Agnico-Eagle Overcomes Multiple Arctic Challenges At Meadowbank

VANCOUVER — Most new mines have problems as they make the transition from the drawing board to production, and the newly constructed Meadowbank gold mine in Nunavut was no exception, says Eberhard (Ebe) Scherkus, president and COO of Agnico-Eagle Mines (AEM-T, AEM-N).

Scherkus told delegates attending Mineral Roundup 2010 in Vancouver that the remote project was controversial from the start. The company held an interest in Meadowbank through a joint venture with Hecla Mining (HL-N) in the 1990s, but dropped the project soon after, only to acquire 100% of it through a $710-million bid for then-owner Cumberland Resources in early 2007.

“People asked: ‘Why Meadowbank? What are you people thinking?’ But we believe Nunavut is one of the last frontiers for gold exploration. We saw camp potential as well, and so took the long-term view.”

At the time of the bid, Cumberland was procuring and shipping initial equipment and supplies to the mine-site and preparing to build a $350-million open-pit mine expected to produce an average of 330,000 oz. gold over an 8.1-year life.

Three years later, after a total investment of $1.5 billion split roughly equally between acquisition and mine construction costs, Agnico-Eagle is poised to pour its first gold from Meadowbank and expects to achieve commercial production in April.

Scherkus said there were many challenges along the way, notably road construction, dyke construction related to dewatering of Portage Lake, higher than expected costs of logistics and materials, and low productivity because of harsh weather.

“Steel quantities ended up being fifty percent higher than designed, adding to capital costs, and concrete was roughly double the original estimates,” Scherkus said.

The company decided to engineer and build the project inhouse rather than use a large engineering firm during a period of escalating cost and time pressures.

“We used our eastern base because at the time we couldn’t compete with the business coming from the west, from oil sands and diamonds, et cetera.”

Scherkus said the company always knew logistics would be a problem, but never appreciated how much of a problem they can be in a remote area with a short transport window. “We had no Arctic experience. We have northern experience, but there’s a world of difference between Arctic and northern experience.”

Meadowbank is situated in the Kivalliq region, 330 km west of Hudson Bay and 70 km north of Baker Lake, the nearest town. The company relied on the annual warm-weather sealift by barge from Hudson Bay to Baker Lake, which had shorter than normal windows in both 2008 and 2009.

Scherkus says another major challenge was building the 110-km all-weather road linking Baker Lake to the mine-site, which also has an airstrip.

Cumberland started road construction in 2006-07, after receiving the necessary permits from various regulators. This was an arduous process, as roads are rare in Nunavut and new construction requires extensive consultation with native and other local stakeholders. Nunavut is also known for its tough permitting regime, albeit one more favourable than the onerous system in neighboring Northwest Territories.

Road construction costs ended up being almost twice the original estimates, but the road was significantly upgraded from its original design. Harsh weather caused some problems during road and mine construction, but Scherkus said the costs of doing business in the North were higher than expected and led to project overruns.

“We also underestimated the complexity of the permitting and regulatory process, and the complexity and costs of dyke construction.”

Dykes designed to be 2-4 metres in depth on average had to be built-up two or three times higher in small areas, while a silk curtain meant to contain silt was breached and required repairs, all of which added to the cost overruns.

“But we did some things right, including a decision to go and not delay,” Scherkus said, citing the current robust gold price environment as a welcome benefit.

Scherkus said operating as a two-week-in, two-week-out camp is popular with employees and creates a positive working environment.

He also noted that Meadowbank gives the company a “toehold in the Arctic” within a favourable geological district for hosting multiple deposits, similar to the greenstone belt underlying its cornerstone mine and exploration lands in northwestern Quebec.

Agnico-Eagle’s exploration success at Meadowbank has helped overcome the construction-related problems, with total resources now 100% higher than in 2008, which allows for the expected mine life to be increased through to at least 2019.

Meadowbank is Nunavut’s largest mine, with proven and probable reserves totaling 3.7 million oz. gold from 32.2 million tonnes grading 3.5 grams gold per tonne. A priority for Agnico-Eagle in 2010 will be to convert and expand resources to reserves. Toward this end, the company has initiated a study to examine potential to increase the design production rate to 10,000 tonnes per day from the current 8,500 tonnes per day.

Meadowbank is expected to contribute significantly to Agnico- Eagle’s production profile beyond its cornerstone LaRonde mine in Quebec, and four other operating mines in Canada, Finland and Mexico. Companywide gold production is forecast to reach or top 1 million oz. in 2010, with total cash costs averaging US$399 per oz.

In 2009, Agnico-Eagle produced 492,972 oz. gold at total cash costs per oz. of US$347, and generated net income of US$86.5 million, or US$0.55 per share. –Based in Vancouver, the author is a freelance writer specializing in mining issues, and is a former editor of The Northern Miner.