Agnico deal eyes the future

Agnico Eagle’s (AEM-T, AEM-N) latest deal shows the company to be keeping a steady eye on future growth while it puts mines into production in the present.

The Toronto-based company, which has been in the midst of one of most aggressive mine building campaigns of any mid-tier producer over the last two years, is set to add to its stable of sizeable gold assets in politically sound regions by taking hold of Comaplex Minerals’ (CMF-T) Meliadine gold project in Nunavut.

On a conference call held on April 5, Agnico’s chief executive Sean Boyd said the acquisition – which Comaplex management has agreed to and now only needs shareholder approval – is about securing continued growth in production beyond the year 2014.

The agreement in principle between the two companies has Agnico paying 0.1567 of its own shares for each Comaplex share.

Once fully merged, Agnico would then issue Comaplex shareholders one share of a new Comaplex company that would consist of all of the assets not associated with Meliadine. Those assets are mainly made up of oil and gas projects and cash that would give the new company a valuation of $1.00 per share.

The deal breaks down into Comaplex shareholders getting $9.32 per share for Meliadine and one share worth $1.00 for a total value of $10.32 per share – a 34% premium to the companies 20 day volume weighted share price.

Boyd said that when Agnico’s initial 12.3% stake in Comaplex is taken into account, the company will be paying a total of $650 million to acquire Meliadine.

Or, put another way, Boyd says Agnico will be giving up 5.6% of its shares to increase its overall gold resources by 17%.

Beyond bolstering resources and securing longer term production for Agnico, the deal will also clear up a legal squabble between the two companies.

Agnico had filed a suit with the OSC against Comaplex for issuing 12.75 million of its shares to Perfora Investments without obtaining shareholder approval.

The deal saw Perfora replace Agnico as Comaplex’s largest shareholder.

Comaplex issued the shares to Perfora in exchange for its 22% interest in Meliadine West and its 50% stake in Meliadine East.

The fact that Perfora is offering its support for the Agnico transaction is another signal that dispute is coming to an end.

Tom Winmill, a portfolio manager with Midas Fund, says despite the suit Comaplex management deserves credit for clearing up the ownership issue, as in doing so it cleared the way for a straightforward valuation of the project – something that allowed the deal to get done.

Now the deal will just require the majority of the minority shareholders votes to close in June of this year.

If that happens, Agnico will waste little time in getting busy.

The company’s president and chief operating officer, Ebe Scherkus, says Agnico will do 100,000 metres of drilling on the project over the first two years.

The size of the drill program is in proportion to Agnico’s high expectations for the project.

While Comaplex envisioned a 3,000 tonne per day mill, Agnico sees a 3,000 tonne per day mill as a minimum, with 7,000 tonnes per day being the upper limit.

Supporting such bold ambition is an already sizeable measured and indicated resource of 12.9 million tonnes grading 7.9 grams gold per tonne for 3.29 million oz. of gold, and an inferred resource of 8.4 million tonnes grading 6.4 grams gold for 1.73 million oz. of gold.

And Agnico sees considerable upside on the exploration front.

Having only been discovered in 1990 the deposit and the area around it still offer blue sky potential.

The land package extends over 650 sq. km of largely unexplored land – land that sits in a region that Agnico is not only comfortable with, but land that also offers synergies for the company.

Familiarity and synergies come from Agnico’s having built the Meadowbank mine roughly 300 km northwest of Meliadine. Meadowbank achieved commercial production in March of this year.

“This project is closer to Hudson Bay, and further south, so they won’t have the logistical issues of Meadowbank,” Tom Winmill, of the Midas Fund says. “This project should be a real winner with Agnico’s expertise in such hostile environments.”

Specifically, Meliadine sits 25-km north of Ranklin Inlet on Hudson Bay which will allow Agnico to ship supplies for both mines on large sea-born vessels to Meliadine first and then on smaller vessels up to Meadowbank.

As for the timing of the deal, Boyd also mentioned Meadowbank as a contributing factor.

He said because Meadowbank came with long term commitments and contracts, Agnico found itself under pressure from the time it acquired the project. Something the company wanted to avoid this time around.

By acquiring Meliadine at this early stage, the project is free from any such commitments.

“Here we have the luxury of moving at our own pace,” Boyd said, “and that is much more attractive to us.”

Boyd said he expected construction of a mine would be five years a way.

In his report, UBS analyst, Brian MacArthur, reduced his 2010 earnings per share estimate slightly to $1.88 from $1.96 to reflect the transaction, but said the project would be marginally accretive to the Agnico’s net asset value.

MacArthur also raised his target price for Agnico to $68 from $66 and maintained his “Buy” rating on the stock

Midas Fund’s Winmill, which had Comaplex as its largest investment taking up 4% of the fund, was also bullish on the deal.

Winmill called the deal a “good one” for Agnico and said the fund would continue to hold shares in the gold producer.

“Agnico has great management,” Winmill says. “They really seem to grasp that the best returns for precious metal investors is to own companies with a strong growth profile and they are lining things up for three to four years out. This is yet another great project on the horizon.”