Agnico-Eagle gets its groove back

Once a company achieves upper mid-tier status, as Agnico-Eagle Mines (AEM-T, AEM-N) has, it is faced with different problems.

Speaking on a conference call, Agnico CEO Sean Boyd says the company is grappling with how best to distribute its bounty of cash flows. Some problem.

Boyd says the trick is striking the right balance between paying out cash as dividends, putting it in the ground for exploration, and reinvesting into existing core assets for expansion and optimization.

The company is doing a decent job so far: its US20¢-per-share quarterly dividend is one of the highest in the industry, its exploration budget is aggressive and has yielded enviable results, and  three of its five core assets are reaching loftier levels of production.

Not that it has all been smooth sailing. Last year was notable for  the operational hurdles that wound up hobbling the company’s share price.

The chief culprit on the operational side was its Goldex mine near Val-d’Or, Que. Agnico suspended operations and advised analysts to assign the asset a zero value while building financial models on the company. The moves were necessary owing to unstable rock formations and excessive flooding at the mine.

Boyd says studies on what went wrong at Goldex are ongoing, and investors can expect a thorough update on its status in the middle of the year. He adds that Agnico continues to spend money on exploration at the site, however, and while no work can be done on the main deposit, other satellite deposits are seeing the drill.

But when examining first-quarter results, it is evident that Goldex has become periphery to the Agnico story, as the company has more than ample assets to pick up the slack that the mine’s suspension brought about. Agnico actually increased its total gold production over the same period last year — a period in which Goldex had been contributing.

“We increased output from all five of our mines, and that more than made up for loss of gold from suspension at Goldex,” Boyd explains.

The company has reached record gold production at its Kittila mine in Finland and its Pinos Altos mine in Mexico. It also achieved a record throughput rate of over 9,700 tonnes per day at its Meadowbank mine in Nunavut.

With assets pushed harder, gold production for the quarter came in at 254,955 oz., compared to 252,362 oz. in the first quarter of last year.

Cash costs on ounces did rise slightly, however — they were up to US$594 per oz. from US$531 per oz. for the same period last year.

The key contributor to the higher costs was a decline in base-metal by-product credits from its flagship La Ronde mine in Quebec.

Despite those credits winding down, the mine maintained its juggernaut status in gold production as cash costs remained below the US$300 mark and gold output was up 17% to 43,000 oz. for the quarter.

With La Ronde humming along and Kittila and Pinos Altos hitting record levels, the company managed a first-quarter profit of US$78.5 million, or US46¢ per share — a big uptick from the US26¢ in earnings per share from the same period last year.

And while Boyd says the company is confident it will meet its 2012 production guidance with 875,000 oz. to 950,000 oz. gold, he cautions that production at Kittila will fall off in the second quarter, because the mine will be shut down for a scheduled 40-day maintenance in May.

As for the project pipeline, development at the Meliadine project in Nunavut continues, with Agnico investing $82 million this year on exploration and infrastructure.

The project has probable reserves of 12.4 million tonnes grading 7.2 grams for 2.9 million oz. gold, indicated resources of 12.6 million tonnes grading 4.1 grams gold for 1.7 million oz. and inferred resources of 12.7 million tonnes grading 6 grams gold for 2.4 million oz.

Company-wide, Agnico has proven and probable reserves of 157 million tonnes grading 3.71 grams gold for 18.75 million oz.

On April 27 — the day of the conference call — the company’s shares were up 10%, or $3.40, to $38.66 on 1.6 million shares traded.


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