Kittil, Finland — It is an ocean away and 6,000 km northeast of LaRonde, Que., 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, AEM-N).
So it came as no surprise when the Toronto-based company gave the thumbs-up in June 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 rich 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 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 grading 5.16 grams per tonne for roughly 2.3 million oz. gold and a resource of another 8 million tonnes containing 1.2 million oz. gold, Kittil certainly had enough goods in the ground to get Agnico’s attention.
But there’s more to Agnico’s Finnish expedition 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 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 the company has honed through 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. gold per year by mid-2008, with a mine life of at least 13 years.
Suurikuusikko trend
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 hosting seven deposits.
The company’s plan is to approach the Juurikuusikko deposit in two phases.
First, high-grade ore will be mined by open pit while underground construction and further underground exploration get under way.
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, averaging 4.94 grams gold per tonne for 788,474 oz. gold with a strip ratio of 8:1.
The ore that 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.
Currently, the underground reserves stand at 9.3 million tonnes of ore grading 5.28 grams gold for a total of roughly 1.6 million oz.
The two-phase approach is designed to minimize capital costs at the beginning of production, and allow cash flow 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,” Boyd says. “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 resources into reserves, testing mineralized 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, pretax, from the mine. Preproduction capital costs are estimated at US$135 million, while sustaining capital costs are pegged at US$49 million. Operating costs will come in at roughly US$250 per oz.
Riddarhyttan acquisition
In November 2005, Agnico-Eagle acquired the outstanding shares of Riddarhyttan Resources, a Swedish company that controlled the Suurikuusikko 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 the 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.
Agnico displayed both headstrong determination in its drive to move development of the site forward and prudence in its takeover method — both traits characteristic of the company.
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; it acquired LaRonde and Goldex, also in the Abitibi, 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. gold in reserves and another 5 million in resources, 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 substantial reserves is Agnico’s solid balance sheet. The company has no debt, has not hedged its gold production, and with the recently completed share issuance which raised US$237 million, it has enough cash on hand to push all its major projects forward.
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 become Canada’s next major.
“We don’t have a lofty goal that says we have to have x-million ounces by a certain date,” Boyd says. “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?
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