.
And as we’ll see on the next slide we’re ahead of target and this is a slide that we put out on the Analyst Day in late May. And we’re ahead on target a bit on our gold output in June and slightly ahead of our target for expected recovery.
So we’re making good progress on that issue in Finland. There is an additional expansion opportunity in Finland.
We’re still working through that study. The ore body continues to grow.
We’ve got our 11 drills drilling there right now. We will really be able to open up that deposit later this year when we get access with our drills from the underground.
So this is still wide open below 1,100 meters. It’s open under the Central Roura area.
It will be a project that we can expand and add further value. And as we said, we’ve got about six months to go to complete that study.
Pinos Altos in Mexico, on track. It’s started to pour gold from the heap leach.
The mill should start up in September which was according to plan. So things are going well from a construction perspective there.
We also announced the building of Creston Mascota which was not unexpected given the solid nature of that project. But I think the newer news there is the fact that we’re still getting good exploration success in that large land package in Mexico and we feel that’s going to present us with further opportunities to grow output by building satellite deposits and we’re also based on the expansion of the reserve base since the original feasibility looking at different scenarios where we can increase the tonnage rate at the main Santo Niño area from 4,000 to 6,000 tons a day.
So that’s something we’re looking at now as well. So there is certainly lots of upside present at Pinos Altos.
And there is a detailed slide there on the expansion, and I think you’ve seen that. I won’t really get into a lot of detail.
At Meadowbank, we’re on track to begin the production there in the first quarter of 2010. We’re having a very good construction season.
We’ve started the shipping season. We’ve got barges in Baker Lake that are bringing in the equipment that’s needed to, meet our production target there.
So good progress on dike construction, good progress on de-watering, good progress on infrastructure construction there as well. So we’re all on track to meet our target of starting that mine in the first quarter of 2010.
In terms of expansion studies, we’re working on expansion study at Meadowbank. We’re providing an exploration update in the third quarter which is focused on Pinos Altos and Meadowbank, but we’ll also have exploration information from the other projects.
We’re working hard on an extensive study at Kittila which would involve a shaft and as we indicated and we don’t have a timeline for that, but we’re also working on an expansion study at Pinos Altos along the mainline horizon given the expansion of the reserve base in that area since the original feasibility. So it’s a good position to be in.
We’ve done a lot of hard work in the last four years. We’re coming to the end of this massive construction phase.
It hasn’t been perfect, but on balance its put us in a strong position to generate net free cash flow. It’s transformed the company.
It’s strengthened our skill set. It’s put us in a position where we’re just opening up some of these deposits that we’ve been building for the last little while.
We think the exploration upside is extremely good there and we’re focused on early stage acquisitions that have a good potential to add to our production base beyond 2014. And that’s the focus and that’s a good update of where we are.
And operator we’d like to open it up for questions.
Operator
(Operator Instructions). Our first question comes from [John Finnegan with Fundamental Equities].
Please go ahead.
John Finnegan
Mr. Boyd, earlier you were having some problems in Finland with the buildup towards production.
Could you give us an update on where you stand on that?
Sean Boyd
Well the issue you’re referring to is in the processing facility and it was an issue with recoveries. When we talked about this in the last quarter, our recoveries were in the range of about 30%.
Our recoveries in June were more than double that earlier rate. They’re now about 65%.
We see continued improvements ahead of us, but I’ll turn it over to our technical team and they can give you and the people on the line an update of where we are --
Jean Robitaille
Okay, in quarter two, we updated the curve as Sean mentioned. Presently we expect to have for the next coming two months as a kind of stability at around 65% recovery with the profile of gold.
We are doing some minor modification and it’s a delivery on some equipment. As mentioned recently, the sump pump we have to change.
Presently it’s follow exactly the pattern that we had last during the test work and pre-feasibility and the feasibility study. So presently we are quite happy.
