Investment Comment Higher earnings forecast for Agnico

Backed by a new silver discovery near Cobalt Ont., an expected end to dilution problems at its Telbel gold mine and significantly higher earnings, the executives at Agnico- Eagle Mines are in a bullish mood this year.

A 3-fold increase in the company’s 6-month net income to $5.1 million or 37 cents per share, compared to $1.5 million or 11 cents per share in the same period last year, seems to justify that enthusiasm.

And now, Merrill Lynch has rated Agnico as an above-average buy for both the intermediate and longer terms in its latest quarterly update.

Agnico-Eagle is a precious metals producer capable of steady and sustained growth with “an excellent outlook over the longer term,” said analyst Robert Cook.

“Its operations are low cost and the company uses a very conservative financial approach while maintaining an exceptionally strong balance sheet with a strong cash position and no debt,” he said.

According to Cook’s report, the improved outlook for operations is based on a mining method which could reduce gold production costs to between $210 and $230 per oz.

The sub-level retreat method is being tested in a number of new stopes at Agnico’s Telbel gold mine at Joutel, Que., where ore dilution problems had hampered the operation. Production target

A stope containing 770,000 tons averaging 0.30 oz gold per ton is now in full production and with four more expected to follow, Agnico has set a gold production target of 77,000 oz for 1987.

The discovery of a new silver deposit at its Langis project seven miles northeast of New Liskeard, Ont., also bodes well for the Agnico earnings outlook, according to the Merrill Lynch report.

Discovered almost by accident, the deposit is located under 100 ft of overburden a mile and a half from the old Langis mine shaft. As reported (N.M., Aug 24/87), additional drilling has returned 61.0 oz across 11ft and 39.0 oz over 31 ft respectively and the company is currently sinking a 1,200-ft production shaft (at a cost of $3.5 million) to develop the deposit.

Agnico is undertaking this project in a joint venture with 19.75%- owned subsidiary Silver Century Explorations.

In other news, the 300-ton Penn silver mill and refinery at Cobalt are now back in production and should add 400,000 to 500,000 oz silver to Agnico’s output this year. Real Estate

The company has also hatched a new real estate arm which according to Agnico-Eagle could be liquidated immediately for an $8-million to $100-million profit.

Holdings which include a 41.5- acre subdivision in Scarborough, Ont., and a Toronto office building are expected to be spun off into a separate company while Agnico retains a 10% interest for itself.

The one black spot on the Agnico- Eagle horizon is a law suit involving 1.5 million shares of Dumagami Mines which Agnico bought from Noranda Inc. last year.

Noranda said it would not have sold the shares to Agnico if it had previous access to assay results from drilling on a new gold zone on the west side of the Dumagami property in northwestern Quebec.

As reported (N.M., Nov 16/87), Noranda has launched a lawsuit in the Ontario Supreme Court against Dumagami, Agnico-Eagle and Mentor Exploration and Development seeking damages of $40 million.

Based on an average gold price of $445(US) and production of 77,000 oz gold, Merrill Lynch has reduced its 1987 earnings estimate to 75 cents per share from 95 cents (compared to 37 cents per share in 1986).

Agnico had hoped to produce 85,000 oz gold this year but problems at the Telbel shaft resulted in a loss of output during October and as a result the company is being more conservative in its estimates. Previous forecast

Merrill Lynch has also lowered its 1988 estimate to $1.10 with gold averaging $475 per oz, down from a previous forecast.

However, with production of 85,000 oz gold and one million oz silver in 1988, Cook says Agnico can expect a strong earnings rebound.

At press time, Agnico shares were trading on the Toronto Stock Exchange at $28.63 in a 52-week range of $45 and $17.75.

On Dec 1, the company declared a dividend (No. 8) of 20 cents (US) per share payable on Jan 5 to shareholders of record on Dec 9. According to the company, this represents no change from the previous 20 cents per share dividend paid on Jan 6.