Agnico-Eagle offers $710M for Cumberland

Agnico-Eagle Mines (AEM-T, AEM-N) plans to take on Canada’s North with its proposed takeover of Cumberland Resources (clg-t, clg-x).

Cumberland’s 100%-owned Meadowbank open-pit gold project near Baker Lake, Nunavut, will produce about 400,000 oz. annually over its first four years and would boost Agnico’s total annual gold production by 39% to 1.3 million oz. in 2010.

The Arctic is Agnico vice-chair and CEO Sean Boyd’s solution to the depletion of world-class deposits in more hospitable areas of the world.

“We feel companies will have to go deeper and we also think companies have to open up the northern parts of the world,” said Boyd in a recent conference call. “This strategically positions us in the Arctic.”

Agnico has offered 18.5% of an Agnico share for each Cumberland share. This values Cumberland at about $710 million based on its 80 million shares, with a 29% premium over their closing price on Feb. 13, one day before the announcement.

Cumberland shares were up more than 25% in Toronto on Feb. 15 to $8.68 on trading volume of more than 24 million. Agnico shares were down about 2% to $46.91 on about 5 million shares traded.

Both companies’ boards have approved the deal. Cumberland’s directors have agreed to tender their shares, which make up 10.5% of all outstanding shares, to Agnico. Agnico already owned 2.6% of Cumberland shares.

If two-thirds of Cumberland shareholders agree to the offer before it expires in April, Agnico would increase its gold reserves by 28% to 13.3 million oz. Agnico’s cash position would increase to more than US$550 million from US$460 million and the company would grow to 146 million shares from 131 million.

Meadowbank is slated for production in 2010. Three open pits are planned to a depth of 170 metres — the Goose Island deposit, the Portage deposit and the Vault pit.

Meadowbank currently has proven and probable reserves of 21.3 million tonnes grading 4.2 grams gold per tonne, or 2.9 million oz. An average annual production of 350,000 oz. per year over eight years at a cash cost of US$250 per oz. had been planned. The company estimates it will cost $375 million to bring the project into production with an additional $65 million to be spent over the mine’s life.

Cumberland had signed a letter of agreement for a gold loan, but Agnico has cancelled the loan, shelling out nearly $1 million on a cancellation fee.

Boyd said the company has enough capital to finance all of its projects with its cash flow of US$200 million, a bank loan of US$300 million and US$130 million in warrants to be exercised this November.

Agnico also spent US$14.9 million to close down Cumberland’s hedge position.

“We don’t like any hedging on the gold side,” Boyd said. “We are one of the companies that has never sold forward.”

The company is looking to increase the processing facility to 8,500 tonnes per day from 7,500. As well, Agnico found Cumberland’s diesel fuel estimates low at US37 per litre, upping them to US60-US70 per litre. The company reported that with diesel at US75-US80 per litre, operating costs increase by 10%.

The Meadowbank project will be run by a team based in Val d’Or, northwestern Quebec, where Agnico’s flagship LaRonde gold mine is located. The team will operate Meadowbank on a fly-in, fly-out basis. Agnico also plans to employ more than 300 people from the area; the largest community is Baker Lake, with a population of 1,500.

Boyd said Agnico will increase its 2007 exploration budget to expand the Meadowbank reserve base beyond 2.9 million oz. gold by converting the 1.1-million-oz. resource and carrying out more exploration drilling.

Little drilling has been done below 200 metres in the areas surrounding the pits. Agnico plans to examine the potential for underground mining.

“There are forty known targets,” Boyd said. “A lot have one or two drill holes with interesting values and intercepts that have not been followed up on because of funding and timing issues.”

Boyd said the company will look at the Goose South zone and the Goose Island zone, which returned intercepts of 5 to 6 metres running 10 to 12 grams gold per tonne. Agnico will also drill to expand the Cannu zone between the Portage deposit and the Vault pit.

Agnico has several other projects: the LaRonde mine in Quebec’s Abitibi region produced about 250,000 oz. gold last year and has produced 2.9 million oz. gold since 1988; LaRonde II is an expansion of the first; and the Goldex mine, 60 km east of LaRonde, is expected to go into production in 2008, averaging 170,000 oz. gold per year over 10 years; the Lapa project, 11 km east of LaRonde, is also slated for production in 2008 at an average 125,000 oz. gold per year; the Kittila mine in northern Finland will produce 150,000 oz. per year beginning in 2008; and the Pinos Altos project in Mexico hosts a resource of 1.6 million oz. gold and nearly 41 million oz. silver.

T.N.M. Nugget

AGNICO-EAGLE MINES’ PLANS FOR MEADOWBANK

Mine Life: 8 yrs

Throughput: 8,500 tpd

Mining method: Open pit

Capital cost: C$375 million

Average annual production: Yrs 1-4, 400,000 oz. Au

Life of mine: 350,000 oz. Au/yr

Open pit reserves: 2.9Moz.