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Agnico Eagle Mines Ltd (AEM) Q3 2021 Earnings Call Transcript

By Motley Fool Transcribers – Oct 29, 2021 at 5:30PM

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AEM earnings call for the period ending September 30, 2021.

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Agnico Eagle Mines Ltd (AEM -4.58%)
Q3 2021 Earnings Call
Oct 29, 2021, 11:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Grant, and Ill be the operator for todays conference. At this time, I would like to welcome everyone to the Agnico Eagle Third Quarter Results 2021 Conference Call. [Operator Instructions] Mr. Boyd, you may now begin your conference.

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Sean Boyd -- Vice-Chairman & Chief Executive Officer

Thank you, Operator, and good morning, everyone, and thank you for joining us for our third quarter 2021 conference call. Just to take note of the fact that this presentation will include certain forward-looking statements. Id just like to start off with a summary and a bit of an overview. A very strong quarter from a production perspective, a cost perspective, from a cash generation perspective as well. We had record quarterly production as expected in the third quarter, producing over 520,000 ounces, excluding production from the Hope Bay mine. There was a big part of this performance was really driven by the performance of our Abitibi mines and our Meliadine mine. If you look at the Abitibi platform, Goldex, Canadian Malartic and LaRonde, those three mines collectively produced in the quarter, 222,000 ounces of gold, total cash cost below $600 an ounce. If you look at Meliadine, well get into that in a minute, had a record quarter from a production standpoint, producing about 97,000 ounces of gold at total cash costs of $634 million. So really strong performance from that base, producing almost 2/3 of the production ounces for the company in the quarter. As a result of the strong production and cost performance in the quarter, weve maintained our 2021 guidance. We did provide commentary in the press release on cost inflation.

As we said in the press release, were seeing cost inflation on consumables and supplies in the order of about 5% to 7% going into next year. Thats roughly half of our cost structure. The other half would be largely labor. And our labor expected increase would be less than that were seeing in our consumables and our reagents. So were not seeing any abnormal pressure on the wage side. And we thought it was important to give you our sense. We did update you last quarter, and we wanted to give you what were seeing in the current environment. Also of note, as you know, on September the 28, a month ago, both Agnico and Kirkland Lake announced a merger of equals that would combine and create the best-in-class gold company operating in pro mining jurisdictions, unlocking significant synergies. So this is really a transaction to unlock value, amounting to about $2 billion over 10 years. This is basically done to take advantage of what is really a regional consolidation opportunity, which drives a lot of those synergies.

And as weve said before, when you look at -- from Detour down to Kirkland Lake, across to Val dOr, that relatively small geographical footprint, the combined company will produce annually almost two million ounces of gold with a combined reserve and resource of almost 70 million ounces. If you look at the combined Canadian production, from this company, as weve said before, over 2.5 million ounces with the potential to get to about three million ounces. So this is the major building block of this company going forward, not only unlocking value through synergies, but creating the highest quality platform for creating additional value going forward. We continue to work with our partners at Kirkland Lake Gold, continue to discuss and plan for a successful integration of the two businesses making good progress. Weve been asked about the combination of these two businesses. Well, as weve said in the past and said on September the 28, I think the magic of this combination is the fact that were taking two high quality businesses, one with nine mines, one with three mines. And Kirklands, two of their three mines are on the same rough geological belt as our business in Quebec, and we do have development projects in Ontario.

So from an integration standpoint, from a manageability standpoint, from a cultural standpoint, these line up extremely well. And were highly confident that well have a successful integration of these two high quality businesses. A big part of our story has been the exploration success over our long history, but more recently, over the last year or so, were seeing significant exploration results at many of our largest cash flow generators and our largest producers, including three of our largest gold mines, and well talk about that as well. As youve heard us say before, this is the largest exploration budget in the history of Agnico, around $160 million. And I think its important to note that Kirkland Lake gold actually spends more than we do. And so when you think about that combination, again, it will be a company that actually has the best upside potential in terms of adding value through the drill bit, and that will be a core part of the strategy, given that its been a core part of the strategy and a big part of the success of both companies individually over the last couple of years.

Well have a more detailed update of the exploration story of Agnico on November the 2. And so were still compiling that information around this. But some of the highlights were included in our press release, LaRonde, continues to be a major focus for exploration, even after being in production for over 30 years because we do have a lot of undrilled ground to the west of LaRonde on the old Barrick Bousquet property. Thats going to require access to drill. So were extending three exploration drifts into the LZ5 property, the former Bousquet property. That will be a big part of the exploration story over the next two to three years. And we also continue to see good promise to the east of the mine, and we put in a recent drill hole that was encountered on the 20N Zinc South zone. And the NSRs of these intersections are several hundreds of dollars. So highly valued rock in the lower part of the mine, which is not inconsistent with what weve seen over the 30-year history of this mine, where weve seen polymetallic zones that run high NSR value. So were going to also, as well as the focus on the west part of LaRonde, also focus on the east part of LaRonde. At Meliadine, we continue to drill that deposit as we go deeper, continue to encounter higher grade over meaningful width, which is important.

