Agnico looks to reign in Arctic gold

Meadowbank, Nunavut — Once all the speakers were finished talking at Agnico-Eagle Mine’s (aem-t, aem-n) Meadowbank mine opening ceremony, Rick Olsen, a contractor based out of nearby Baker Lake and a guest at the event leaned over and said “People don’t realize what a big deal this is for Nunavut.”

While the opening of what will be Agnico’s largest gold producing mine doesn’t represent the first mine in Nunavut it does represent the only active one and it also represents a new way of life for local inhabitants.

“It’s pretty easy to see that we’ve had a major impact on local communities,” Ebe Scherkus, Agnico’s president and chief operating officer says. “Unemployment at Baker Lake was close to 40% before we arrived and now it’s down to 4.5%.”

Those kind of tangible results were also heralded by community leaders.

“This project has brought a lot of hope to our people.” Jose Kusugak, the president of the Kivalliq Inuit Association said from the podium. “All you have to do now is look at all of the smiling faces at Baker Lake.”

Currently Agnico has 180 Inuit working on the site which represents 36% of the project’s payroll.

If that number seems less than seem staggering, Scherkus points out that Xstrata’s (xsraf-o, xta-l) Raglan mine in the Nunavik Territory of Northern Quebec has never attained such levels and that mine has been in production since 1997.

Scherkus is also content to let the company’s track record speak for itself.

At its operations in the Abitibi region of Quebec the workforce is made up of 100% locals; at its recently commissioned Pinos Altos mine in Mexico the workforce is 68% local and in Finland, at the also recently minted Kittila mine, 50% of the workforce is local.

“For a mine that just got started 36% is an excellent starting point,” Scherkus say.

While the company won’t issue any targets for how much of its workforce will be locals it is doing its part to get that figure up as high as it can.

As for the availability of bodies in the often sparsely populated north, Scherkus says the bodies are there, it’s simply a matter of accelerating the training.

Beyond doing its own in-house training, Agnico is also a partner in setting up the Kivalliq Mine Training Society, which the company is investing $3 million in over the next three years and it is in continual talks with the Nunavut Arctic College towards setting up a mine training program. The College expects to offer such a program at Rankin Inlet later this year.

And lest anyone doubt the company’s focus on such programs, it should be considered that Agnico’s motivation for beefing up training goes beyond its immediate requirements at Meadowbank.

The company recently completed $650 million acquisition of Comaplex Minerals to get its Meliadine gold project which sits 300-km southwest of Meadowbank and just 25-km north of Ranklin Inlet

Fueling Agnico’s appetite for Meliadine was its already sizeable measured and indicated resource of 12.9 million tonnes grading 7.9 grams gold per tonne for 3.29 million oz. of gold, and an inferred resource of 8.4 million tonnes grading 6.4 grams gold for 1.73 million oz. of gold.

The acquisition continues the company’s increasingly familiar strategy of acquiring early stage development projects with sizeable resources.

“We like early stage projects,” Scherkus says. “We drill them up and we develop them, and we feel that’s the best way to create shareholder value.”

Indeed the company’s foray into Meadowbank followed a similar track.

Discovered in 1994 by Cumberland Resources, Agnico acquired the company in 2007 for over $700 million. It quickly went on to add 600,000 oz. of gold in new reserves and spent $710 million developing the mine into commercial production which was achieved in March of this year.

Combined the two acquisitions have made Agnico the key gold player in the region – and that isn’t by accident.

“When we look at other parts of world, we were late to the party in Nevada and in Chile, so we asked ourselves where is the next frontier?” Scherkus says. “In Canada it is in the Canadian Arctic.”

But gaining a dominant foothold took time and the careful execution of a strategy. Early on Agnico took a position in Arctic explorer Stornoway Diamond (swy-t) then set up an operations base in the region where it began to gather expertise and identify which projects it would target.

As for why the Arctic has remained largely unexplored for so long, besides its harsh weather the area also suffered from political uncertainty due to the dividing up of the Northwest Territories and Nunavut which was only completed in 1999.

Then there was the laborious process of establishing the rules on land claims which, by most accounts, was only settled recently.

Now, whether it’s the regions Premier Eva Aariak or community leaders, the message coming from the tundra is that the territory is open for business, and there is no better emblem for that fact than Meadowbank.

