Agnico-Eagle shuts down and writes off Goldex mine

Vancouver – 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 gold mine in Val d’Or Quebec due to the instability of the mine.

The drastic measure came after two independent rock mechanic experts confirmed the assessment of Agnico’s internal staff – that a weak volcanic rock unit in the hangingwall of the deposit has failed, which has in turn allowed groundwater to seep into the mine and likely exacerbate 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,” said Sean Boyd, vice-chairman and CEO of Agnico-Eagle 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 now, with millions committed to increase grouting and pumping to reduce water inflow. But it was only in recent weeks that the perception of the problem changed from a manageable one to the current state. Along with the rock mechanics, soil and grouting experts added their voice to the instability of the mine, with a grouting expert apparently commenting that “we’re just dumping concrete into a black hole.”

While the company has taken the conservative approach of writing-off the mine, it will certainly be looking into the possibility of reopening at least portions of the mine and recovering some of the 13 million tonnes of broken ore at some point.

“Yes, there are ways that we could go back,” said Eberhard Scherkus, president and chief operating officer of Agnico-Eagle in 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 uncertainty, however, of what form and when, if ever, that happens has forced the company to write-off the mine. Taking the conservative approach of the write-off means Agnico-Eagle will take a US$260-million charge, or roughly US$170-million after-tax, plus costs of remediation. The company has downgraded the 1.6 million oz. of gold reserves, 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 this year the 42,000 oz. gold produced at Goldex accounted for 18% of Agnico’s gold production at a cash cost of US$408 per oz. gold, for 15% of Agnico’s total revenue.

The 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 in the midst of trying to take over. Grayd’s share price was down 19¢ or 7.6% to $2.30, though Agnico executives reiterated in the conference call that they view Grayd as an important acquisition going forward.

Boyd noted that the company is still funded for growth, including Meliadine, with cash flow to move forward. At the same time he said that capital allocation will be critical and the company will have to focus resources going forward.

The company is also 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 though a US$8.4 million exploration budget for deep drilling on the D zone at Goldex, which starts at roughly 800 metres depth.