Editorial: Goldex cookie crumbles

If anything underscores the inherent risk of mining, it was the past week for Agnico-Eagle Mines.

Agnico stock was pummelled, dropping 26% over several trading sessions, after the company announced it had to close its new Goldex underground gold mine in Val-d’Or, Que., owing to major stability problems in the 400-metre-thick volcanic rock mass directly above the Goldex deposit and mine workings. 

In addition to the concerns of an uncontrolled, deadly collapse, the instability was causing major flooding into the mine and further exasperating the rock’s instability.

Rather surprisingly for this rough industry, Agnico took the unusual and ultra-cautious steps of both closing and completely writing off its investment in Goldex (a US$260-million hit) only a week after coming to the firm conclusion that the mine was unsafe for workers.

The reserves of 1.5 million oz. gold – formerly enough for 10 years of mining – have been reclassified as resources, bringing Goldex’s measured and indicated resources to 36 million tonnes grading 1.8 grams gold per tonne, or 2 million contained oz. gold. Another 26 million tonnes at 1.7 grams gold lie in the inferred category.

The closure confirms Agnico’s strong and well-deserved reputation as an operator that’s profoundly concerned with its employees’ well-being. It also speaks to the company’s robust balance sheet that management could be generous, and wasn’t tempted to roll the dice and keep operations going.

With the major kitchen fire earlier this year at the new Meadowbank gold mine in Nunavut severely curtailing production, and now this latest writedown, you have to wonder if Agnico has stretched itself too thin by developing so many gold mines around the world in recent years.

And in this age where deposits of shockingly lower and lower grades are going into production, the Goldex heartbreak is also a timely reminder that there is little financial room with a low-grade mine for anything to go wrong, especially in a technically difficult underground bulk-mining operation.

Opened in 2008, Goldex was low-cost and a good cash-flow generator for Agnico. It would have produced 14% of Agnico’s 2012 gold production, and accounted for 13% of Agnico’s net asset value. 

But Agnico hasn’t given up on Goldex entirely: it is drilling the deposit at great depth and considering resuming mining at the deposit’s narrower western end next year.

• With the 2012 presidential elections race well underway in the U.S. and Herman Cain emerging as a frontrunner for the Republican presidential nomination, Americans are for the first time widely discussing the merits of a 9% nationwide sales tax, which Cain is touting.

Our American readers who fear that a national sales tax will inevitably be hiked by future governments and lead to European levels of taxation need only look to Canada’s generally positive experience with implementing a value added tax (VAT) to see nothing’s inevitable, and such a national consumption tax can sensibly lead to lowered production taxes.

Canada’s Good and Services Tax (a VAT) was introduced in 1991 at 7% by a business-friendly conservative government, and then equally conservative governments in the past few years reduced it to 6% and 5%. So it’s not a given that politicians will raise it. 

The GST, which is levied on just about all goods and services but with rebates for the poor, proved to be a windfall in tax revenue for the federal government in the 1990s. It’s the number one reason – along with an effective spending freeze by the Liberal government of the day – that Canada was able to record budget surpluses year after year beginning in the mid-1990s and substantially pay down the national debt, which today stands at US$16,500 per Canadian citizen, compared to US$47,500 per U.S. citizen. Today, 18% of federal tax revenue in Canada comes from the GST, compared to 64% from personal and corporate income taxes. So it’s in the neighbourhood of a Cain-sian “9-9-9” ratio.

By instituting the GST, the federal government has been able to gradually lower corporate income taxes to just 15% as of Jan. 1, 2012 – the lowest rate in the G7 – compared to 35% in the U.S. today. It makes Canada an attractive destination for setting up a business.

How many Americans realize that their corporate taxes are among the highest in the world? Even Afghanistan and Zimbabwe have much lower rates than the U.S. (See a global list here: http://goo.gl/kV9Fp.) It’s a huge job killer – compare Canada’s 7.1% unemployment rate with the 9.1% seen in the U.S. today.