Development of the LaRonde gold mine in northwestern Quebec is one of those business stories that just gets better with each passing year.
Having completed its 7,350-ft. Penna shaft and expanded from a 2,200-ton to a 5,000-ton-per-day mining rate in 2000,
For the second quarter, Agnico made a net profit of US$3.4 million (or US5 per share) on mining revenue of US$30.6 million, compared with a profit of US$480,000 (US1 per share) on revenue of US$29.5 million during the corresponding period last year. Cash flow from operations rose to US$7.6 million from US$4.1 million between the two periods.
For the first six months of 2002, profits totalled US$3.8 million on revenue of US$56.2 million, compared with a profit of US$978,000 on revenue of US$50.3 million during the year-earlier period.
The second quarter saw Agnico produce a record 74,617 oz. gold (65,937 oz. a year earlier), as well as 709,000 oz. silver (723,00 oz.), 24.7 million lbs. zinc (32.6 million) and 2.1 million lbs. copper (1 million).
Operating time in LaRonde’s mill was 93% during the quarter, and the facility reached a rate of 5,400 tons per day — another quarterly record. Head grades during the quarter were 0.17 oz. gold per ton (0.16 oz. per ton last year), 2.28 oz. silver per ton (2.53 oz.), 3.64% zinc (5.32%) and 0.3% copper (0.21%).
Metallurgical recovery rates during the quarter were on target, at 93% for gold, 80% for silver, 81% for zinc and 74% for copper — a strong improvement for copper, up from about 60% last year.
On the negative side, quarterly cash operating costs at LaRonde rose to US$164 per oz. from US$111 per oz., partly as a result of larger royalties paid to
With its production emphatically un-hedged, Agnico realized US$310 per oz. gold during the second quarter (US$267 per oz. last year) as well as US$4.67 per oz. silver (US$4.59), a painfully low US36 per lb. zinc (42), and US78 per lb. copper (88).
On-site operating costs during the second quarter and first half were C$52 per ton, unchanged from the corresponding year-earlier periods. Second-quarter unit costs included definition drilling (C37), development work (C$5.02), mining (C$8.31), underground services (C$14.35), milling (C$16.93), surface services (C$1.75), and administration (C$4.51).
“As we move toward the completion of our 7,000-ton-per-day [mill-expansion] objective in the fourth quarter, what we’re already seeing are the benefits of this expansion through increased gold production and much stronger earnings and cash flow,” Agnico-Eagle President Sean Boyd told analysts during a conference call. “Although we had record gold production in the quarter, we were actually hoping to produce more gold than 74,000 oz.”
The shortfall was a “simple timing issue” of not being able to get to mining blocks at the bottom of the Penna shaft because of a slight delay in completing ventilation work.
As a consequence, the company had to alter its mining sequence, replacing higher-grade gold blocks with silver-zinc ore — a change that should result in substantially higher-than-budget zinc production for 2002.
Another event that will reduce gold output this year happened in early July, when the processing plant experienced an unplanned shutdown in the semi-autogenous-grinding (SAG) mill for 11 days.
The mill is up and running again, and the company is reviewing the entire SAG-mill electrical system to determine whether any modifications are needed in order for the facility to reach its 7,000-ton-per-day expanded production rate in October.
With respect to the expansion, Agnico reports that mill construction is well under way, including the installation of a ball mill, piping upgrades and work on the refinery addition.
More specifically, Agnico upgraded the refinery’s heating and ventilation system, built a vacuum-cleaning system in the concentrate load-out area, completed the grinding-bay foundations and building, and began installing the ball mill. As well, the company is modifying piping in the copper and zinc circuits and building two additional leach tanks and high-capacity thickeners.
Underground, the first production stope on level 194 was blasted in June, though extraction was delayed while an ore pass between levels 194 and 215 was completed. (LaRonde’s level numbers refer to vertical depth, with level 194 being 1,940 metres below surface, level 215 being 2,150 metres below surface, etc.) Workers also installed a spot-cooling system.
