Agnico Bewitched By Kittila

SITE VISIT

Kittila, Finland — Finnish legend tells of a powerful witch named Paivio who lived in far northern Finland with the primeval Finnish shamans, famous for their magic. One day Paivio gave birth to another witch, Kitti, and it’s her legacy that lives on in the name of the local municipality, Kittila (pronounced Kayht-tull-lah).

Agnico-Eagle Mines (AEM-T, AEM-n) recently opened the Kittila gold mine, and now Kitti has a mine named in her honour by a mid-tier producer that knows something about growing a legend.

Kittila is the second gold mine the company has opened this year, after Goldex, near Val d’Or, Que., launched production in June.

The company plans to double up again in 2009, with production starting at the Lapa gold mine, 11 km east of LaRonde, in Quebec’s Abitibi camp, and the Pinos-Altos gold-silver project in Mexico.

But it’s all part of Agnico-Eagle’s grand plan, the endgame of a strategy that would see the company reach annual production of 1.2-1.3 million oz. gold at average cash costs of roughly US$275 per oz. by 2010.

Kittila, the second stage of that expansion plan, entered production near the 67th parallel, about 900 km north of Helsinki.

On the ground at Kittila

The Kittila mill is up and running, employing a relatively simple circuit. Ore is crushed and ground to 5.5 mm in diameter in a 4,400-kilowatt semi-autogenous grinding mill. Chemicals are then added to the ore, which undergoes carbon and then sulphur flotation in nine 360-cubic-metre Outotec cells. The gold in sulphides floats to the surface in the cells where it clings to the edges of bubbles.

The bubble lather concentrate is sent into the autoclave, where oxygen is injected at high temperatures (as much as 190 Celsius) to separate the gold from the sulphides. The gold-bearing material is then leached in 822-cubic-metre tanks using activated carbon. After the carbon is stripped, the leftover material is dried and smelted into dor bars, which are then sent to a refinery for more processing.

The 3.5 by 23.5-metre autoclave, similar in appearance to a small submarine, is the linchpin of the processing circuit. It was built in Germany and lined with three layers of silica-quartz bricks by a Finnish contractor. The autoclave is connected to a 300-tonne-per-day oxygen plant and was commissioned.

Agnico had some problems with “hot spots” in the autoclave during startup, but after several heating and cooling cycles the company believes it has the problem licked. Gold recovery is averaging 92%.

Kittila cost about 155 million euros ($247 million) to build and includes atop-notch assay lab and core shack, a standard at most Finnish mines.

In an odd twist, the Kittila mill also features a first-class bomb shelter, as required by Finnish law. The Finns placed the law on the books in 1917, the same year the country declared its independence from Russia.

President and chief operating officer Ebe Scherkus estimates the bunker cost the company “a couple of hundred thousand” dollars just to blast out the rock where it sits. Visitors were allowed a peek inside the shelter, which contained some oxygen tanks, bits of food and drink, and a nearly new set of Pinseeker golf clubs.

History

The Geological Survey of Finland discovered gold mineralization in the Kittila area in 1986 but it sat snow-covered and inert until the property was sold to the highest bidder in April 1998.

Over the next six years, the winning bidder, Swedish-listed Finnish junior Riddarhyttan Resources, drilled roughly 140,000 metres into a structure known as Suurikuusikko, where the gold is hosted in vertical lens-shaped bodies that strike north-south. The gold there is associated with arsenopyrite and pyrite, with less than 10% as free gold in the upper oxidized parts of the mineralized zones.

Along the way, Riddarhyttan secured environmental (2002) and open-pit and underground mining permits (2003).

Around that time, back in Canada, Agnico-Eagle was taking some lumps for being too Quebec-centric, with its sole producer the venerable LaRonde gold mine in the Abitibi. Agnico set about seeking new gold projects in mining-friendly jurisdictions, preferably ones with the potential to expand resources and where Agnico could use the mining skills it had almost perfected at LaRonde. Soon Riddarhyttan was a target.

After acquiring about 14% of the junior in two separate transactions, Agnico made an all-share bid for Riddarhyttan in May 2005, worth roughly $150 million. The deal dragged on for months, but Agnico finally secured the company later that fall, and by that time Riddarhyttan had outlined 3.7 million oz. gold at Kittila, with only 30% of Suurikuusikko’s strike length having been drilled.

Six months later, Agnico announced it would enter production at Kittila, first as an open pit and later as an underground operation.

Today, Kittila hosts reserves of 18.2 million tonnes grading 5.12 grams gold per tonne for 3 million contained ounces gold, plus indicated and inferred resources of 2.7 million oz.

Agnico will likely not hit its goal of 20,000 oz. gold from Kittila by the end of 2008 but should reach Kittila’s planned production of 150,000 oz. in 2009.

The company had some problems with local contractors throughout the early months of 2008 but had better performance in the year’s second half when it decided to bring in people and train them, mostly with staff from LaRonde.

“Most of our people here are in an advisory role, as a backup,” Scherkus says.

Agnico is currently processing about 65,000 tonnes per month at a stripping ratio of 8:1 from the Kittila pit and would like to boost that to around 100,000 tonnes but has had trouble sourcing large-tonnage haul trucks. The average cost per tonne is 32.5 euros ($52).

Ore from the open pit, which should last between four and five years, is offsetting the capital costs of underground development. During the visit, the access ramp, at a decline of 12, extended 3.5 km underground at 320 metres below surface. Two tunnels were each being advanced at a rate of 5 metres per day.

