Agnico has room to grow in Quebec

Agnico Eagle Mines (TSX: AEM; NYSE: AEM) has grown over the past two decades from a single asset producer to a mid-tier gold miner, with mines spread across Quebec, Nunavut, Finland and Mexico. But its four gold mines strung out along a 50 km stretch of the Trans-Canada Highway in Quebec’s Abitibi region remain the heart of the Agnico beast, and show significant upside.

The biggest shakeup for Agnico this year has been its joint acquisition with Yamana Gold (TSX: YRI; NYSE: AUY) of Osisko Mining and its Canadian Malartic gold mine in Malartic, halfway between Rouyn-Noranda and Val-d’Or. The deal gave Agnico 50% of the mine, which ranks as one of the largest gold mines in Canada, and produced 475,000 oz. gold and 422,000 oz. silver in 2013.

Canadian Malartic yielded 11,878 oz. gold attributable to Agnico in the first half of 2014 (representing only 15 days of ownership at the end of June), at a total cash cost of US$614 per oz.

A new reserve estimate was recently calculated, and the partners expect to update mine-optimization plans this month.

Speaking at the Denver Gold Forum in September, Agnico president and CEO Sean Boyd said the transition has “gone well,” and that the acquisition “gives us big reserves, big production and good net free cash flow in a part of the world we know really well.”

The acquisition also partly allowed Agnico to boost its overall production guidance for 2014 to 1.35 million to 1.37 million oz. gold, with cash costs of US$650 to US$675 per oz., and all-in sustaining costs of US$990 per oz.

“It was a mine that was functioning well, and it was a solid team,” Boyd said of Canadian Malartic. “We’ve made some minor changes, but we’re still looking at ways that we can optimize that opportunity. We think some of the big opportunities are in the processing side. The mine plan calls for substantial mining and stockpiling of ore, and what we’re looking to do is come up with a way that we can expand the processing capacity, and as we mine some of that planned stockpiled ore, we put it through the plant.”

Boyd said the Osisko deal is yet another example that Agnico is “able to grow in a measured way by focusing on the quality of the opportunity, and taking the lead from our technical group. And most importantly, getting involved in situations as early as we can, so we can use the skill set that we have from an exploration point of view and mine-building point of view to add value.”

He noted that Agnico boasted record gold production in the first half of 2014, and that it is “on track for record production for all of 2014.”

Meanwhile, Agnico’s nearby LaRonde underground mine produced 107.846 oz. gold in first half of 2014, at a total cash cost of US$642 per oz.

“LaRonde’s been a flagship asset for us for many years,” Boyd said. “It started producing in 1988 and it still has 12 years of reserve life, probably another four to five years based on resource, and we’ve had some recent drilling that suggests that can get longer.”

Despite the age and great depth of the mine, Agnico is also increasing production at LaRonde.

“We’ve been mining for several years well below reserve grade,” Boyd explained. “The grade of that deposit is increasing as we access the lower part of the orebody where we see higher grades.

Furthermore, Boyd says Agnico is achieving more flexibility in the lower reaches of LaRonde: “We have three operating horizons working right now. We have a central core of that deposit that we’ve known about for a couple of decades, and average grade of the stopes in the mining blocks in the lower part of the mine is 6 to 8 grams gold. So now with three mining horizons we have more flexibility, and we expect the gold grade to trend up and achieve not just reserve grade, but see years that are well above reserve grade, which is currently 5 grams per tonne.”

Longer term, he said, Agnico says LaRonde could produce 350,000 oz. in 2019, up from 180,000 oz. last year.

“So it’s still a big part of our company, after 26 years of production,” Boyd said. “At some point, it won’t be my problem, it will be somebody else’s problem, but ten years ago we didn’t think we’d be mining 3 km underground, and now we’re doing it and generating a lot of cash flow. It’s truly a world-class mine.”

At the Goldex mine, production in the first half of 2014 was 43,359 oz. gold at a total cash cost of US$678 per oz.

Throughput is forecast to increase to 6,000 tonnes per day by year-end, and Agnico says accelerated development of the exploration ramp into the D-zone (the top of the Deep zone) is underway.

“Goldex has been a turnaround story, and our team there has done an exceptional job at low-cost mining,” Boyd said. “We’re making money mining a deposit that’s 1.5 grams, in an underground mine. We hope to employ some of that expertise and some of the methods we’ve used there to make money and 1.5 grams underground at our expanded property position in that Abitibi region, now that we have added properties with the Canadian-Malartic acquisition.”

Most importantly, there are satellite zones at Goldex that Agnico reckons will extend the mine’s life.

“We’re going to grow production at Goldex,” Boyd said. “We’ve gotten to 6,000 tonnes per day faster than we expected … the plant has capacity for 8,000, and we have a satellite deposit we’re looking to develop.” 

“It was the right decision to go back here, start slow, and develop the M- and E-zones … now we’ve opened up other opportunities because of the cost structure. Our cost per tonne to mine and process a tonne of ore here is C$35 — that’s what makes these additional satellite zones work.”

The Lapa mine — Agnico’s fourth operating mine in Quebec — produced 42,230 oz. gold at a total cash cost of US$747 per oz. in the  first half of 2014.

Agnico said it achieved lower mine costs in the second quarter due to lower labour costs and more cost-reduction efforts despite mining at a deeper depth. It adds that  grades could improve in the second half, with mining commissioned in the Zulapa 7 zone.

However, Boyd cautioned, “Lapa is a short-life mine, so there’s not much we can do there.”