Tale of two deposits emerges in North

Agnico-Eagle Mines Ltd.'s hunt for gold in Nunavut is rapidly becoming a tale of two deposits.

Though the aggressive mid-tier gold producer is about to celebrate a second anniversary of gold production at its Meadowbank Mine near Baker Lake, it is increasingly looking to the Meliadine gold project located 290 kilometers (180 miles) to the southeast to make future investment in the northern territory worthwhile.

An advanced-stage gold project, Meliadine is Toronto-based Agnico-Eagle's second major project in Canada's Low Arctic. The company acquired the property from Comaplex Minerals in 2010, boosting an existing 16 percent stake in the project to 100 percent ownership.

Meliadine is a growing asset with more than 7 million ounces of gold reserves and resources. In terms of reserves and resources, the Meliadine project hosts one of Agnico-Eagle's largest gold deposits. It is currently in the permitting phase with first production expected in 2017. In addition, Meliadine is a large greenstone property with significant exploration upside, and it has potential for regional synergies with Meadowbank.

Costly setbacks at Meadowbank

On Feb. 15 Agnico-Eagle reported a loss of US$568.9 million, or minus US$3.36 per share, for 2011, mainly due to write-downs at its Goldex mine in Quebec (mining operations suspended October 2011) and Meadowbank mine in Nunavut (US$302.9 million and US$907.7 million, respectively, before taxes). That compares with a profit of US$332.1 million, or US$2.05 per share, in 2010.

Payable gold production from all six of Agnico-Eagle's mines in 2011 totaled 985,460 ounces at total cash costs per ounce of US$580. That was down slightly from full-year 2010 output of 987,609 ounces with comparable costs of US$451. The higher costs in 2011 stemmed primarily from higher operating costs at Meadowbank, the loss of Goldex and general cost escalation in the industry.

"While 2011 was a very difficult year for our company, we look forward to 2012 as we expect most of our mines to produce more gold. We also anticipate further growth in gold output in 2013 and 2014 from our existing mines while we advance our development projects at La India and Meliadine," said Agnico-Eagle President and CEO Sean Boyd. "In 2012, Agnico-Eagle anticipates meeting its targets, increasing profitability and growing the shareholders' exposure to gold on a per-share basis."

The company took a write-down of US$644.9 million on the Meadowbank mine in the fourth quarter, reflecting its decision to reduce its estimate of remaining ore reserves at Meadowbank by more than one-third to 2.201 million ounces from 3.486 million ounces as of Dec. 31, 2011.

Payable gold production at Meadowbank in 2011 was a disappointing 270,801 ounces at total cash costs per ounce of US$1,000. That compares unfavorably with the mine's full-year 2010 output of 265,659 ounces at total cash costs per ounce of US$693.

The Meadowbank mill processed ore at an average rate of 8,866 metric tons per day in the fourth quarter. This is significantly higher than the 6,659 tpd achieved in the year-earlier quarter. Since the startup of a permanent secondary crusher in June, the mill's design rate of 8,500 tpd has been consistently exceeded.

Minesite costs per metric ton averaged C$91 in 2011, down only slightly from C$95 in 2010 despite the improved throughput. Higher costs were realized in nearly all aspects of operations, specifically, transportation, logistics, labor and maintenance.

Higher operating costs at Meadowbank directly impacted the gold grade that the producer can mine economically.

"Simply put, some of what was previously considered ore is now considered waste," said a company spokesman.

As a result, Agnico-Eagle pared Meadowbank's ore reserves to reflect its belief that it can no longer economically mine some of the lower grade ore.

The company also adopted a new optimized mine plan for Meadowbank that shortened the mine's life by three years to 2017 instead of 2020 and resulted in an associated reduction in the carrying value of the operation. Meadowbank's value was reduced to about US$762 million from a previous property, plant and mine development book value of roughly US$1.7 billion.

