Agnico closes, writes off Goldex

In a significant blow to its bottom line, Agnico-Eagle Mines (AEM-T, AEM-N) has been forced to indefinitely shut down and write off its Goldex underground gold mine in Val-d’Or, Que., because of the mine’s physical instability.

The drastic measure came after two independent rock mechanic experts confirmed an assessment by Agnico-Eagle staff that weak volcanic rock in the hangingwall of the deposit has failed, which has allowed groundwater to seep into the mine and likely exacerbated the weakening and movement of the rock. The 400-metre-thick shifting rock mass sits directly above the Goldex deposit.

“It really became apparent that we had no choice but to suspend operations,” Sean Boyd, vice-chairman and CEO of Agnico-Eagle, said in a conference call. “It is a disappointment. We’re not happy to be doing this, but at the end of the day . . . it was the right decision to make.”

Agnico has been aware of the subsidence and increasing levels of water infiltration for months, with millions committed to increase grouting and pumping to reduce water inflow. But it was only in recent weeks that perception of the problem changed from a manageable one to its current state. 

Along with the rock mechanics, soil and grouting experts added their voices to the instability of the mine, with a grouting expert apparently commenting that “we’re just dumping concrete into a black hole.”

The company has taken the conservative approach of writing off the mine, but it will also explore the possibility of reopening at least portions of the mine and recovering some of the 13 million tonnes of broken ore.

“Yes, there are ways that we could go back,” Eberhard Scherkus, president and chief operating officer of Agnico-Eagle, said during the conference call. “But we can only look at those methods once we have a full understanding of what occurred, and why it happened so quickly in the last couple of months.”

The writeoff means Agnico-Eagle will take a US$260-million charge, or US$170 million after tax, plus costs of remediation.

The company has downgraded the 1.6-million-oz.-gold reserve – contained within 14.8 million proven tonnes grading 1.87 grams gold per tonne and 13 million probable tonnes grading 1.62 grams gold – into resources.

In the second quarter the 42,000 oz. gold produced from the Goldex mine at a cash cost of US$385 per oz. gold accounted for 18% of Agnico’s gold production and 15% of the company’s total revenue.

The closure news sent the company’s shares tumbling, down $10.62, or 18.3%, to $47.35 on 6 million shares traded. The fall marks the lowest point for Agnico shares since late 2008, while it hit a high of $88.52 earlier this year.

The bad news also hit Grayd Resource (GYD-V), which Agnico is attempting to take over in a $275-million deal. Grayd’s share price was down 19¢, or 7.6%, to $2.30. The takeover included a significant share component. Agnico announced the following day that it had doubled the cash component of the takeover offer to $183 million, with Grayd’s stock price bouncing back up 20¢ to $2.50 on the news.

Boyd notes that Agnico-Eagle is still funded for growth, including the Meliadine gold project in Nunavut, with cash flow to move forward. 

At the same time, he says that capital allocation will be critical and the company will have to focus resources going forward.

The company is working to ease the transition for the 233 workers at the mine, including keeping some on for remediation, investigation and maintenance work, and potentially transferring some to other Agnico operations.

Agnico will also continue working through a US$8.4-million exploration budget for deep drilling on the D zone at Goldex, which starts at 800 metres depth.