We just try to oxidize the ore gentle and that was quite successful. So it’s just limitation that we have presently that we will fix and it’s not costly what we have to do.
John Finnegan
Will the eventual production cost be above what you expected when you started the project?
Sean Boyd
Yes, we do. We have about another 700 tons per day to ramp up.
We are currently at 22 to 2,300 tons average, and once we do get to our design rate of 3,000 tons per day, well the unit cost on a per ton basis and on a per ounce basis will decline.
John Finnegan
Thank you.
Operator
Our next question comes from John Bridges with JPMorgan. Please go ahead.
John Bridges
Good morning, Sean and everybody. Congratulations on the results.
You must be really beavering away with all these projects. Just on LaRonde, that’s a sizable increase in the cost per ton we’ve seen over the last 12 months, and given this repeated deflation that we’re seeing in some areas, any chance of that coming back going in the next 12 months?
Sean Boyd
There might be a bit of a softening, John, but when you compare it to year-over-year the first half of last year we had very limited increases and a lot of the increases that we experienced in inputs were in the second half of the year. Currently that number also contains some stockpile adjustments, but on the mine level we are right on budget or below what we had forecasted including those additional input costs that we experienced late in the year.
John Bridges
Any stabs on what you think costs might be next year?
Sean Boyd
It’s a bit early, but my guess right now would be like they would remain flat or maybe slightly lower, but I would say flat.
John Bridges
Okay, that’s great. Just following on, that 16% recovery of silver at Creston, just wondered how flexible that was, is this stuff tied in there or if you give it a bit more cyanide could you increase that?
Jean Robitaille
Okay, I’ll take that one. 16% recovery for silver at Creston Mascota, that’s based on test work that’s a conservative number and over a long, long lease cycle, over a period of a couple of years, probably it will be higher than that.
Silver to gold at Creston Mascota the ratio is lower than it is at Pinos Altos and it’s not very significant for the revenue.
Operator
Our next question comes from Anita Soni with Credit Suisse. Please go ahead.
Anita Soni
Hi, congratulations on a good quarter. My question is with regards to the current commercial production at Kittila, I was just wondering what tests you used in order to get to that declaration for May 1?
Ebe Scherkus
There’s two main criteria. One is you have to achieve somewhere in the 60 to 70% range of capacity, it can be the mine operation of the mill.
And then you also have to cover your operating costs. And that’s it essentially.
And that criteria was met as of May 1.
Anita Soni
Okay. So it’s only on the throughput that you’ve got the criteria and not...
Ebe Scherkus
No, it’s actually on the mine operation as a whole. You have to be operating at 60 to 70% capacity across the mine operation.
Anita Soni
I guess, I think that it’s the recovery rates and I’m just wondering about, did you achieve that on the recovery rates?
Ebe Scherkus
Well, the recovery rates aren’t the issue. It’s whether you cover your operating costs or not.
And so if you’re producing enough revenue to cover your operating costs regardless of what the recovery rate is then you achieve commercial production along with the other criteria.
Anita Soni
Okay. And then just in terms of the improvements post two months.
Could you go over that again in terms of where you expect to see I guess the next leg up in improvement and recovery rates I guess from the chart I’m looking at sometime in September, as you kind of move from the mid-60s range up to 80%?
Sean Boyd
I just to want make sure we have the question right before we turn it over to Jean Robitaille to answer. You just want an update on what we have done so far and what we propose to do in the next quarter to be able to continue along that graph, is that correct?
Anita Soni
Exactly, yeah.
Jean Robitaille
Okay. Essentially since the beginning, we just push more in the autoclave.
The issue was the way that the oxidation was done. It was not according to the concept.
The design was slightly different. So we cut the recirculation, what’s probably something like a gain of between 20 and 30% recovery.
And now what we did, we pushed the oxygen at the back-end of the autoclave and we’re able to raise the total recovery at 65%. Presently, we have some limitation with the amount of oxygen we can have at the end and cut at the front.