And again, reinforcing the concept that we first understood very early on as we were looking at this opportunity. And after we bought it doing a bulk sample, we found that, that bulk sample returned more gold than was indicated in the block model. So we continue to see a lot of visible gold in the drill holes, suggesting that this deposit not only continues and gets bigger, its also retaining its high-quality nature in terms of grade, and well get to in a minute, and you can see that, that translates into higher production, very good cash generation coming out of Meliadine. At Amaruq, as you know, thats a focus for us. In the region of the Amaruq deposit, we continue to drill largely to the west. Were drilling also between Whale Tail and IVR, but of note, in the quarter was in the Mammoth area. Thats about 600 meters west of the Whale Tail pit. Were encountering good thicknesses, decent grades within 250 meters of surface. So its early, but potentially significant, and that will be a focus as we move into next year to continue to follow-up our drilling in that area because thats what were looking for, near-surface mineralization close to our existing infrastructure.

The Odyssey project continues to have tremendous potential. We continue to get -- as we drill the core of East Gouldie, as Guy Gosselin has said many times, its very consistent, very tabular, almost like LaRonde, when you drill a hole within the envelope or within the outline, youre hitting gold, very consistent. And the excitement is really what do we see as we move to the east in that favorable geological pattern. And what weve seen as weve drilled in between that wide step out that we talked about over the last few months is we continue to see the potential to maybe add additional zones in that gap. Again, early, but its a real focus for exploration at Canadian Malartic. And Upper Beaver, were seeing the potential to add additional mineralization as we drill deeper, high gold grades, very good copper grades over very good thicknesses in a potential new zone. So were focused on that as we move forward. And that will be an important part of extracting additional value out of the combination of Agnico and Kirkland because of the proximity of Upper Beaver to Kirklands Macassa mine. And in addition to that, weve got a sizable resource right on the boundary in the AK zone, which is easily accessible with a tunnel drift from the Macassa operations.

So well be able to provide more clarity on that as we move through the next couple of months. On ESG, we continue to rank very high in ESG ratings. Its a focus for it will be a focus in the combined company as we put those two businesses together, we see lots of opportunities, particularly in communities, particularly on renewable energy in the combined company. So that will be an important focus. The highlights in the quarter was really the reintegration of the Nunavut at workforce in Nunavut, both at Meliadine and Meadowbank. Weve been able to do that successfully. Were happy to have them back. We missed them while they are away. And thats an important step in building the business and building the platform in Nunavut. On climate change, we announced recently, our commitment to Net-Zero by 2050 and also recently committed to implement the task force on climate-related financial disclosure. We talked about that at our Health and Safety committee yesterday and at the Board level. So thats the primary focus. And our Mexican mines continue to win awards in terms of safety and corporate and social responsibility.

So that was a big highlight in the quarter. Ill spend a little time on the next page, mostly just to go down some of our assets and talk about some of the highlights, and Ill just use this page as a bit of a guide and a reference before getting into the individual mines, just want to highlight the strong operating margin in the quarter coming off of that record production. And really looking at, particularly from the big three mines, looking at LaRonde, continues to be our biggest cash flow generator, almost $150 million of operating margin in the quarter. Canadian Malartic at $93 million and Meliadine sort of entering into that group of the big three mines with record production, but also strong cash flow generation at $85 million. So that cash flow is a significant part of our overall cash margin in the quarter of over $500 million. Just starting with LaRonde, a very strong quarter. We had very good grades in the west mine. We set a new quarterly tonnage record at LZ5, which is important in terms of continuing to optimize that asset. A lot of that productivity comes from using automated equipment, where we continue to be well advanced there with Sandvik, and Sandvik will acknowledge that LaRondes one of the mines that they deal with, which is further ahead than most mines in terms of integrating and utilizing automated equipment.

Our Board was just at site this week at Goldex, at Canadian Malartic, at LaRonde, and were able to see some of that automation in progress. Continue to focus on exploration, as we said, as we move to the west, and really, what were looking at is as part of the full potential exercise here, LaRondes strong production, we think will be bolstered going forward in an ability to extend the mine life as we drill out both the western and eastern side of that deposit and that trend. So good performance there at LaRonde. At Canadian Malartic again, record quarterly tonnage mined and record quarterly tonnage milled in the quarter, resulting in strong gold production and very good cash generation. The focus continues to be on optimizing the Odyssey project. We got to see the new concrete head frame. I think its completed in terms of the form. Its up about 97 meters, so an extremely big head frame to match the big underground opportunity that exists there. And you need the big head frame if this is going to become, which it is, the largest underground gold mine in the country, in Canada, as we build it out. But as we said, the focus is -- were on target in terms of development there, on budget in terms of development, but the focus is also on exploration and how big is that structure and how do we integrate that into the mine plan and improving the economics of that project, which we believe we can continue to do as we look to optimize that project.

