Agnico-Eagle takes big hit in Q3 with Goldex closure

Agnico-Eagle Mines (AEM-T, AEM-N) has posted a US$81-million net loss for the third quarter following the writeoff of its Goldex gold mine in Quebec.

The quarterly results come a week after the company broke the news about the loss of the mine, caused by the discovery of a large, unstable rock mass directly above the orebody. Agnico-Eagle is in the early days of finding out what happened at the mine and how much, if any, of the gold in the ground it will be able to recover, but the company has made the difficult decision to assume the worst.

“We’re disappointed to have to make decisions like we did at Goldex,” Sean Boyd, Agnico-Eagle’s CEO, said in a conference call. “Goldex has been in the Agnico group since 1971, so clearly it was not an easy decision to make.”

Shutting Goldex meant Agnico-Eagle took a US$161.1-million after-tax writeoff, plus a US$32.7-million closure provision. The company has also cut this year’s production forecast by 70,000 oz. to 1.01 million oz. gold, owing largely to the problems at Goldex. And because the mine was one of Agnico-Eagle’s lowest-cost producers at US$411 per oz., expected average cash costs have gone up to US$575 per oz. from US$495 per oz.

“Having to remove one of our lowest-cost producers and a steady performer, which is about 15% of our production, is clearly going to impact not only our production, but our overall company-wide cash costs,” Boyd says.

With Goldex included in third quarter results, cash costs were US$563 per oz. compared with US$423 per oz. in the third quarter of 2010. The increase comes after the company saw a 7% drop in gold production because of lower grades in its mines.

The company’s northern mines, particularly Meadowbank in Nunavut and Kittila in Finland, were the main culprits for the high cost per ounce. At Meadowbank, cash costs were US$1,033 per oz. compared with US$671 per oz. in 2010, as the grade dipped 38% this year with ongoing dilution issues and delays to waste removal. Cost overruns in maintenance and processing, partially related to lower grades, also heavily impacted overall costs. At Kittila, cash costs were US$694 per oz. compared with US$519 in the third quarter of 2010 following overall cost increases for fuel, electricity, materials and contractors.

Cash from operating activities in the quarter was a record US$197.6 million, up from US$156.8 million in the third quarter of 2010. The record was achieved even though the 266,000 oz. gold produced was 19,000 less than what the company produced in the third quarter of 2010, with Agnico-Eagle’s revenue instead boosted by a 39% increase in the realized gold price and by-product prices.

Excluding the Goldex costs, stock option expenses, writedown of available securities and foreign currency gains, Agnico-Eagle reports it would have made US$101.9 million in the quarter, compared with US$121.5 million in the third quarter of 2010.

With only a week since the Goldex announcement, the company had little more information to give. The company talks cautiously of future potential at the mine but makes no assurances. Even if the main orebody is inaccessible, there remains a deeper D zone, the M zone above the main resource and the E zone to the east of the resource.

“There are three other structures that have a combined two million ounces, but we can’t say what’s possible with those structures until we know exactly what’s happening,” Boyd says.

For now the company underlines how unexpected it is that a 400-metre block of granite could have failed, and how early it is in the assessment process, with many conflicting views about the causes and solutions.

Agnico-Eagle’s share price closed down $2.68, or 5.9%, at $42.37 on the quarterly results, having already lost $12.86, or 17%, of its share price since news of Goldex broke.