And this is on what we are working. And in excess of that we have to concentrate inside of the autoclave, we have excess capacity.
So we reduce the quality of the concentrate, but we have some limitation in the de-water and the circuiting the CIL. So we are looking to change some pipe and pump presently and that we consider that will be completed in September.
After that, we’ll be able to raise gradually by the end of the year at 83% recovery.
Anita Soni
Okay. So you’ve got to switch out some of the pumps and pipes in order to push more concentrate through in September onwards?
Jean Robitaille
Yes, as soon as we will have that done, we will be able to push more. That will reduce the retention time in the autoclave that will be beneficial, and we maybe able to push a little bit more on the production, so we are more than confident to achieve what we have put on this graph.
Operator
Our next question comes from Victor Flores with HSBC. Please go ahead.
Victor Flores
Yeah, thank you. I have two questions.
A very quick one and then perhaps a bit more complicated one. When do you expect to achieve commercial production at Pinos Altos, or is it too soon to ask that question?
Sean Boyd
Tim?
Tim Haldane
Well, I think it will be October-November. We’re planning on ramping up starting in September and we’ll just see how it goes.
Victor Flores
Okay, fair enough. Thanks.
The second question is back at the autoclave at Finland, I had a very good chat a few months ago with Ebe regarding the very specific issues with respect to the gold chlorides that were being formed and how they were binding with some of that carbonaceous material? And just going back to the last question that Anita asked, I’m trying to understand how the changes that you’ve talked about with respect to recirculation in oxygen levels in the autoclave address those specific issues that came up?
Jean Robitaille
Okay, I will try to be short, and if it’s not enough we can have a discussion after the conference call. Essentially, when you over-oxidize what we see is in the ore you have some chloride.
If you do a proper oxidation without any excess, you will not separate that excessive chloride, try to simplify that. If you recirculate the solids, you just expose to just liberate more free chloride that will dissolve gold and after that you are in trouble.
So by cutting that recirculation, we avoid that issue and now by doing the oxidation just more at the end of the autoclave, we avoid that over-oxidation period of time and this is why we obtained that result. Now, we have some physical limitation and it’s not a big deal to resolve it.
It just takes a bit of time.
Victor Flores
Okay, and with respect to the issue of the carbonaceous material?
Jean Robitaille
Carbonaceous material under certain condition you will activate more the organic portion and this is linked with the same issue, but by not over-oxidizing we expect to have better result and now we are working to load that part. And during the study we saw that not more than 3 to 5% have a potential impact.
And we have also, we have the organic floatation circuit. That was introduced in the concept and presently we raised the organic from 10% recovery to 25% of the organic portion what is normally the most active one, most active one.
Operator
Our next question comes from Haytham Hodaly with Salman Partners. Please go ahead.
Haytham Hodaly
Thanks operator, morning Sean, everybody else. Just a couple of quick questions, maybe I’ll just follow-up on a question earlier on Creston Mascota.
You gave some economic numbers in there, talked about internal rate of return of 17%. First question I’ll ask is, is that feasibility study actually posted on SEDAR or is that an internal one?
Sean Boyd
It’s internal.
Haytham Hodaly
Okay, and so a question, I ran the parameters that you outlined and the only way I could get a 17% IRR based on your commodity price assumption is if I’m assuming no taxes, no sustaining capital, and no reclamation. Can you give me an indication of just what you assumed for each of these three?
Sean Boyd
Well, on taxes we’re using a statutory rate in Mexico which is 28% and you really don’t pay any taxes until you recover all your capital. So it might be a time value issue there, Haytham, I’m not sure how your models run, but we don’t pay any cash taxes until the capital is recovered.
Haytham Hodaly
Okay. And in terms of sustaining capital annually and reclamation what’s your assumptions in there?
Sean Boyd
Well, including salvage value, the capital over the life of the mine is 65 million give or take.