Kittila, quarterly record in terms of mill feed and quarterly record gold production. So a lot of records in the quarter, which is, I think, is a testament to the ability now once weve expanded some of these mines, now to focus on optimizing the assets, and Kittilas certainly one of those, although were already working on the next phase of expansion at that mine. Continue to get good drill results there. As we drill deeper, that deposit continues at depth, continues to be wide open. Its already a very large mine in terms of mine life. And again, another optimization opportunity and expansion opportunity there. At Meadowbank, good production coming out of the Amaruq deposit, 90,000 ounces in September, was over 30,000 ounces in September, 34,000 ounces. The focus now is really on optimization, really on cost reduction as we go forward. We need to get the cost down. We have a definite plan in terms of optimizing that asset as we move forward. But the key for us is to get the tonnage, get the long-haul truck performance, which weve been getting. Thats allowed us to process good tonnage, which has resulted in good production going forward. So theres still work to do there. Our goal is to make it as a high quality mine as we have at Meliadine. It shows you that can be done in Nunavut.

But as we move into the fourth quarter, we did have a 1-week shutdown in early October, and that was really to do some tie-in work in the mill as we add a new circuit there to improve the recoveries in that plant. So with that 1-week shutdown, well have lower production in the fourth quarter at Meadowbank. And Meliadine, Ill just finish with Meliadine on this page, as we said, a record quarterly production of 97,000 ounces, hitting commercial production at the Tiriganiaq open pit in August. Were progressing on our Phase two expansion, which is important to continue to optimize this asset. We know from exploration that this asset will continue to grow, had a successful sealift. We discharged the saline water to the sea, almost all completed at this point. And the NIRB has reviewed the permit application. The NIRB recommendation for the water line project was positive, and were just waiting for the approval from the federal government as they review the NIRB report. We expect to receive that before the end of this year. So just wrapping up here before we open it up for questions, just on financial highlights. Normalized earnings of $0.60. Work-- operating cash flow before working capital, a very strong result at $1.69.

Again, thats driven by a record production, strong cash position, but we should note, post the merger announcement with Kirkland Lake, all of our rating agencies put Agnico Eagle on a positive ratings watch. So thats a positive sign on the merger from the rating agencies. So just in conclusion, a good strong quarter, record production, very good cash generation, lots of good exploration results that well be able to spend more time on next week with a more fulsome release and another call to have Guy and his team go through them with those that are interested. And were all focused now on getting to the vote, November 26. So we ask those shareholders of both Kirkland and Agnico to get out and vote for the merger. Were excited about it. We look forward to the combined platform and working with our partners at Kirkland Lake to continue to deliver the type of value that both companies have delivered individually to do it together in a lower risk, higher quality platform.

So thanks for your attention on that, and well be happy to take questions, Operator.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Tyler Langton from J.P. Morgan. Please go ahead

Tyler Langton -- J.P. Morgan -- Analyst

Maybe just to start, I appreciate sort of the details on the inflationary pressures. I mean, I guess, can you talk a little bit about sort of the actions that youre taking to offset some of the pressures on consumables and then just labor? And kind of, I guess, sort of with those efforts, I mean, is it something where sort of overall inflation might be up sort of in the low single-digit range when you kind of sort of lump everything together?

Dominique Girard -- Senior Vice President of Operations-Canada & Europe

Yes. Well resume that maybe in two. One is the -- on the procurement. What were looking, we call it, the strategic sourcing. Its a lot about to -- what we see in the crystal ball coming with the inflation and to do the timing of buying stuff and the quantity based on that. Again, this is a lot with -- going with communication with externally and internally, but we have a good procurement team on top of it to secure the price. I will say, other than that, its mainly all about productivity. How could we be better at the maintenance, at the operation, using automation toward the end of the day, use less material. Maybe on the workforce, we do every year negotiation with our employees. This is year after year, the same thing. We dont expect something very exceptional this year, might have a bit of pressure higher, but this will not end to too much inflation on that part. So overall, it is continue to improve what we do. We have plan in place on the cost side and on the workforce management as well as the procurement strategy.

Tyler Langton -- J.P. Morgan -- Analyst

And so to those, I mean, the -- I guess, the 5% to 7% increase in consumables and then labor costs up less. Are those sort of net of the efforts youre making? Or is that something where those efforts could kind of sort of lead to lower costs?