Agnico has revised its 2002 gold production forecast to 320,000 oz., down about 5% from the originally planned 340,000 oz. The decline is largely due to the shortfall in gold production in late June and the lost time in the mill in July.
Meanwhile, costs for the rest of the year are expected to swell as a result of the lower-than-expected gold production, a higher El Coco royalty stemming from higher gold prices, and lower-than-budgeted zinc prices. Cash costs at LaRonde in 2002 are expected to rise to US$145 per oz. from the originally budgeted US$130 per oz.
However, zinc production is 2002 is expected to be better than budgeted, at about 20 million lbs. and gold production in 2003 will likely be closer to 390,000 oz., compared with the 375,000 oz. originally planned.
By 2004, Agnico expects to be producing at a rate of 400,000 oz. gold per year, with cash costs declining below US$100 per oz. — a decline helped in part by the end of the El Coco royalty.
Boyd said that, despite some of this year’s operational setbacks, “the entire big picture of LaRonde as a low-cost, gold-production growth story is essentially unchanged, and we are on-track for steady growth in both earnings and cash flow.”
Agnico-Eagle continues to explore LaRonde, with six rigs drilling almost 44,000 ft. of core during in the recent quarter.
“The primary element of our strategy to create value continues to be an aggressive exploration program on LaRonde, and east of LaRonde on our large land package,” said Boyd.
Targets
There were four main exploration targets during the quarter:
n Agnico had one drill active east of LaRonde on the 20th level exploration drift (2,800 ft. below surface) within the El Coco property where, to date, the company has completed 3,864 ft. of level development.
“Although results to date are not economic, the geology observed in the drill core — consisting of host-rock alteration and sulphide mineralization — is similar to the alteration zone encountered on LaRonde just prior to the discovery of zone 20 North,” Boyd said.
Agnico will continue to test the favourable geology farther to the east and at depth, where this alteration zone remains open. Surface mapping has already traced the favourable unit across the El Coco property on to Agnico’s Sphinx property.
n A second rig carried out production delineation drilling between levels 98 and 152.
Highlights from zone 20 North (LaRonde’s largest and richest zone) include: hole 1062061, which was drilled along the upper, western edge of the zone and returned 18.4 true feet of 0.19 oz. gold per ton, 8.21 oz. silver per ton, 1.75% copper and 4.13% zinc; and hole 3152-08-Zn, which cut 51.8 true feet of 0.02 oz. gold, 2.80 oz. silver, 0.04% copper and 11.22% zinc.
In Zone 20 South, pa
rallel to Zone 20 North and in mining blocks scheduled for production during this quarter, one of the best holes, no. 10221872, intersected 13.5 true feet of 0.68 oz. gold, 6.47 oz. silver, 0.20% copper and 7.01% zinc.
n As lateral access improved on levels 194 and 215, two more rigs carried out definition drilling on and below levels 194 in the heart of the gold-20-North reserve.
Transition
Boyd described this drilling as having confirmed the grade of the mineralization encountered in much earlier drilling from the shaft. “One of the highlights during the quarter is that delineation drilling continued to confirm the transition of 20 North from zinc-silver to gold-copper below level 152, and it also outlined several additional higher-grade gold mining blocks in 20 South.”
Along level 215, the drilling also encountered one of the best results so far in the lower part of the mine. The hole, no. 21520473, intersected almost 86.9 ft. grading 0.16 oz. gold, 3.76 oz. silver, 0.75% copper, and almost 3.9% zinc.
“More importantly,” adds Boyd, “this better grade and thicker mineralization appears to line up with the best holes we’ve encountered to date in deep drilling,” Boyd.
n Two rigs were involved in Agnico-Eagle’s deep drilling program from level 215, testing zone 20 North at depths of 8,500-9,500 ft. below surface and toward the west.
One highly encouraging hole was completed outside the current known reserve-and-resource limit on level 215, immediately below the bottom of the shaft and along the western margin of zone 20 North. This hole returned 0.22 oz. gold over 11.2 true feet, indicating a potential for higher gold grades at depth toward the west.
