Agnico-Eagle keeping the costs low

As gold mining costs continue to escalate, Toronto-based Agnico-Eagle (AEM-T, AEM-N) is managing to buck the trend, predicting a decrease in costs for 2006.

On Wednesday, Dec. 14, Agnico gave guidance for 2006 that pegged its production costs at its LaRonde mine in Quebec at $50 per tonne – making it one of the lowest-cost gold producers in the industry.

Agnico’s president and chief executive, Sean Boyd, says costs were in the high-$50 range just two years ago, but has dropped as Agnico benefited from both positive internal and external factors.

“It’s a combination of mining the deposit at a higher volume, being in a great location (Quebec), and the experience of our workforce,” Boyd says. “And the fact that at this stage, the mine is fully developed with four separate mining horizons that bring flexibility and mobility to the deposit to feed the mill at 8,000 tonnes a day.”

The rising price of zinc, copper and silver don’t hurt either. LaRonde produces the three metals as a byproduct of its gold production.

Geoff Stanley, an analyst with BMO Nesbitt Burns, says the byproducts are a “big advantage” to Agnico, as funds generated from their sale go back into reducing costs. Stanley does not hold shares in Agnico-Eagle.

In addition, Boyd says cost guidance for 2006 was made using conservative estimates for byproduct pricing. Boyd says the $50 per tonne figure was arrived at using a silver price of $7 per oz., a copper price of $1.50 per lb. and a zinc price of 65 per lb.

On Friday, Dec. 16, silver was trading at $8.63 per oz., copper at $2.03 per lb. and zinc at 79 per lb.

Stanley says Agnico’s strength goes beyond low costs. He says the company has put itself in a position to have four operational mines running in the coming years. Currently LaRonde – Canada’s largest gold deposit – is Agnico’s only operational mine.

“They’ve established a good portfolio of development opportunities,” Stanley says on the phone from New York.

Those opportunities include the recently announced acquisition of Riddarhyttan Resources, a Swiss company exploring on the Suurikuusikko property in Finland. Agnico is awaiting one final permit from the Finnish government and expects to have its feasibility study done by the end of the first quarter, 2006.

Currently, 30% of the strike length at Suurikuusikko has been drilled. Measured, indicated and inferred resources total 24.3 million tonnes of ore with an average grade of 6.22 grams gold per tonne in the measured category and 4.35 grams gold in the inferred for a total resource of 3.7 million oz. gold.

Agnico is also sniffing around in northern Mexico. It has until mid-February to acquire the Pinas Altos project outright for US$39 million in cash and 1.8 million shares of Agnico.

Agnico has been drilling on the property since April of this year and Boyd says it has intersected high grades of gold and silver outside of the previous resource outline.

Pinos Altos, has measured and inferred average grades of 5.59 grams gold, taken from an orebody of 6.9 million tonnes for a total of 1.2 million oz. of gold. The property also has significant silver deposits with a total measured and inferred resource of 25 million oz. silver.

Closer to home, Agnico plans to have its Goldex and Lapa projects, relative neighbours of LaRonde – in operation by 2008.

Goldex’s reserve is 22.1 million tonnes grading 2.2 grams gold per tonne for a total of 1.6 million oz. Lapa has a reserve of 4.5 million tonnes with a grade of 8 grams gold per tonne for a total of 1.2 million oz.

In determining which prospective properties to go after, Boyd says Agnico places a high priority on political stability — the benefits of which it has felt from doing business in Quebec over the years.

“Quebec is at the top of the class in terms of being pro-mining,” Boyd says, citing the low cost of energy, a highly skilled pool of labour, and the proximity of mining suppliers and contractors as factors contributing to such status.

Boyd believes operating in districts that can offer investors similar of peace of mind will win more market favour.

“As the market starts to realize the strength of our production growth story, and more importantly, the strength of our resource growth story, it will set the stage for a better understanding and a higher market valuation,” he says.

On Friday, Dec. 16, Agnico shares are up 3.5% or 73 to $21.41 on roughly 330.000 shares. They have gained roughly 30% or $4.93 since mid-November when they were trading at $16.48.