Ammar Al-Joundi -- President

Those are individuals. So consumables going up, ballpark, 5% to 7%. Obviously, its hard to predict, labor, less than that. And then all those efforts that Dominique is talking about are going to work to offset as much of that as we possibly can.

Tyler Langton -- J.P. Morgan -- Analyst

Okay. Thats helpful. And then just a final question on your cost guidance for the year, I guess, to kind of hit sort of the higher end for the year, it looks like costs should come down a little bit in Q4. Could you just, I guess, give us some details on what might be driving on the lower cost in the quarter?

Ammar Al-Joundi -- President

Well, as Dominique said, really, its mostly to do with mine sequencing and the grade that youre going to get within the year, thats the key driver. Its really -- its hard to make a big difference within a year. So usually, Tyler, within a year, its just a function of where you are in the mine sequence. There has been pressure this year, no doubt about it.

Tyler Langton -- J.P. Morgan -- Analyst

Great. Thanks.

Operator

Our next question comes from Fahad Tariq from Credit Suisse. Please go ahead.

Fahad Tariq -- Credit Suisse -- Analyst

Hi. Good morning. Thanks for taking my questions. Just on the -- a follow-up on some of the things youre doing to mitigate. Can you talk about once the merger is complete, will a larger platform in Canada help with some of the mitigation from an inflation perspective, maybe bigger purchases, greater scale of procurement, etc.?

Ammar Al-Joundi -- President

Absolutely. Absolutely, it will. One of the big advantages of this merger of equals is the opportunity on the synergies. And lets be honest, most of the synergies will be operational and associated with a bigger footprint in a particular platform. So it does, of course, give you a better purchasing power. It does, of course, give you better negotiating power, but its more than that. Its also logistics, its warehousing, its a number of things. And then, of course, above and beyond that, opportunities to share infrastructure. So absolutely, a bigger position in a region where you have more influence is a competitive advantage.

Fahad Tariq -- Credit Suisse -- Analyst

Okay. Great and my only other question, one of your competitors today that also has a large Canadian platform, talked about absentees at mines because of COVID. Can you talk a little bit about, like, are you seeing that at any of your mines, Hope Bay excluded? And maybe some of the measures youre taking to combat infections on site?

Dominique Girard -- Senior Vice President of Operations-Canada & Europe

Yes. No, we dont have significant absentees issue. Some action that we took to -- for our employees and for their business is to have mandatory vaccination in the Nunavut, which is, lets say, more sensitive with the camp occupation and the flight. So since October 15, everybody needs to have one shot to take the plane and November 15, its going to be two shot. So far, we have a good response, good collaboration with the employees, and there is no issue on that.

Sean Boyd -- Vice-Chairman & Chief Executive Officer

Yes. One of the other things that we have noted as weve looked at, theres no doubt that attracting skilled work -- workers is getting harder. What weve been able to do and what our focus has been in the last little while is transitioning some of our higher-quality contract workforce into Agnico Eagle direct employment. And thats just to give them certainty to give us more certainty and to ensure that we maintain that skill level. That ultimately gets reflected into productivity and costs, etc.. So thats one of the things that weve done specifically to try to manage that situation.

Fahad Tariq -- Credit Suisse -- Analyst

Okay. Great. Yeah. Thats helpful color. Thank you.

Operator

Your next question comes from Ralph Profiti from Eight capital. Please go ahead.

Ralph Profiti -- Eight capital -- Analyst

Thanks for taking my questions. Sean, I wanted to come back to this cost reduction at Meadowbank because you put it in the context of Meliadine as the target. And Im just wondering, is the goal here to get that cash structure down into that sort of $700 an ounce range? Or are you talking more sort of generic terms about productivity, maintenance, automation and Meliadine as sort of the benchmark?

Sean Boyd -- Vice-Chairman & Chief Executive Officer

Yes. I think that, as weve been saying over the last few quarters, this at Amaruq, as far as unit cost is sequencing. And so the next couple of years sequencing in the pit, moving to higher grade, a couple of years after that, where that will lower the unit cost dramatically from what theyll be over the next couple of years. So part of that is sequencing. But part of that is just fitting the cost structure to the asset and to the mine and the opportunity. One of the things that is different clearly at Amaruq versus Meliadine is Amaruq is lower grade. Amaruq is also more remote relative to major infrastructure. Meliadine has the advantage of being closer to rank in inland. So built in, Meliadine certainly has an advantage. So I think the concept that I was referring to is more in terms of the cash generation potential of Amaruq as a mine, while we continue to explore for other assets is to ensure that were generating maximum cash from that asset.