Haytham Hodaly
I’m sorry, that was including sustaining capital and salvage value?
Sean Boyd
Yeah, yeah.
Haytham Hodaly
Okay, that’s what I wanted.
Sean Boyd
So salvage value and the sustaining capital more or less offset.
Haytham Hodaly
Okay, fair enough. That makes sense.
Another question I guess with regards to your debt. We saw that you drew down another 70 million debt this last quarter.
Curious where do you think you’ll be in terms debt drawdowns, pardon me, by the end of the year?
Sean Boyd
It’s discretionary. It really depends on how much cash you want to carry, but assuming we keep our cash balances in more or less same level, we’ll probably draw another $200 million.
Haytham Hodaly
100 million more in debt. And then with regards to expensed interest estimate for the year, where do you think that will end up?
Sean Boyd
Expensed interest will be more or less double you saw in the first six months. A lot of it is still capitalized because we still have construction expenditures.
Haytham Hodaly
So, it will just double. If I take the number now and double it, it’s probably not unreasonable?
Sean Boyd
Yeah. I think that’s right.
Haytham Hodaly
And then you give a 550 million CapEx in 2009. I know it was given before.
Can you just give us the break down of that again?
Sean Boyd
The CapEx breakdown?
Haytham Hodaly
Yeah, by asset.
Sean Boyd
Yeah, we’re still looking for, one second I’ll just pull up the page. We’re looking at a sustaining capital at LaRonde of about 25 million, 10 million at Goldex, 20 million at Lapa, LaRonde depth extension is 40, Lapa is 22 of construction capital.
Haytham Hodaly
Sorry, could I just slow you down a little bit. Let’s go back, LaRonde 25, Goldex 10, Lapa 5 was it?
Sean Boyd
Sorry, sustaining capital 25 at LaRonde, 10 at Goldex, 20 at Lapa, 40 million on the depth extension at LaRonde, construction capital at Lapa of 22 which is now spent, Goldex construction capital of about 10 which is now spent, Meadowbank about 200 odd million, sustaining capital at Kittila of about 50, and construction capital of about 35 and Pinos Altos about 140, that should roughly come to 550, given you round numbers there.
Operator
Our next question comes from Steve Butler with Canaccord Adams. Please go ahead.
Steve Butler
Well guys, good afternoon or morning there I guess it still is. Ebe, a couple questions for you on Lapa.
I mean respecting that it’s declared May 1 and only you poured your first gold May 7, so it’s very early days still at Lapa. But you had alluded to 40% greater reconciliation on the first three stopes of Creston, so does that reconciliation pan out through the mill on those particular stopes material that’s just not yet processed?
And then secondly how is the dilution, I think obviously you implied or you showed us 34% dilution assumption in the Analyst Day, May 29 and I assume it’s therefore higher than that. So how are you managing?
Ebe Scherkus
Okay, with respect to the overall grade we have processed, our reconciliation has been based on 80,000 tons. This is very early, 80,000 tons of which 60,000 tons of the material has been development ore, so it’s a bit premature.
We only have about two stopes that actually went through, so two stopes out of 750 that are planned over the life of mine. So we still have some work to do.
We’re going to do that in August and we’re going to be running strictly on production stopes rather than commissioning development ore. With respect to dilution, we are seeing about 20% more than we had projected in the model.
Yet despite that our grade so far to the mill are reasonably close to this, slightly lower despite having 20% more dilution. But we went on the ground and we looked at the situation and it is a situation that we have previously experienced at LaRonde and there are remedial plans currently in progress to address that.
Steve Butler
Okay. And Ebe or Jean, you had shown a recovery curve for Lapa I think as well and at least a recovery ramp-up through May since May 1 or May 7 I guess it was and you showed improvement from 55 up towards 75 to imply May around 65.
And if you did 70% in the quarter, I suppose is June therefore closer to 75 or are you getting better on recoveries at Lapa as well?