Agnico-Eagle said it is anticipating slightly higher total cash costs per ounce of US$1,040 per ounce at Meadowbank in 2012, and has issued new guidance for the next three years that is down about 27 percent annually, on average. Grades to the mill continue to be lower than expected, reflecting more complex orebody geometry that makes selective mining difficult and more costly. Compared with the 2010 LOM plan, the new LOM grade is now forecast to be down about 1 percent, metric tons milled down 28 percent and ounces produced reduced by 29 percent.

The company said the new LOM plan for Meadowbank, while expected to produce a similar return, is a lower risk option as about 73 million metric tons, or 36 percent, of previously budgeted ore and waste tonnage will not be mined under the new strategy.

"We know it's been a difficult year, but we feel we have a solid plan going forward to build shareholder value," Boyd told Mining News in a Feb. 16 interview.

He said the new mine plan for Meadowbank is still expected to generate US$1 billion in net cash flow over the next six years. It also has sufficient flexibility to bring some resource ounces in the deposit into the reserves category.

No worker layoffs in Nunavut

No employees layoffs are planned at Meadowbank, though the mine's 499 workers are being engaged in actions to continue reducing the mine's operating costs.

In a bulletin sent to employees Feb. 15, Meadowbank Mine General Manager Dominique Girard cited extreme winter weather conditions, a fire in at Meadowbank last March and the lower gold grades due to dilution of the ore in the pit as significant challenges that the producer faced in 2011.

"We can clearly see significant improvements in productivity since a year ago, and this has been achieved by working as a team. Girard wrote. "If we are successful at reducing our costs even further and we are able to improve our overall gold production, there will be flexibility in our mining plan that could allow us to extend the life of the mine. A sharp rise in the price of gold could also make it possible to mine the lower grade material economically and extend the mine life. Unfortunately, we do not have any control over the price of gold. We can only work on what is under our control: the operating costs and increasing our productivity."

In the longer term, Girard said Meadowbank employees are well-positioned to transition to the Meliadine project that is scheduled to begin production around 2017.

"We have already developed an incredible expertise at operating in the Arctic and if we are to be successful, it will only be through the efforts of everyone that we are able to transfer the knowledge and experience to Meliadine. However, right now, we need all your efforts here and all your talent to work safely and productively to extend the life of the Meadowbank mine," he added.

Brighter outlook at Meliadine

Agnico-Eagle's experience at its Meliadine Project located to the southeast of Meadowbank is another story.

"Although Meadowbank is a tougher situation, it doesn't diminish our enthusiasm for doing business in Nunavut," Boyd said.

With the expectation of mining multimillion ounces of gold at Meliadine, Agnico-Eagle views the project as one of four long-term cornerstone assets of the company.

"It's important to demonstrate that Meliadine is a different type of deposit. It's double the size, double the grade and better located logistically than Meadowbank," Boyd said, referring to the project's proximity to Rankin Inlet.

"We anticipated (an average of) 4 g/t gold at Meadowbank, but the grade is not quite what we thought it would be," he explained. "Meliadine is big and it can be bigger. It's still open to expansion underground at the Tiriganiaq deposit and to extension at the Wesmeg (zone) and in between."

In 2011, the company committed C$65 million to its exploration program at Meliadine. The work included drilling and a large bulk sample.

"We also built a much larger camp in 2011," Boyd said. "We had 10 drills going and we're looking at having that number turning in 2012."

Agnico-Eagle drilled 90,000 kilometers on known areas of the property and about 25,000 meters on new areas, Boyd said. The work primarily focused on two main zones, Tiriganiaq and Wesmeg. Much of the program involved resource conversion drilling and resulted in an additional 300,000 ounces of proven and probable gold reserves, mainly at the Tiriganiaq zone as well as initial reserves at the F zone deposit.