Ammar Al-Joundi -- President

The one thing to remember about Amaruq is its a satellite deposit. It is a higher cash cost than Meliadine, but its leveraging off existing infrastructure at Meadowbank. And our primary objective is to get the best return on capital, on our shareholders capital. So that is something to keep in mind. It is a -- it will be a structurally higher cost than Meliadine, but it will be a very good mine because it had a lot less capital because its using an existing mill.

Ralph Profiti -- Eight capital -- Analyst

Okay. My follow-up, Sean, is I do want to come back to the inflation mitigation, right? And presumably, that means hedging, supply chain management, inventory. But Im wondering about the interrelationship between some of the hedging strategy and the currency hedging strategy, right? Are those independent of each other because in this cycle, we have rising fuel prices, but we also do not have Canadian dollar rising at the same rate, which is actually coming in as a net benefit. So how is Agnico thinking about hedging raw materials versus hedging currency?

Ammar Al-Joundi -- President

Well, we dont have any hedges on raw materials beyond fuel. Of course, we do diesel. We do currency as well. And I dont think our strategy is particularly changing on how we hedge those things. Theyre fairly independent of whats going on. At any given moment, we look at the sentiment in the market where we think things are going, and that could cause us to do larger or smaller quantities of hedging at any given moment. But basically, what were trying to do is to make sure that we deliver better than budget levels to try and make sure that we can do what we said were going to do in our February guidance annually. Thats really the line in the sand, is -- and governs how we hedge. The when is quite honestly, very opportunistic. And over the years, its worked out. But as you well know, past performance does not guarantee future success. But no change to the strategy overall. I think well still get our opportunities because volatility seems to be existing still, and I dont think its going to go away. So we kind of feed off the volatility.

Ralph Profiti -- Eight capital -- Analyst

Understood. Thanks for that.

Operator

Your next question comes from John Tumazos from John Tumazos Very Independent Research. Please go ahead. Congratulations on all the good things.

Sean Boyd -- Vice-Chairman & Chief Executive Officer

Thank you, John.

John Tumazos -- ohn Tumazos Very Independent Research -- Analyst

Usually, when large companies merge exploration, they fire half of the geologists or something like that. My sense is that your team and the Kirkland team are going to be very smart and not do that. Maybe youre going to eliminate administrative duplication and get more drilling for the same money or something smart like that. I hired a fellow Bill that was with Santa Fe, that was let go with Newmont at Santa Fe. I know people -- juniors that are hiring Newmont people from the Barrick Newmont Consolidation. Im sure that you thought this through meticulously because thats an important part of the company.

Sean Boyd -- Vice-Chairman & Chief Executive Officer

Yes. Thats a big part. Good point, John. Thats a big part of the historical value creation of both companies is that Agnico has been around, as you know, for a long time, and weve generally just followed geological potential and found our way into Finland and Mexico and throughout the Abitibi belt and in Nunavut. Kirkland, as everybody knows, has created a lot of value based on making geological assessments that others were also making, and they came up with a different view and through determined drilling and focussed drilling and fairly aggressive budgets, created a lot of value. So that wont change. Actually, we see this as a big differentiator between Barrick Newmont and the new Agnico, would be not just the focus on exploration, but the ability to actually add value through exploration. And thats because if you look at the combined asset basis, a lot of the exploration news is coming at some of our biggest assets, with the biggest NAVs, the biggest production, the biggest cash flow generation, and that gives us an opportunity to turn that into brownfield development opportunities, which creates value sooner.

And I think weve also -- are making the assumption, which I think is fair is that certainly, we know that from Agnicos perspective that the market has tended to pay us earlier than most when we have exploration success. I would suggest thats probably the same with Kirkland. So this will be a big part of the focus, and geologists will be important. I think the constraint will be, as we look at combining two big budgets, its a constraint that everybody is feeling right now is to get quality drillers and quality drills. So in that context, well have to make sure that we get the best drills and the best drillers at the right projects that are going to drive the most value. That will really be the exercise. I dont know if Guy has anything to add there.

Guy Gosselin -- Senior Vice President of Exploration

No, I think you nailed it down, Sean. I think that theres a lot of complementary of the land package, both driven by obvious near-term potential to grow around Detour a lot of synergies, potential in Kirkland Lake. Obviously, well need to wrap our head around how do we realign priorities after. But certainly, no change in the big game plan to create a lot of value around existing operations.

John Tumazos -- ohn Tumazos Very Independent Research -- Analyst

Can I ask a follow-up on Hope Bay, now that youve had it almost a year?

Sean Boyd -- Vice-Chairman & Chief Executive Officer

Yes.

Guy Gosselin -- Senior Vice President of Exploration

I know the costs are a little high, and its not consolidated with the -- its not described with the continuing operations, but you probably know more now than you did at the beginning.