Jean Robitaille
The recovery is I don’t have the number in front of me, but near 72. What we just investigated more is when we did the study and we have 14 composite of the different ore zone.
And presently we started with, as you know, Lapa is slightly refractory and we started with the most part refractory. So presently we’re doing better than the composite we process.
We are near 72 and the process was between 66 and 68. So on the curve we provided was the average curve.
So as soon as we’ll be in other zone, you can expect some extent improvement.
Operator
Our next question comes from (inaudible) with Silver Arrow Capital Markets. Please go ahead.
Unidentified Analyst
Sean, I would like to know what you’re going to do with all the free cash flow you’re going to generate. If we look at the gold price of say 1,000 bucks next year which is probably very conservative and then 1,200 for 2011 and 1,400 for 2012, we’re looking at cash flow generation of between 500 million and $1.4 billion.
What are you going to do with all that money?
Sean Boyd
Well, we’ve got two more internal expansion studies underway, one at Meadowbank and one at Kittila, and the Kittila expansion would involve a fair amount of capital because it’s an internal shaft. We’ve also now begun a study at Pinos Altos to increase the main horizon throughput from 4,000 and 6,000 tons a day.
So we’re certainly going to reinvest some of that back to the existing asset base to optimize and maximize those assets. We will also look to increase the dividend; that’s certainly an objective of ours given the track record of paying one for 27 years.
And then we’ll look at opportunities to increase our production beyond 2014 through acquisition. So we’re certainly looking at smaller, earlier stage development potential assets with a resource on it that we think can be quickly put into a reserve base and then eventually built into a mine over a three to five year horizon.
So that’s where we’re focused right now.
Unidentified Analyst
Okay. And could you tell me what your cash cost would be ex the byproducts?
Sean Boyd
I guess ex the byproduct, I think I’ve seen some co-product calculations out there by some analysts that put LaRonde in the low 400s per ounce, but we don’t do that calculation. So I’m quoting somebody else’s.
Unidentified Analyst
$400 you said for the whole company?
Sean Boyd
Low 400s if you use co-product accounting. That’s what I saw on one analyst report this morning.
But I think one way to look at it is the byproduct component of revenue becomes very small as we move forward. And with that small component using assumptions on silver at $11 and zinc in the mid-50s, we look at that and our costs are still in the low 300s overall, incorporating that small component.
So it’s becoming less and less of a factor moving forward.
Operator
Our next question comes from [Steve Valardo with Casadevil]. Please go ahead.
Steven Kissey
Hello, gentlemen; it’s [Steven Kissey]. I was just wondering; you do have a lot of focus on growth right now and just following on from the last question where assumption of the gold price staying where it is or actually going a bit higher; that you would have expansion and growth, increase dividends and that.
My question is regarding more risk management. Your debt position has grown.
Agnico traditionally never had a lot of debt. Granted, the ratio on net debt is probably somewhere below 15%; but I’m just wondering in terms of risk management and in terms of your strategy of debt versus growth.
If we look historically from the 1980s to 1990s, gold did go from 800 to $300. And I’m just wondering if you stress test your strategy, if gold was to fall from where it is now to around the $500 level; and I know that sounds extreme, how would you manage the debt versus growth scenario?
If you are going to have good cash flow going forward, are you going to use some of that to pay down the debt or are you comfortable with having a higher debt level going forward?
Sean Boyd
I’ll just start and then I’ll turn it over to Dave. But I think what you’ve seen yesterday with the announcement of the two expansions, combined additional investment there is about $75 million, of which roughly 10 is spent this year and the balance spent next year when we’re generating net free cash flow.
And if we look at on a potential expansion at Kittila, those funds would be spent over a sort of three-to-five year time horizon. And then if you look at the strategy and tie it into what we’re looking for in terms of acquisition, as we stated over the last several quarters, anything that we’d be looking at in terms of bringing in, we would undertake a 12 to 24 month exploration and feasibility study phase before we committed any further capital.
