Agnico-Eagle buys out Breakwater at Lapa (April 24, 2003)

Hungry to expand beyond its single LaRonde gold mine in northwestern Quebec, Agnico-Eagle Mines (AGE-T) has struck a deal to acquire Breakwater Resources‘ (BWR-T) interest in the Lapa high-grade gold property, situated just seven miles east of LaRonde.

Under a previous deal signed last year, Agnico had been earning a 60% stake in the property by spending $3.5 million on exploration and paying Breakwater $200,000 in cash over five years. Had that earn-in been achieved, Agnico could have boosted its stake to 80% by paying another $1 million and completing an independent feasibility study.

However, under the new deal, Agnico is increasing its ownership to 100% by paying Breakwater US$7.93 million plus two net smelter return royalties: a 1% royalty on gold production from the Tonawanda portion of Lapa; and a 0.5% royalty on gold production from the Zulapa portion of the property.

Upon closing, Agnico will shell out an additional US$1 million to Breakwater as an advance on future royalties, and then pay another US$1 million should Lapa’s inferred resource reach 2 million oz. gold.

Based on additional drilling carried by Agnico last year, the inferred resource at Lapa currently stand at 3.3 million tons grading 0.25 oz. per ton (3 million tonnes at 8.5 grams gold per tonne), for 816,000 contained oz. gold based on a cut-off of 1.5 oz. per ton and a gold price of US$300 per oz. (Prior to Agnico’s involvement, Breakwater had delineated a resource at Lapa of 1.9 million tons grading 0.19 oz. gold.)

Agnico reckons that its discovery costs at Lapa — including both acquisition and exploration expenditures — is about US$11 per oz. gold.

For its part, Breakwater, a junior zinc producer, plans to use most of the proceeds to reduce its term debt, with the balance being retained as working capital.

Agnico is spending US$2.5 million on exploration at Lapa this year, with five drills in operation: two drills are probing the eastern limit as well as at depth; the third is carrying out infill drilling; the fourth is obtaining samples for metallurgical testing; and the fifth is exploring the deposit at depth.

The company has released results from two more holes at Lapa: hole 118-03-16 intersected 12.1 ft. (from 4,186 ft) grading an uncut 0.52 oz. gold per ton; and hole 118-03-18B cut 9.2 ft. (from 2,047 ft.) of 0.20 oz. per gold.

Agnico’s geologists have now traced Lapa’s key Contact zone over a vertical distance of 2,800 ft. and a horizontal distance of 1,600 ft.

The company reports that initial metallurgical testing on core samples has yielded favourable results, and that testwork on larger samples should be completed by the end of the third quarter.

In the past few months, Agnico has also acquired the nearby Normand Lake and Chibex North properties, situated on the same geological trend as Lapa, and acquired Breakwater’s 66.7% interest in the Chibex South property for $75,000 and a 0.66% net smelter royalty.

As a result, Agnico-Eagle now controls properties covering 12 miles on the geological structure that hosts Lapa’s Contact zone.

Agnico has reported a first-quarter net loss of US$6.2 million (US7 per share) on mining revenues of US$30.1 million, compared with a net profit of US$0.5 million (US1) on revenues of US$25.5 million a year earlier.

As a result of a previously reported 30,000-ton rock fall in two production stopes at LaRonde, first-quarter gold production was below expectations at 55,005 oz., compared with the 60,259 oz. gold produced in the first quarter of 2002.

Cash operating costs soared to US$169 per oz. from US$129 per oz. during the year-ago period — a rise that Agnico blames on lower gold and byproduct zinc production and a stronger Canadian dollar, which were only partly offset by higher silver and copper output.

Total cash operating costs at LaRonde, including the El Coco royalty paid to Barrick Gold, rose to US$243 per oz. from US$161 per oz.

Due to the rockfall, Agnico expects its 2003 gold production to be about 300,000 oz., or 20% lower than the previous target of 375,000 oz.