Agnico-Eagle takes big hit in Q3 with Goldex closure

Vancouver – Agnico-Eagle Mines (AEM-T, AEM-N) has posted a US$81-million net loss for the third quarter following the write-off of its Goldex gold mine in Quebec.

The quarterly results come only a week after the company broke the news about the loss of the mine, caused by a huge unstable rock mass directly above the ore body. Agnico-Eagle is still in the early days of finding out exactly what happened at the mine and how much, if any, of the gold in the ground it will be able to recover, but has made the difficult decision to assume the worst.

“Clearly we’re disappointed to have to make decisions like we did at Goldex,” said Sean Boyd, CEO of Agnico-Eagle in a conference call.  “Goldex has been in the Agnico group since 1971, so clearly it was not an easy decision to make.”

Shutting Goldex meant Agnico-Eagle took a US$161.1-million after-tax write off, plus a US$32.7-million closure provision. The company has also cut its 2011 production forecast by 70,000 oz. to 1.01 million oz. gold due largely to the issues at Goldex, and as the mine was one of Agnico-Eagle’s lowest-cost producers at US$411 per oz, expected average cash costs have gone up to US$575 per oz. from US$495 per oz.

“Having to remove one of our lowest-cost producers and a steady performer, which is about 15% of our production, is clearly going to impact not only our production, but our overall, company-wide cash costs,” said Boyd.

Even with Goldex included in third quarter results, however, cash costs were US$563 per oz. compared with US$423 per oz. in the third quarter of 2010. The increase comes after the company saw a 7% drop in gold production due largely to lower grades in its mines.

The company’s northern mines, particularly Meadowbank in Nunavut and Kittila in Finland, were the main culprits for the high cost per oz. At Meadowbank, cash costs were US$1033 per oz. compared with US$671 per oz. in 2010, as the grade dipped 38% in 2011 with ongoing dilution issues and delays to waste removal. Cost overruns in maintenance and processing, partially related to lower grades, also heavily impacted overall costs. At Kittila, cash costs were US$694 per oz. compared with US$519 in the third quarter of 2010 due to overall cost increases for fuel, electricity, materials and contractors.

Cash from operating activities in the quarter was a record US$197.6 million, up from US$156.8 million in the third quarter of 2010. The record was achieved even though the 266,000 oz. gold produced was 19,000 less than what the company produced in the third quarter of 2010, with Agnico-Eagle’s revenue instead boosted by a 39% increase in the realized gold price and increases in by-product prices as well.

Excluding the Goldex costs, along with stock option expenses, the writedown of available securities, and foreign currency gains, Agnico-Eagle reports it would have made US$101.9-million in the quarter, compared with US$121.5-million in the third quarter of 2010.

With only a week since the Goldex announcement, the company had little more information to give on the issue. The company continues to cautiously talk of future potential at the mine while making no assurances. For example, even if the main orebody is inaccessible, there remains a deeper D zone, the M zone above the main resource, and the E zone to the east of the resource.

“There’s three other structures that have a combined 2 million oz., but we can’t say what’s possible with those structures until we know exactly what’s happening,” said Boyd.

For now the company continues to underline how unexpected it is that a 400-metre block of granite could have failed, and how early it is in the assessment process with many conflicting views as to the causes and solutions.

Agnico-Eagle’s share price closed down $2.68 or 5.9% at $42.37 on the quarterly results, having already lost $12.86 or 17% of its share price since news of Goldex broke.