So this is the go-slow approach that we’ve been referring to for the last couple of quarters. But certainly, part of that net free cash flow will be used to reduce the drawings under the line of credit and I’ll turn it over to Dave.
Dave Garofalo
Yes, the net debt to cap this past quarter, Steve, was just over 10% and I think that’s pretty conservative. We might get it up to about 15% by the end of the year, but I think that’s still a relatively low level given the size of the company and the cash flow we’re generating.
And we’re also constraining ourselves to no more than 3.5 times net debt to EBITDA; that’s both a covenant within our existing facility and it’s a policy we have internally in terms of maintaining a conservative debt position. And on top of that, the existing facility has no amortization; it’s a three-year unsecured facility – it’s a revolver.
As Sean said, as we generate more cash, we’ll just revolve some of that debt back in and keep it available for other opportunities that might come up. So I think we’re quite conservatively capitalized right now and we feel comfortable with the debt we’re carrying.
Operator
Our question comes from Barry Cooper with CIBC. Please go ahead.
Barry Cooper
Yeah, good day, congratulations on turning Kittila around. What was the recovery at Kittila for July?
Jean Robitaille
For July, the month end is not completed and we need to complete inventory so it will be in the 60s, but I cannot give a nominal digit. But it was 65.3% for June.
Barry Cooper
Right. And Jean is that kind of lumpy week to week or day to day or is it kind of gets stabilized?
Jean Robitaille
It’s stabilized. We’re still doing some validation, so for sure in the three month period I’m saying that will be at that level.
We are planning some tests. So to be honest we have some days that we are over the 65% and some weeks, but we have some cushion to do some validation.
Barry Cooper
Right; okay. And then for Dave, this is the first time we’ve got to see some depreciation per ounce costs obviously for Lapa and Kittila.
How relevant are those for a go-forward basis, Dave?
Dave Garofalo
Well I think I’d rather look at it on an aggregate basis, I’d say, across all the operations. Our acquisition and discovery costs have averaged about 50 bucks an ounce.
Our build-out costs have averaged about 100. So I would say our depreciation over time will average about 150 across all the operations.
It might be a little lumpy between operations, but on average it’s about 150.
Barry Cooper
Right, but I guess Lapa was close to -- I don’t have that figure in front of me I guess it’s in that ballpark. How was Lapa able to meet the commercial hurdle, given that its op costs were higher than the gold price?
Dave Garofalo
It was close enough. And I’m not trying to be flip.
Actually, the onus is on us to prove that we don’t have commercial production according to SEC. They assume we’re in commercial production when we start pouring gold and we have to prove that we’re not.
And so when we’re close enough to covering our operating costs and we’re at 60 to 70% of throughput, the SEC says well close enough; you’re at commercial production, you’re not allowed to capitalize cost anymore.
Operator
Your next question comes from John Tumazos with John Tumazos Independent Research. Please go ahead.
John Tumazos
Two questions if I may. I’m very intrigued at the 146 kilometers you’re drilling at Kittila and Meadowbank.
And in Mexico, I guess you don’t go to the gym to lift weights or sleep at night; you just squint and look at drill core boxes. You expect to drill the same 146 kilometers in the second half of the year and should we view that volume of drilling as indicative of 5, 10, 15 or 20 million ounce potential resource magnitudes?
Jean Robitaille
What we know is Meadowbank, the season is very short and we drill during the winter season and the spring season. Presently we drill over a 47 kilometer and the rest of the year we do not drill a lot; probably my guess would be around 8 kilometers of drilling.
And we expect to receive all the asset probably at the end of August and we put all the information together to know what we have in hand.
John Tumazos
And does the drilling continue at the same rates at Kittila and in Mexico through the second half?
Jean Robitaille
Kittila, yes, and in Mexico as well.