That doesn’t mean, however, that there isn’t more work to be done on the regulatory side of things.

Nunavut has a reputation for having a tough permitting process, and while Scherkus says the standards weren’t overly tough in that they were similar to those in other jurisdictions, he says efficiency can be improved.

“There’s a lot of overlap between the Water Board, the KIA and other organizations. We feel the process could be streamlined,” he says. “We don’t want standards reduced, just streamlined.”

The Canadian government has introduced legislation aimed at doing just that, but only time will tell if it is successful at doing so.

Another key issue in developing a mine in the territory is the government’s insistence that local contractors be used as much as possible.

While the Inuit Impact Benefit Agreement (IIBA) signed by the company does not set specific targets for what percentage of the mine build-up must use locals, it does demand that any contract below the $500,000 mark go local.

“Trying to encourage northern development is laudable and we have no objections provided local bids are competitive,” Scherkus says of the stipulation.

But Agnico is currently negotiating on the $500,000 dollars threshold as it believes no threshold should be established.

Scherkus points out that in the Abitibi 67% of expenditures were spent in the area and 80% were spent in Quebec, and, he says, the numbers are similar in Finland.

“But with only 33,000 people in the area it isn’t always easy to do that here,” he says.

Over on the mining side of things, getting Meadowbank up and running presented its own unique set of challenges — mainly that much of the gold deposit lay underwater.

While the company was prepared to take on the challenge, in the early days it didn’t realize just how expensive the job would be.

That’s because the method for building the dykes needed to hold the water back as outlined in Cumberland’s feasibility study was not approved by the third party firm that Agnico brought in before construction began. The firm insisted on a different approach which made the cost of building the dykes triple from the cost in the original feasibility study.

All the extra money did buy some insurance, however, as the new dyke design borrowed heavily from the work done at the legendary Arctic diamond mine Diavik.

And the challenges didn’t stop with the costly re-design of the dykes. Agnico refers to the building of Meadowbank as its most “logistically challenging project” to date.

That’s because goods can only be shipped in to Baker Lake in a short window from mid-August to October. Then there was the 110-km all weather road that had to be built from the town to the project, and added to that there are the daily joys of dealing with the constant freezing of ground water in blast holes.

But on the occasion of the official mine opening such obstacles were as much as water un
der behind the dyke…so to speak.

Meadowbank is set to become one of Agnico’s biggest producers as it should account for roughly 35% of the company’s total gold production with projected annual production of 350,000 oz. of gold over a 9 year mine life at an estimated cash cost of US$460 and oz.

The significant cashflows that such production will generate will come courtesy of the 390 sq. km land package that hosts two gold bearing structural features: the Meadowbank trend and Northeast trend

While the Northeast trend hosts the early-stage PDF deposit, it is the Meadowbank trend that holds the deposits of Agnico’s current interest: Vault, Goose Island and Portage. The deposits all lie within 7-km of each other, are shallow, and are the sites of the initial mining.

Currently the company is mining ore from the North Portage pit area. The Portage pit is expected to be in production from late 2009 to 2014. The Goose Island pit is expected to start producing ore in 2013, following construction of dykes in 2010 and 2011. Looking out further into the future, dewatering of Vault Lake will allow the Vault pit to be mined beyond 2014.

Put all together, the three deposits currently have a proven and probable reserves of 32.2 million tonnes grading 3.5 grams gold for 3.7million oz. Indicated resources come in at 42.3 million tonnes grading 2.43 grams for 3.3 million oz. and inferred resource of 9.1 million tonnes grading 2.54 grams for 751,000 oz. of gold.

And Agnico believes there’s considerable potential to find more gold on the property. It’s enough to justify all the hard work the Agnico team put into the project over the last three years – although don’t expect the company to do it all over again any time soon.

“What we tell people now,” Scherkus says with a laugh, “Is that we will never build five mines at the same time again.”

The comment is in reference to the fact that while building Meadowbank, the company was also putting good size mines into production in Mexico, Finland and Quebec.

Scherkus’ tone then becomes more serious.

“It was tough on everyone, and while it has been company changing, and while we will continue to build mines, it’s difficult to maintain that kind of pace. Going forward we will be a lot more measured and not do it at such a frenetic speed.”