Agnico-Eagle Mines Ltd. (TSX: T.AEM, Stock Forum) and (NYSE: AEM, Stock Forum), a company with deep roots in Quebec, has embarked on a major expansion in the Canadian arctic that will cost around $4 billion and push its annual gold production to roughly 1.5 million ounces.
That would mark a 50% increase from the 1.08 million ounces that Agnico expects to produce this year at a cash cost of $445-$495 an ounce.
Having already brought its Meadowbank mine in stream last year, the Toronto based company is working to develop a second Nunavut operation known as the Meliadine.
Once they are both in operation, Agnico-Eagle could be looking at a minimum of 700,000 ounces of annual gold production from the Arctic, with the balance coming from mines in Quebec, Finland, and Mexico.
The expansion in Nunavut marks a major departure for a company which was built on a philosophy of mining gold in Quebec and selling it at spot prices. Even when gold was trading at US$250 an ounce ten years ago, the 54-year-old company has paid its annual dividend, year after year.
After closing at $70.12 on Friday, Agnico has a market cap of $11.8 billion based on 169.2 million shares outstanding. The 52-week range for the stock is $88.52 and $53.05.
Now that gold is trading at US$1,882 an ounce, the company expects to generate an average of $1 billion per year in cash over the next four years. As Agnico has earmarked about $500 million for expansion and development of existing operations during that period, much of that will be free cash flow.
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We decided five years ago that we wanted to diversify away from the reliance on a single mine," said Agnico chief executive officer Sean Boyd during an interview with Stockhouse. "We decided to do it step by step rather than to merge the company," he said.
With forecast output of about 310,000 ounces this year, Meadowbank is currently Agnico's largest mine. It is located about 300 kilometres west of Hudson Bay and 70 kilometres north of Baker Lake.
But Boyd says it will eventually be overtaken by the Meliadine project, which is located about 290 kilometres to the southeast of Meadowbank, (about 25 kilometres north of Rankin Inlet) and has the potential to produce up to 400,000 ounces of gold annually.
"We still see tremendous growth coming in the next several years and that is from the things that we currently own," he said.
Meanwhile, Boyd says supply and demand fundamentals in the gold industry should lead to higher prices in the near future.
"We have said US$2,000 an ounce within the next six months," he said. "I think that is a distinct possibility."
Boyd said the factors that will push prices higher include excessive government debt, the debasement of fiat currencies and strong physical demand in regions like India and China. On the supply side of the equation, Boyd said mine production remains flat. "If you look at production, the industry is producing the same as it did in 2001."
For its part, Agnico has never seen the need to get bigger just for the sake of gaining size. "We are not going to go out and do mergers," Boyd said. "We have never done that. We don't bet the company on any single transaction."
Rather, Agnico has achieved its growth in methodically by relying on the technical expertise and in-house knowledge that comes with mining gold at almost three kilometers underground at the LaRonde mine in Quebec, for example.
During its expansion in Nunavut, the company plans to use the experience it gained from the development of Meadowbank and its 110 kilometre access highway.
Agnico officials have said they expect Meliadine to be easier to develop because of its proximity to Rankin Inlet and related infrastructure.
The company has established a budget of $64.8 million for drilling and related work at Meliadine this year.
Sean Boyd bio
Sean Boyd is the Vice-Chairman and Chief Executive Officer and a director of Agnico-Eagle. Mr. Boyd has been with Agnico-Eagle since 1985. Prior to his appointment as Vice-Chairman and Chief Executive Officer in December 2005, Mr. Boyd served as President and Chief Executive Officer from 1998 to 2005, Vice-President and Chief Financial Officer from 1996 to 1998, Treasurer and Chief Financial Officer from 1990 to 1996, Secretary Treasurer during a portion of 1990 and Comptroller from 1985 to 1990. Prior to joining Agnico-Eagle in 1985, he was a staff accountant with Clarkson Gordon (Ernst & Young). Mr. Boyd is a graduate of the University of Toronto (B.Comm.).