Once it switches to underground mining, Agnico plans to employ long-hole open stoping — the same mining method used at LaRonde.

“The open pit is giving us time to do the underground properly,” says Francois Vezina, operations manager at Kittila.

The company continues to have some issues finding enough qualified people to work at Kittila but this was offset somewhat with the global economic downturn and the subsequent collapse of base metal prices. That caused some Finnish mines to close and Agnico was able to snap up those seeking work. Kittila will employ about 210 people at full capacity.

Seeking more gold

Kittila is already Agnico’s second-largest asset in terms of reserves and resources, but the company continues to seek and find more gold at depth.

The recent summer drill program at Kittila added another 1 million oz. to inferred resources. That brings the total mineral inventory at Kittila to 3 million oz. of probable reserves grading 5.1 grams gold per tonne from 18.2 million tonnes, indicated resources of 5.4 million tonnes grading 3 grams gold for 500,000 oz., and inferred resources of 15.7 million tonnes grading 4.34 grams for 2.2 million oz.

Since May 2007,when Agnico reported the first two deep intercepts on the main Suuri zone at Kittila, exploration has extended the resource at depth and along strike.

Drilling has traced the East lens of the Suuri zone down to around 1.1 km and extended its overall north-south strike length at depth to about 1 km. The Suuri zone represents roughly 75% of the current Kittila probable gold reserve (60% of the resource), and consists of three lenses, East, Central and West, though Agnico says it has likely found a new lens at depth in the Suuri zone.

Situated 20 to 100 metres west of the East lens, at 600 metres below surface, drill hole 08001B on the potential lens cut 6.3 grams gold per tonne over 16.6 metres, at 850 metres below surface.

In 2009, eight rigs (seven at surface and one underground) will continue drilling along the Suurikuusikko trend. Half of those drills will be used to convert resources to reserves while the others will drill 10,000 metres to test extensions to previous gold intersections on the Hako and Retu gold targets.

Another target is Roura, north of Suurikuusikko, where drilling appears to have discovered the down-plunge extension of the Roura zone at depths of almost 1 km. The zone is about 300 metres north of the main Suuri zone at depth.

The Roura central zone’s probable reserves represent around 15% of Kittila’s reserves (10% of the resource), and are now defined to a depth of about 500 metres.

Drill hole 07010 on Roura returned 4.6 grams gold per tonne over 7.6 metres. Hole 08001 intersected the Roura zone roughly 150 metres north of 07010 and at a depth of 1 km, cutting an 80-metre-thick zone of alteration and sulphide mineralization. That hole returned four mineralized intervals grading between 4 and 11 grams gold over thicknesses of between 2.5 metres and 6 metres. Overall, the intercept graded 2.2 grams per tonne over 47.5 metres true width.

At current reserves, Kittila is slated to produce 150,000 oz. gold per year over a scheduled 13 or 14 years, but the company believes that timeframe could be extended to 30 years or more as Agnico learns more about the deposit and converts resources to reserves.

In fact, Agnico is conducting a scoping study at Kittila to determine the feasibility of sinking a shaft that would double Kittila’s production to about 300,000 oz. gold annually. The plan is contingent upon converting resources to reserves, as well as a mill expansion. All in, the cost would be in the $250-275 million range.

“We don’t know where the end of this deposit is,” Scherkus explains. “But we might be able to tell in a couple of years.”

Finnish economics

At presstime, Agnico shares were trading at $41.75, less than three weeks after the company announced that it would issue 8 million shares (roughly 6% of those outstanding) at $31.50 apiece in a private placement financing led by a syndicate of lenders including Mcquarie Capital Markets Canada, several big banks, and the Canada Pension Plan. At minimum, Agnico will raise $252 million, but that number could reach $289 million if all warrants are exercised.

The cash injection comes less than two months after Agnico doubled its line of credit to US$600 million through a syndicate of banks. Add to that solid cash flow from operations and the question now is: What sort of project is Agnico seeking with its fist full of cash?

That sort of thinking would be congruent with comments from a couple of sources close to the company and a speech delivered by company CEO and vice-chairman Sean Boyd during the tour.

“We will be aggressive. . . We will not sit back on our heels,” Boyd told the room full of media and analysts.

One noteworthy target is Comaplex Minerals (CMF-T, CXMLF-o).

Agnico-Eagle acquired a 15.6% interest in Comaplex earlier this year. The junior owns significant interests in the Meliadine East and West gold projects, not far from Agnico’s Meadowbank gold project, also in Nunavut.

As of May, Meliadine West hosted 1.78 million oz. gold in the indicated category, and another 1.38 million oz. were inferred; Meliadine East, meanwhile, boasted 259,000 oz. in the indicated category and 149,000 oz. inferred.

One hurdle might be Meliadine Resources, privately held by Resource Capital Fund, owner of 22% of Meliadine West and half of Meliadine East.

Shares of Comaplex were trading at around $2 at presstime with about 52.7 million shares outstanding. Agnico- Eagle has a track record of buying small interests in juniors, then getting a seat on the board and a feel for the company before buying it outright, as it did with Riddarhyttan.

Agnico-Eagle sports a $6-billion market cap and Credit Suisse First Boston has published a buy recommendation with a 12-month target of $62, whereas Torontobased Wellington West Capital Markets rates the paper as “market perform,” with a 12-month target of $55.