John Tumazos
Should we assume that this drilling converts into resources and could you give us any idea as to the magnitudes? It would seem like that magnitude of drilling would be worth more than a million ounces of indicated or inferred resource at each location and possibly much more.
Alain Blackburn
Well, I think the break down would be about 25% exploration, 75% conversion, John. That’s just a very rough figure.
And as Sean mentioned at the outset of his presentation, we are on track to be able to convert the resource into reserves, to be able to get close or attain the 20-million ounce level. We’re monitoring this very closely and we always update our internal progress mid-year, and we’re just in the process of doing that as we speak.
Sean Boyd
The one part of that, John, is in terms of actual drill core, I think the industry is challenged in terms of getting assays processed, and we’re certainly no different. So we’ve got a backlog, and we’re working through that backlog and that’s why we’re saying that we anticipate having an exploration update in September based on clearing up that assay backlog.
So as Alain just mentioned, we expect to have a lot of assays in on and a lot of this drilling done in the first half of the year in August and we’ll be compiling that. But again, we’ve had some success in Mexico.
It’s a large property position. We’re really just, from our view, scratching the surface there.
Meadowbank is also large; 40,000 hectares, so we’ve seen some encouragement there. So it’s really targeted on taking deposits that we felt had a lot of potential and drilling them very aggressively and that’s the focus.
And in answer to one of the earlier questions where do we spend the increasing cash flow? Well, certainly some of that is going to go back to increasing the exploration budgets, because as you know, this team on the exploration side like the operating team has been together for 20 years.
They’ve had a great track record. They’re excited about the prospects of some of these properties.
So we’re going to support their recommendation to continue with a very healthy drill program and look to increase it next year.
John Tumazos
If I could ask a specific accounting question; there was 50 million of cost involving concentrates and at Lapa and Kittila those concentrates I guess had not yet changed title at quarter end or some of them if I understand the note. Do you use the June actual month recovery rate in estimating production from those concentrates and could you just give slightly more color on the accounting process?
Dave Garofalo
Well, for revenue recognition, frankly, title would has to pass for revenue to be recognized, otherwise concentrates are carried at cost on the balance sheet for quarter end. I don’t know if that answers your question, John, or not.
So all we’re doing is we’re not really estimating the market value of those unproduced cons or unsold cons; we just carry them at cost at quarter end. For production purposes, there is an estimate in terms of what’s produced from the circuit.
I don’t know Jean, if you want to give some insights as to how you estimate gold production within the circuit and quarter end.
Jean Robitaille
The estimation is we have different kind of inventory; one is it’s considered as produced when it’s on the final form that we can sell, so copper come, zinc come, lead come or fine carbon, then what is the payable is really, so what is out of the site, so.
John Tumazos
So, the footnote small I and small III, in the cash cost details in the second half of the release; those footnotes are cons for production and footnotes I and III –
Dave Garofalo
What that refers to is we calculate our cash costs on a production basis. So we have to reconcile that back to the P&L.
So we have to take our cost of sales and adjust it to bring it up to a production basis in order to calculate the cash cost per ounce of production. So that’s what that inventory adjustment refers to.
John Tumazos
So it’s only related to the cash cost, not (inaudible) and not the P&L.
Dave Garofalo
That’s right.
John Tumazos
As accounted.
Dave Garofalo
Yeah. That’s right.
The cash cost we reported on a production basis, whereas the P&L is obviously on a revenue or sales basis. And that’s part of the adjustment process.
John Tumazos
Thank you.
Dave Garofalo
Welcome.
Operator
(Operator Instructions). There are no further questions at this time.
Please continue.
Sean Boyd
Okay, thank you operator and thank you everyone and we’re not just excited about completing another quarter, but we’ve been told that summer is going to start this weekend up here in Toronto, so we’re excited about that. Thanks for your attention and we’ll talk to you at the next quarter.
Thanks.
Operator
Ladies and gentlemen, this concludes the conference call for today. Thank you for participating.
Please disconnect your lines.