The drilling expanded the Tiriganiaq resources to the west at depth, with hole M11-1092 intersecting 7.4 g/t gold over a true width of 11.2 meters at a depth of 330 meters below surface. The central part of the deposit has shown high-grade intercepts inside and outside the resource envelope, and the resources also have been expanded downward on the east side of Tiriganiaq.

During the second half of 2011, the company conducted an underground bulk sample on the Tiriganiaq deposit, which included 222 meters of lateral development on two levels, resulting in 8,460 metric tons of broken material. Early results from the bulk sample indicate significantly improved confidence with regards to the continuity and grade of the Tiriganiaq deposit. A complete analysis of the results is expected during the second quarter of 2012 and the results will become part of the updated feasibility study expected to be completed in late 2013.

The Wesmeg zone has continued to demonstrate significant growth, with its resources mushrooming from just 1.0 million metric tons grading 4.4 g/t gold (or 143,000 ounces of gold) in the inferred category in 2010 to 3.5 million metric tons grading 3.0 g/t gold (or 343,000 ounces of gold) in the indicated category and 3.7 million metric tons grading 3.5 g/t gold (or 411,000 ounces of gold) in the inferred category in 2011.

Drilling in 2011 also has helped extend the Wesmeg zone to 3.3 kilometers (2.05 miles) of strike length and increased its depth to at least 300 meters, showing the Wesmeg resource to have similar size potential to the Tiriganiaq zone situated about 400 meters to the north.

The company also discovered a new horizon about 100 meters from Wesmeg and about 100 meters from Tiriganiaq. This discovery raises the possibility of yet another satellite deposit in close proximity to the existing deposits. This also highlights the exploration potential of the overall Meliadine property, much of which has not yet been fully evaluated.

The company said its 2012 exploration program will aim to better define the Wesmeg deposit over its entire length.

Agnico-Eagle also appears to have intersected a new lens of mineralization in between Tiriganiaq and Wesmeg with hole M11-1314 returning 5.1 g/t gold over a true width of 6.8 meters at a depth of 380 meters below surface. The company said this intercept is meaningful, as it opens Wesmeg's potential for underground high-grade mineralization that could be potentially be accessible using Tiriganiaq's underground infrastructure. This area will be an important target in 2012, given that it could improve the underground component of the deposit with multiple parallel mineralized horizons.

Staying power

Overall, proven and probable gold reserves at Meliadine climbed to 2.9 million ounces in 2011, while measured and indicated resources totaled 1.7 million ounces gold (12.6 million metric tons grading 4.09 grams per metric ton gold) and inferred resources represent 2.4 million ounces gold (12.7 million metric tons grading 5.98 g/t gold). This represents a significant increase in the deposit from the time of acquisition in mid-2010, when the deposit had no reserves, indicated resources of 3.2 million ounces gold (8.8 million metric tons grading 5.21 g/t gold) and inferred resources of 1.7 million ounces gold (11.8 million metric tons grading 6.94 g/t gold).

As the main deposit at Tiriganiaq continues to develop at depth, the company believes that more emphasis on underground extraction would be prudent to control dilution, reduce the impact of a harsh environment and optimize the value of the high-grade deposit.

An initial feasibility study using 3,000 tpd throughput at Meliadine was completed in March and a new feasibility study is underway using an increased production rate, taking into account recent successful exploration results. While the project is still under study, it appears that the mine life at Meliadine could be about 15 years and ongoing exploration could increase the deposit's resources.

The company anticipates making a project decision in 2013 and production could begin in 2017, with capital expenditures expected to be distributed over the 2012 to 2016 period.

Agnico-Eagle has explored only about 10 percent of the Meliadine property, which covers 80 kilometers (50 miles) of strike length and has multiple favorable targets that the company plans to test during the next two years.

"Based on our experience, we like the fact that we have that much property coverage and the potential to explore says we have a lot of staying power," Boyd told Mining News. "As our founder used to say, 'we can't put the gold there, but if it's there, we're going to find it.' "