Agnico-Eagle goes international through Finland

It is over an ocean and 6,000 km northeast of LaRonde, Quebec, but with pine-forest covered hills and a pro-mining government presiding over a nation of highly skilled, hockey loving beer drinkers, Finland doesn’t feel so far from home for Agnico-Eagle Mines (AEM-T).

So it came as little surprise when on June 5, the Toronto-based company gave the thumbs-up to begin immediate construction of the Kittil mine in Finland’s far north.

While in the past Agnico has been accused of resting on the laurels of its amazingly profitable LaRonde mine in Quebec’s Abitibi region, its arrival on Finnish soil marks a turning point in the company’s history.

“Having LaRonde is great but we knew as a company we had to diversify and become a multi-mine company,” says Agnico’s president and chief executive Sean Boyd. “With the construction of Kittil we’ve accelerated the transformation of Agnico from a regional single mine company to an international multi-mine gold company.”

With reserves at Kittil standing at 14.2 million tonnes with an average grade of 5.16 grams per tonne for roughly 2.3 million oz. of gold and with a resource of another 8 million tonnes containing 1.2 million oz. of gold, Kittil certainly had enough goods in the ground to get Agnico’s attention.

But the story of Agnico’s Finnish expedition has more to it than just the geological upside.

For Boyd who’s been with Agnico since 1985 — Agnico’s interest in Finland is tied to the company’s quest for the best of all possible working conditions.

“When we look for a project we look at the whole thing,” Boyd says. “By choosing carefully where we want to operate we eliminate a lot of the risks other than just the technical risk of the project.”

That means finding projects near infrastructure to help minimize rising capital costs, and working in countries that are politically stable and that offer, as Boyd puts it, “a fair forum to explain the benefits of the mine to the people in the region.”

Lastly, Boyd says, Agnico chooses projects that match the skill set that the company has honed through its dealing with the notorious complexities of LaRonde.

Kittil met all of the company’s strict criteria, and because it did, Agnico plans to have the mine turning out 150,000 oz. of gold a year by mid-2008, with a mine life of at least 13 years.

Kittil will be taking gold from the Suurikuusikko trend, a shear zone that extends roughly 15 km within a much larger greenstone belt that stretches from the Norwegian coast through Sweden and Finland and into Russia.

To date only 5 km. of Suurikuusikko has been drilled, but those holes defined three parallel mineralized zones divided into seven deposits.

The company’s plan is to approach the deposit in two phases.

First, high grade ore will be mined by open pit while underground construction and further underground exploration get underway.

Agnico estimates that after three years of mining the surface, the underground mine will be ready to turn out ore.

The higher grade ore will be mined by way of five separate open pits. Combined the pits will pull out roughly 5 million tonnes of ore, with an average grade of 4.94 grams gold per tonne for 788,474 oz. of gold with a strip ration of 8 to 1.

The ore which will be mined from underground sits beneath the largest of the open pits — the Suurikuusikko pit.

Once beneath Suurikuusikko Agnico will drift north beneath the North Rouravaara zone of the trend.

Presently the underground reserves stand at 9.3 million oz. of ore with an average grading of 5.28 grams gold for a total of roughly 1.57 million oz.

The two-phase approach is designed to minimize capital costs at the beginning of production, and allow cashflow to be generated from the surface for the more expensive undertaking of developing the underground mine.

But Boyd points out that while the reserves are substantial at present, Agnico will continue to aggressively explore both underground and in the areas outside of the 5 km. currently drilled.

“If more gold is there, we’re going to find it, and we’ll find it as quickly as we can,” says Boyd. “There’ll be no shortage of budget here from an exploration point of view.”

Currently there are eight drills on site at Kittil. The company plans to do 21,000 metres of drilling with an eye towards converting resource into reserves, testing mineralize zones at depth, testing land to the north and defining additional targets along the structure.

With a gold price of US$450 the company says it will generate US$223 million net cash flow, pre-tax, from the mine.

Preproduction capital costs are estimated at US$135 million, sustaining capital costs are US$49 million. Operating cost will come in at roughly US$250 an oz.

Details of the acquisition

In November 2005, Agnico-Eagle acquired the outstanding shares of Riddarhyttan, a Swedish company that controlled the claims since 1998.

Prior to the move, Agnico put two members of its senior management team on Riddarhyttan’s board by acquiring a 14% stake in company. That move, made in 2004, allowed Agnico to push for more drilling.

It’s clear from talking to local media that Agnico’s arrival was welcomed by locals, as the site was viewed to be languishing under Riddarhyttan’s control, and needed the injection of Agnico’s capital and know-how to get things moving.

While the drive to move the site forward is telling of Agnico’s headstrong appraoch, its method of takeover is telling of its carefulness.

Agnico has applied the same takeover technique over the years: find a project it likes, get on the board to push for more drilling, and engineer a takeover if it likes what it sees.

While some say its acquisitions have been few and far between, the company’s methodical approach served it well in its early days as it acquired LaRonde and Goldex in the same manner.

“People have criticized us for being slow off the mark, but we take the long term view and we’re not buying assets right now to package them for sales. We’re buying assets because we want to build them,” Boyd says.

And with five projects in the pipeline making up 10 million oz. in reserves and another 5 million in resource, Agnico is already near its target of having 15 million oz. of reserves within the next two years.

But the gold in the ground is only half of the story. Side by side with the solid reserves is Agnico’s solid balance sheet. The company has no debt, is un-hedged on its gold production and with the recently completed share issuance which raised roughly US$237 million, it has enough cash on hand to push forward on all its major projects.

Importantly for Boyd, Agnico was able to raise the funds without causing considerable dilution. With roughly 120 million shares outstanding, Agnico sits in the lower end of the spectrum for similar sized mid-tiers.

With so many positive indicators, it’s natural to wonder if the company is positioning itself to be Canada’s next major.

“We don’t have a lofty goal that says we have to have x million oz. by a certain date,” says Boyd. “We don’t want to destroy the good working chemistry we have by taking on people and assets that don’t fit with our mentality just so we can get bigger.”

When slow and steady has worked this well, why mess with the formula?