Sedimentary
For the first time, exploration crews recently discovered high-grade gold in nearby sedimentary rock. (The LaRonde mine has so far been exploiting only gold-bearing volcanogenic massive sulphides.) A drill hole that was testing the upper western limit of Zone 20 North was inadvertently extended 44 ft. south into the sediments, where it intersected a quartz vein containing numerous specks of visible gold. The hole, no. 9821771, assayed 0.60 oz. gold and 2.25 oz. silver, with minor copper and zinc, over 3.3 ft.
Two follow-up holes returned similar widths and grades, and they traced the vein over a strike length of 200 feet, only about 60 feet from zone 20 South. “Our initial thoughts are that . . . [this new zone of mineralization] seems to straddle Zone 20 South into the sediments,” said Ebe Scherkus, Agnico Eagle’s chief operating officer. “If you look at it on a regional scale, it seems to be an area where we happen to have a fold or displacement in the sediments. So our current thinking is that perhaps this displacement or structural fold has opened up some areas in the sediments that have been filled with quartz, and then gold was re-mobilized from 20 South.”
Scherkus said that anywhere where there are indications of a fold in the sediments, “we will probably be examining those a lot closer that we have, . . . extending our holes into the sediments, especially in areas where there could be a deformity.”
At the end of 2001, LaRonde’s proven and probable reserves consisted of 36.3 million tonnes grading 0.09 oz. gold, 2.3 oz. silver, 0.36% copper and 4.05% zinc, for 3.3 million contained ounces gold. In the resource category were 33.7 million tonnes of 0.16 oz. gold, 0.67 oz. silver, 0.52% copper and 0.44% zinc, for 5.2 million contained ounces gold.
Apart from the drilling, which continues with six rigs, Agnico is evaluating options for gaining access to this large and growing resource beneath the bottom of the Penna shaft. The company expects to have identified a preferred option by the end of the year, and this will be followed by the preparation of a feasibility study by mid-2003.
Scherkus described the company’s three options with respect to developing the bottom of the mine:
n Deepening shaft no. 1 — This option would necessitate replacing the disused no. 1 shaft’s surface infrastructure, replacing timber, converting into a circular structure, and starting to deepen it down to 10,000 ft.
“This would almost be equivalent to a new shaft,” said Scherkus. “It would be one of the higher capital-cost alternatives — for just the shaft alone and surface infrastructure, we would be looking in the neighbourhood of C$125-150 million . . . and possibly another C$75-100 million for underground development.”
n Sinking an internal shaft that could be reached either from the Penna shaft or shaft no. 1 — “This would also be a high capex option similar to the first option, but it’s complicated and not really our preferred route,” said Scherkus.
n Driving a ramp system from the bottom of the Penna shaft — This option would provide access to only a third or a half of the 5.2-million-oz. resource. Scherkus said this would be the most rapid and least expensive option, costing C$30-60 million.
Long term
Looking farther down the road, Scherkus said “realistically, if we were to go ahead with an infrastructure project of this nature, it would be in the neighbourhood of four to six years. So we would be looking at around 2006 or early 2007 before it would come on-stream.”
Boyd added, “It is our sense that there is much more value to be created at LaRonde, and we believe that this focused initiative will ensure that we realize this potential. We think that, since this deposit is getting better as we go deeper and is wide open, there is potential for more than five million ounces.”
In terms of corporate strategy, Boyd said Agnico-Eagle is reviewing several opportunities to strengthen the company, and that its focus is on development-stage projects and producing assets, where “we feel we can add value using our mine-building and operating skills.”
At the end of the quarter, Agnico’s cash and equivalents stood at US$28.3 million, working capital totalled US$53.2 million, and there was about US$95 million of undrawn credit lines.
On the other side of the balance sheet, Agnico’s long-term debt totalled US$174 million at the end of the second quarter.
Capital expenses during the second quarter swelled to US$15.2 million from US$7.5 million last year, owing to increased underground development and the ongoing mill expansion.
As a result of corporate activity and insiders exercising their stock options, Agnico’s outstanding shares had increased by about 14 million, to 69 million, or 80.5 million fully diluted, at June 30, 2002.
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