Conservative but clever: Agnico-Eagle strategy pays off with Goldex opening

SITE VISIT

VAL-D’OR, QUE. — While Agnico-Eagles Mines (AEM-T, AEM-N) hails its simple mining process as a key to the economic success of its latest mine, that doesn’t mean getting it to production has been a simple process.

At a recent opening ceremony for the Goldex mine — the second producing mine to be added to the company’s growing portfolio — company vice-chairman and chief executive Sean Boyd acknowledged the reputation that has dogged the project for years.

“People said it was too low grade to get into production,” Boyd said with a wide smile to the crowd of some 800 people who had gathered under a wide white tent, in the shadow of the new mill.

And while the opening itself was testimony to the perseverance and creative thinking that moved the project from a deposit into a mine, low grades were only half of the challenge.

Goldex’s history has been marred by an orebody that behaved liked a bright but difficult child — tonnes of potential but a refusal to fall in line.

Sample results consistently did not match the average grade for the deposit, a symptom of the mineralization not being spread evenly throughout. To develop the orebody to production, the company needed a firmer grasp on the dispersion of mineralization so that a mill wouldn’t be processing waste.

“Historically we tried to mine it selectively, we tried bulk test stopes, we tried numerous bulk samples,” president and chief operating officer Ebe Scherkus remembers.

But then a breakthrough sampling technique was tried in 2004 that finally brought a measure of confidence to the distribution of mineralization.

Agnico decided to approach the deposit from beneath by drilling three vertical alamac raises of about 3 by 3 metres along strike.

“It allowed us to map and sample the structure, drill the deposit and treat it in a local custom mill,” Scherkus explains.

The test returned results that were in line with resource estimates, allowing Agnico to prepare for the next task: cutting mining and milling costs as much as possible to ensure the low-grade deposit would be a boon to its coffers.

To get those costs smaller, Agnico knew it had to go big.

Bigger ore blocks are being blasted, requiring bigger load-haul-dump (LHD) loaders, and a bigger –in fact the biggest in the country –underground jaw crusher.

Another cost saver is the decision to take advantage of the swelling in mass that occurs once ore is blasted underground.

Such swelling allows Agnico to leave some blasted ore in massive cone-shaped trenches that lie at the bottom of a given targeted area. Ore above the trench is taken away while the rest is left in the trench to help maintain structural integrity and prevent collapsing.

The technique frees Agnico from the added cost of backfilling and dilution.

As the mine approaches the end of its 10-year mine life, ore in the trenches will be milled last and the blasted out area will be left as a void deep below surface.

“All the modelling we’ve done shows it is a low-stress environment so there is not supposed to be any problem,” Scherkus says. “The shape of what we will be blasting is dome shaped — so it’s more structurally sound and in the worst case scenario, if it did collapse, the void would be filled before it extended to surface.”

As for the ore that comes to surface, it will move at a rate of 7,000 tonnes per day, a high volume that Scherkus says the company has become comfortable dealing with thanks to ramp-ups at its flagship LaRonde gold mine, in Quebec.

And the citizens of Val-d’Or should be feeling comfortable as well.

Despite the fact that Goldex lies just a few minutes’ drive from the town’s Wal-Mart, Agnico has taken every step to make it as unobtrusive as possible.

The ventilation system is deep underground to keep noise down, and when ore comes to surface it rests in a massive white dome that resembles half of a giant golf ball. The dome keeps dust from settling on the town’s streets.

And a decision to not use any cyanide in the milling process frees residents from worry over cyanide spills.

To get around cyanide usage, Agnico has a gravity circuit that recovers roughly two-thirds of all gold.

The remaining third is put through a flotation circuit to produce a concentrate that is trucked 60 km to LaRonde, where cyanide, lime and lead nitrate are added before it joins up with LaRonde’s native material.

But gold concentrate won’t be the only thing moving out of the mill. Its chemical-free tailings will flow through a pipeline 10 km east of Val-d’Or to an environmental wreck of a former mine known as the Manitou site.

Manitou has long been a black mark on the mining industry in the province. The mine, which operated from 1942-79 left behind acidic tailings that ran into the Bourlamaque River.

Because tailings from Goldex are non-acidic, non-bleaching and have a neutralizing quality, they will be used to cap the site so that vegetation can eventually be placed over it.

A mine that doesn’t disturb a nearby community and produces tailings that will actually benefit the environment might not sound like an economic powerhouse at first blush. But smart engineering brings Goldex’s anticipated life-of-mine cash costs to just US$230 an oz. — further cementing Agnico’s reputation as one of the lowest-cost gold producers in the world.

And those low costs come with much more geological potential, Scherkus says. He contends that it was the untapped mineral upside that helped the company interested in the project through all the ups and downs of its 45-year history.