Sean Boyd -- Vice-Chairman & Chief Executive Officer

Yes. Maybe Guy can start, and then Dominique will sort of roll into some of the thinking because the thinking now will be driven off of what Guy finds from the drill. This is a large exploration play. And then what Guy is able to determine in terms of upside and potential will flow into how Dominique and his team look at what we need from a processing standpoint and where that processing capacity should be on that large land package. So Guy, maybe you could start.

Guy Gosselin -- Senior Vice President of Exploration

I think from an exploration standpoint, to start with, we certainly confirm what we thought, meaning that all of the zone at Doris remains open, both the BTD that is currently being mined, and the central area, west valley, were confirming that we can expand those zones. Weve also resumed drilling more aggressively on the Madrid, confirming that we can identify additional parallel zone or extension of the known zone and the deposit to the north. So lots of positive results from that standpoint. So confirming that well be able to significantly grow the resources. And more importantly, I think were taking a step back, no -- nothing wrong about whats been done over the last five years, but they were mostly focused at putting the mine into production, and we can now take a look back at what was done previously in the time of Newmont at bigger scale, at property scale, go back into the bigger -- large land position in the belt, all of the huge amount of data sets that were collected at the time and really look at the entire land package as a whole and reinitiate exploration at property scale. And maybe on the...

John Tumazos -- ohn Tumazos Very Independent Research -- Analyst

How long do you think it will take before you know whether its part of the long-term team or not? Is this a four year effort or a one year effort or, excuse me for interjecting, Sean.

Guy Gosselin -- Senior Vice President of Exploration

Yes. Well, maybe, starting with the -- again, at Madrid, which we know we can extend Doris, but the bigger price is at Madrid, where the core -- thats currently the center of gravity. So well certainly need, as you mentioned, a couple of years, I mean, kind of, is it 1? Is it 2? We certainly want to ramp up drilling, the sooner the better that we can make our mind about the center of gravity, grow the deposit at Madrid, put our head around in Boston. And we certainly want to do it right and more -- and we know we can continue to grow. So its all about defining the center of gravity, the best thing. So maybe I can hand over on Dominique on that.

Dominique Girard -- Senior Vice President of Operations-Canada & Europe

Yes, John, maybe back to your question, what nuisance were there other than the geologists that they are more and more excited with what we saw. At the mill, the team did a good work to do some improvement, and were currently doing a trade-off. Should we look to expand that mill to bring it to a higher throughput while minimizing the capital? Or should we just go to a bigger mill? When we started and when the first visit I did there with Ammar, Martine, my first visit to the mill was not very positive. But now the team are improving it gradually. So thats the trade-off. Its ongoing, and thats going to be compared to -- should we redo a new mill of -- maybe at Madrid. This is -- still study ongoing. The huge geological potential is just a question of time. What is exactly that timing, thats going to depend on the results.

John Tumazos -- ohn Tumazos Very Independent Research -- Analyst

[Foreign Speech]

Operator

Your next question comes from Mike Jalonen from Bank of America. Please goa ahead.

Mike Jalonen -- Bank of America -- Analyst

Hi, Sean.

Sean Boyd -- Vice-Chairman & Chief Executive Officer

Hi, Mike.

Mike Jalonen -- Bank of America -- Analyst

Just had a question. Youre set to start, youve been discussing with Kirkland the plan for a successful integration. And I guess, keep thinking about Upper Beaver or Upper Canada, those projects sitting 19 kilometers from Macassa mill. And I know theres copper for Beaver, but is there any thought there? Youll put the copper circuit in Macassa, you not only have to build a mill, a tailings and pound, nothing, and that speeds that thing into production. To me, thats a huge synergy, thats not really being talked about much.

Sean Boyd -- Vice-Chairman & Chief Executive Officer

Yes, thats certainly part of the discussions and was also a big part of the thinking as we were doing sort of reciprocal due diligence. And that was the one connection, which was probably one of the things that started the discussions a couple of years ago as we were thinking about Upper Beaver, what we were going to do there as we continue to get good results. It was clear that Upper Beaver was a mine and was going to be an attractive mine with low unit cost once it got built. The question was, when to build it, what to actually build. And so that was one of the things that were driving our desire to talk to Kirkland about these types of opportunities. The other thing that accelerated some of that thinking in the camp is the fact that Guy and his team were drilling on the boundary of our property package and Kirkland Lake and started to grow a deposit called the AK deposit, which is about, at this point, I think, about 700,000 ounces, 680 or something like that. And that project, as we looked at it, was certainly much better from a return perspective and risk perspective and low capex by extending a drift from the Macassa property to access and mine that. So thats part of the synergies as well. So we also have that whole sort of concept of how do we process it, where do we process it, what should be done at the Macassa mill.

