INVESTMENT COMMENTARY — Agnico-Eagle Mines gets nod from National Bank Financial

Just before gold prices soared well above US$300 per oz., research analysts from National Bank Financial paid a visit to the LaRonde gold mine in northern Quebec. They came back impressed and issued a “buy” recommendation for owner-operator Agnico-Eagle Mines (AGE-T) on the expectation that the company would enjoy improved production and lower costs by the year 2000.

National Bank Financial is the firm resulting from the acquisition of First Marathon Securities by the National Bank, and the subsequent merger of First Marathon and Levesque Beaubien Geoffrion.

The firm’s buy recommendation was well-timed. The recent increase in gold prices pushed Agnico-Eagle’s share price to $13.60, up from $8.60 on Sept.

13, when the recommendation was made. The gold company has 53.3 million shares outstanding and working capital of about $60 million.

LaRonde is reported to be “on budget and on track” for shaft 3 to begin hoisting ore in mid-2000, ramping up to 5,000 tonnes per day in 2002. “There is still a lot of work to be done over the next nine months,” the firm’s analysts noted in their research report. “This includes completing the shaft-sinking and the underground infrastructure, continuing with underground development, upgrading the mill facilities to handle 5,000 tonnes per day, and phasing out mining from shaft 1 and 2 once shaft 3 is operational.”

Agnico-Eagle’s production is expected to increase almost threefold over the next few years. This year’s production target is 115,000 oz., and by 2004 the number should increase to 340,000 oz. At the same time, operating costs are expected to fall to about US$100 per oz. from the current US$225 range (net of byproduct credits).

“This will result in strong earnings and cash flow,” the firm notes. “In addition, as drilling continues on the property, we expect additions to resources and reserves, which will be accretive to our net asset value.” Shaft 3 is reported to be at a depth of 6,700 ft. below surface, with another 580 ft. left to go. It will be completed early next year, then converted into a production shaft by mid-2000. Ground conditions are reported as being “excellent.” Throughput next year is expected to average 3,800 tonnes per day, increasing to 4,100 tonnes in 2001.

At present, ore is mined from three main areas; shafts 1 and 2, and levels 122 and 125 in shaft 3 (by way of shaft 1). Once shaft 3 is fully operational, mining will be phased out at shafts 1 and 2, with ore coming only out of shaft 3 in 2001.

The National Bank analysts note that on the development front, levels 118, 122, 125, 146 and 149 at shaft 3 have been opened up for production. “This is important,” they add, as most of the recent announcements by companies, such as Placer Dome [for the Getchell property] and Stillwater Mining, on not being able to deliver on production and cost targets have been the result of lack of underground development.”

Capital costs to develop the deposit at shaft 3 are estimated at $208 million, of which $113 million has already been spent. “Once this capital has been spent, this would amount to only $42 per oz. of developed resource [on 5 million oz.] along a prolific belt in North America.”

The analysts also cite Agnico-Eagle’s favourable exploration potential.

“There is excellent exploration potential on the property at depth, east of the El Coco property [recently acquired from Barrick Gold] and also within the current envelope used to define reserves, as gold grades and widths are better than forecast.

“Longer-term, the company has over a two-mile strike length that could be explored by drifting an exploration drift [as was done at shaft 3] across the El Coco property and the Sphinx property using the 20-level exploration drift 2,800 ft. below surface. This program would cost more than $10 million but would provide a platform to test for structures at depth.” Agnico-Eagle has not been able to report profits so far this year, owing to persistent low gold prices. However, improved prices of late could, if sustained, result in a stronger performance in the last quarter.

The analysts predict that by 2004, when the mine is producing close to 340,000 oz. gold at US$100 per oz. (net of byproduct credits), earnings will be about 48 cents per share and cash flow, $1.11 per share, based on a US$300-per-oz. gold price.