“What kept our faith in it was that the overall deposit looked to contain 90 million tons at an average grade of 0.04 ounces per ton,” he says.

While those numbers are not National Instrument (NI) 43-101-compliant, if they prove correct, it would put the mine’s resource at 3.6 million oz. gold. That’s a good deal higher than Goldex’s current proven and probable reserves of 23 million tonnes grading 2.2 gram gold per tonne for 1.6 million oz.

“We felt that at some point in time, if we could crack it, there had to be a way to take some of those 3.6 million ounces,” Scherkus says.

A rocky history

Goldex’s turbulent history began after gold was discovered here back in 1963.

Agnico founder Paul Penna showed he believed in the project less than a decade later by becoming a controlling shareholder in Goldex Mines — the company charged with getting the gold out of the ground.

Just four years after Penna came on board in 1971, mining began, with ore shipped to a third-party mill. But the closing of that mill and subsequent poor results from another mill put the project on the bricks — on the bricks but not forgotten.

Penna’s trusted consultant and eventual chief executive of Agnico for a time, Wencel Hubacheck, was a big believer in Goldex’s geologi- cal potential and encouraged Penna to stick with it.

So drilling continued through the 1980s and in 1989, a new ore zone was discovered — the Goldex extension zone (GEZ) — the orebody that Agnico is now mining.

The discovery spurred Agnico to take full control of the project by merging with Goldex Mines in 1996, but just two years later, with gold prices tanking, Agnico put the project on hold and flooded the shaft.

It would stay underwater until 2002, when the project, now gaining a Lazarus-type reputation, was resurrected yet again.

By the beginning of 2003, Agnico had an NI 43-101-compliant resource on GEZ, with 1 million oz. gold in the indicated category at 2.5 grams gold. And a prefeasibility study, also completed in 2003, had come up with a solution to the dilemma of how to perform normally high-cost underground mining on a low-grade deposit.

The prefeasibility proposed underground bulk mining and a new milling approach that brought costs well below those predicted by a study conducted in 1997.

With a
green light from the prefeasibility, Agnico pushed ahead, dewatered the shaft, and ignited the mine-building process that has culminated in a mine built on time, on budget, and on point with Penna’s original plan.

But the opening of Goldex reflects more than just Penna’s vision, it also marks the start of a historic period of mine production growth for Agnico-Eagle.

The company has four more mine openings over the next three years, one of which — the Kittila mine in Finland — is scheduled for September.

Beyond Kittila, which holds 3 million oz. of gold reserves, Agnico plans to bring the Lapa gold project in Quebec and its 1.1 million oz. of reserves plus Mexico’s Pinos Altos gold project, with 2.5 million oz. of reserves, into production by the middle of next year.

The fourth key project is Meadowbank in Nunavut, which holds 3.5 million oz. of gold reserves and is scheduled to open at the beginning of 2010.

With such an impressive pipeline and a rock-solid reputation as a mine-builder, it’s little wonder the company’s share price has outgained fellow big name gold miners over the last three years.

Scherkus offers some insight into the corporate philosophy that has served Agnico so well up to now.

“What we have done is to never bet the company,” Scherkus says of Agnico’s acquisition strategy. “We never take more than ten per cent of the equity of another company at any one time so if it fails you don’t blow up the company. . . We get a position on the board, we get comfortable with the deposit and then we try to consummate it.”

Consistent with its conservative attitude towards acquisitions is Agnico’s healthy skepticism about countries with high political risk. Scherkus lists low political risk and the company’s much touted no-hedging policy as key Agnico values.

“Now I’m not saying we won’t ever take on more risk — it depends on the opportunity. But I think with our critical mass, we don’t want to go into an area where we can hurt ourselves,” he says. “In these times of unrest, you look at how many miners are coming back to Canada –I think Canada is a great place to be.”

Since the end of 2005, those principles have helped Agnico’s share price climb 243% — a growth rate far outpacing its peers.

Over the same period, Barrick Gold (ABX-T, ABX-N) gained 51%, Goldcorp (G-T, GG-N) gained 137%, and Kinross Gold (K-T, KGC-N) gained 91%, while Newmont Mining (NMC-T, NEM-N) lost 19%.

The question for investors is, with such robust growth in market capitalization, is there still room for more upside?

Scherkus thinks so.

“Look at operating cash costs going forward,” he says. “We’re in the US$250 to US$275 an ounce range. If you are a firm believer in US$900 plus gold, combined now with the Gold Eagle play, I think there’s lot of upside still left in our story.”

In June, Agnico announced it had entered a private placement with Gold Eagle Mines (GEA-T, GEAFF-O) that could see it acquire nearly 8% of the company, which holds the highly prospective Bruce Channel discovery in Ontario’s Red Lake district.

Just another shrewd move by a company that is steadily building itself into one of the most envied gold companies in the world.