That stuff is ongoing now in terms of even looking at taking samples of ore and doing tests on some ideas that the teams have. So were looking at that inside out. They also have the Holt processing facility. Were not sure whether that fits, but were looking at this as a collection of assets in the area. And I think this just sort of reinforces this concept of regional consolidation. Thats how weve approached this. This wouldnt have been announced. We wouldnt have done this if this didnt provide the synergy and optimization benefits from the regional proximity of these assets to be able to move collective skills around and to take advantage of physical infrastructure, but also to ramp up exploration. We know that Kirklands had some good results on the amalgamated break. We have the Upper Canada, a property which we dont talk much about. So theres lots of opportunities here that our collective teams are working through, and well be thinking more on as we move through the next several weeks and into next year. And well be able to provide a lot more color on that early in the new year as we get more clarity on some of these thoughts, but that work is ongoing and was ongoing even during the due diligence.

Mike Jalonen -- Bank of America -- Analyst

How long does this trip up to be, is it -- is it -- you call it the AK zone?

Sean Boyd -- Vice-Chairman & Chief Executive Officer

Yes. Guy, maybe you can sort of update, Mike?

Guy Gosselin -- Senior Vice President of Exploration

Yes, exactly. The AK currently sits within 300 meter from the property boundary from the shallow infrastructure and the ramp that Kirkland Lake already has on their near surface resources at Macassa. So all of that could quickly be connected and make that surface zone at Macassa, along with AK as an interesting supplemental source of ore to maximize the processing facility at Macassa and provide flexibility for the operation.

Mike Jalonen -- Bank of America -- Analyst

Doesnt Agnico also own some of the old mines east of Macassa.

John Tumazos -- ohn Tumazos Very Independent Research -- Analyst

So yes. Also, yes, on the Toburn and the rest of the break to the east. So youre right, well, at the same time, consolidate the entire -- they already control Kirkland Lake currently control already three quarters of the whole break. We were already sitting on that Toburn and Glencore to the extreme East. So all of that former main break at Kirkland Lake will all be now part of one entity, which removing all of those property boundary constraint will create a lot of opportunity moving forward.

Mike Jalonen -- Bank of America -- Analyst

Okay. Great. Thanks. Looking forward to see how it shapes up.

John Tumazos -- ohn Tumazos Very Independent Research -- Analyst

Thank you.

Operator

Your next question comes from Tanya Jakusconek. Please go ahead.

Tanya Jakusconek -- Scotiabank Global Banking and Markets -- Analyst

Yes. Good morning everyone. Thanks for taking my questions. I wanted to ask Dominique and Guy some questions. Just, Dominique, can we go back to the Meadowbank complex? And I just want to have a better understanding of whats happening in the pit at Amaruq. I understand about the rain, and it gets really sticky down there. But just want to understand what exactly has happened to change your mining sequence, and weve got into these lower grades and more dilution. So what are we doing to get back to the higher grade? And what are we doing to improve dilution? Thank you.

Dominique Girard -- Senior Vice President of Operations-Canada & Europe

Yes. Maybe I could start back with the rain challenges. We get more rain than planned. In fact, by September, it was more rain that we received the entire 2019, and 2019 with an exceptional year. Whats happening is as were drilling into the permafrost, when there is rain and youre all filled with water, its freezing. So you need to do the hot loading to be able to avoid that you have issue. So that creates challenges. And during -- it was more July and August where we had drill and blast challenges, plus in addition of that, some drillers that were had difficulty to staff at that time. And we had the decrease of the inventory, broken inventory. So we were not able to deploy the shovels and the trucks to move the tons. But this is back on track. Now the inventory is 1.5 million tons since the end of September. So this is behind us. The other, also aspect, as we talked the last quarter, we had some wall stability challenge that were looking for. The team are still working on how were going to mitigate that. So that has postponed some higher grade material, but that material is going to be back. So this is, lets say, mainly with the operation. On the good side, maintenance or bidding record availability. This is a very good news. Long-haul trucks are also doing their targets. This is also very good news. And on the grade side, I will let Guy to talk about the dilution that is happening a bit.

Guy Gosselin -- Senior Vice President of Exploration

Yes. So over, lets say, the last couple of years or since the start-up, basically, as we are narrowing down the drill spacing in some portion of the deposit. Well, in some area, we were pleasantly surprised in the Whale Tail where grade is better than expected. But in some other areas, there is some more complex folding pattern at what was encounter with the larger drill spacing. But overall, the ounces are there. And we still -- we see, unfortunately, that in some area, well, we need to mine wider. And currently, there is a team on-site that look at, OK, even with that more complex folding pattern in some portion of the pit, how can we get rid out of that additional internal dilution that we have to integrate, which because, bottom line, we see that the ounces are there. We just need actually in some of those more complex portions to take more external and internal dilution when mining goes, which impacts the cost, obviously, because we are integrating a little bit more dilution. But there is a team currently working on it to see how we can improve moving forward. And -- but in some portion of Whale Tail, we were pleasantly surprised, for example, in September, where we got our good production month because the grade was higher than expected.

Tanya Jakusconek -- Scotiabank Global Banking and Markets -- Analyst

Okay. So are you comfortable with your dilution factor that youve incorporated into your reserves or mine plan right now?

Guy Gosselin -- Senior Vice President of Exploration

Yes. Well, well -- weve run multiple assumptions over the last 1.5 years. And at year-end this year, what youll see in the reserve will be that adjustment with all of that being factored. But I would say bottom line, ounces are the same. We may see in some portion that will add some more internal dilution.

Tanya Jakusconek -- Scotiabank Global Banking and Markets -- Analyst

Okay. And maybe, Guy, that I have you on, its good to see some exploration results coming out of Amaruq because were trying to extend the open pit mine life. I know youre going to have a detailed review with us on November 2. But can you talk a little bit about what youre finding and how you see this open pit mine life extending?

Guy Gosselin -- Senior Vice President of Exploration

Were looking at all sorts of opportunity, as you are alluding to, because we can -- we are looking at ways, could we optimize the ultimate pit at Whale tail, look at that what was left open in the Mammoth area where were getting results. Were also looking at all of the residual inventory as well that were left behind around Vault and Portage, so, there is an intense effort currently being put. Thats looking, obviously, in order to continue on the ground, we would benefit from other source of open pit, and were actively working on it, on all aspects. On dusting all residual mineral inventory at any of the previous pit and also at cam scale, that larger property scale with regional exploration at generating new drill targets, and weve been getting some narrow, but good grade to the west that well talk about next week. So -- but still, its always -- were facing some -- the pressure is always on exploration to find new pits and find new resources, and the team is good at it and have vitros that will be successful.

Tanya Jakusconek -- Scotiabank Global Banking and Markets -- Analyst

On Meliadine, again, the drilling that you put out yesterday continues to show really good grades, and youve been capping at that deposit. What do you need to see before you think that your capping factor is too conservative? Like what do we need to -- like when do you change it?

Guy Gosselin -- Senior Vice President of Exploration

Well, its an ongoing effort, and its not unlike what we were having at LaRonde and what we did at LaRonde as well. Same thing is happening at Meliadine. We knew for a fact, as Sean alluded to previously, when we did the bulk sample, the only way we can get to the ounces we got in the bulk sample was by not putting any capping. Obviously, when youre a QP, you look at the rule of thumb, the way you do it, you need to put a reasonable capping. But as youre processing and as youre reconciling over several quarters, then you have to -- you can relax your capping, which weve been addressing in some zone when we get enough experience, were increasing the capex just as the ongoing exercise of reconciliation between the mill and the model. But currently, were pleasantly surprised because the additional ounces were getting are a lot due to the fact that were getting more gold, and the model is currently predicting. So were working on it. On some deposits, it is slightly more challenging. And some others, were seeing some plus.

Tanya Jakusconek -- Scotiabank Global Banking and Markets -- Analyst

Thank you.

Operator

[Operator Instructions] There are no further questions at this time. Please proceed.

Sean Boyd -- Vice-Chairman & Chief Executive Officer

Yes. Thank you, Operator, and thank you, everyone, for your attention. Thank you for the questions and interest. And as we noted, please watch for the exploration update release on November the 2, and I believe theres a call weve set up there. So if you need details on that, please reach out to the IR department. On November the 3, look for the circular for the merger of Agnico Eagle and Kirkland. Thats out, as we said, on November the three -- November the 1. So our in-house council just held up one finger. Its November the 1. It wasnt the finger you think. It was the index finger. So were still all good, and we look forward to your vote to approve what were very excited about, which is the combination of Agnico Eagle and Kirkland Lake. So thanks again.

Operator

[Operator Closing Remarks]

Duration: 53 minutes

Call participants:

Sean Boyd -- Vice-Chairman & Chief Executive Officer

Dominique Girard -- Senior Vice President of Operations-Canada & Europe

Ammar Al-Joundi -- President

Guy Gosselin -- Senior Vice President of Exploration

Tyler Langton -- J.P. Morgan -- Analyst

Fahad Tariq -- Credit Suisse -- Analyst

Ralph Profiti -- Eight capital -- Analyst

John Tumazos -- ohn Tumazos Very Independent Research -- Analyst

Mike Jalonen -- Bank of America -- Analyst

Tanya Jakusconek -- Scotiabank Global Banking and Markets -- Analyst

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