Agnico-Eagle's huge success: organic growth, no hedging

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2:25p ET Monday, December 4, 2006

Dear Friend of GATA and Gold:

Today's Financial Post / National Post in Canada has a wonderful profile of Agnico-Eagle Mines Ltd., GATA's oldest financial supporter among producing mining companies. The company has reaped spectacular success in recent years by avoiding hedging and concentrating on what this profile calls organic growth.

Continuing its support, Agnico-Eagle was a sponsor of GATA's reception at the New Orleans Investment Conference last month. The company has been with us from the beginning, back in the days when it was considered bad for business and before GATA's case was proved and widely accepted. So we're deeply grateful for Agnico-Eagle's principled and fearless work on behalf of the gold cause and delighted with its well-earned recognition here.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

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Digging gold its own way:
Agnico-Eagle Mines sticks to organic growth

By Drew Hasselback
Financial Post / National Post, Toronto
Monday, December 04, 2006

http://www.canada.com/nationalpost/financialpost/story.html?id=0f1232c9-...

VAL D'OR, Quebec -- For many Canadian gold companies, the fastest, easiest way to grow has been through acquisitions. Indeed, during the past year alone, there have been no fewer than seven Canadian gold deals valued at more than $1 billion each.

Agnico-Eagle Mines Ltd., however, prefers to boost production the old-fashioned way: building its mines from scratch.

That's not the only thing that makes the Toronto-based gold miner something of an odd duck. While its rivals look south to buy companies with mines in Latin America or Africa, Agnico-Eagle has three mines under construction on its home turf near the northwestern Quebec city of Val d'Or. Agnico-Eagle aims to triple its production to 750,000 ounces by 2009.

It's a strategy of organic growth that has proven more successful than pursuing multi-billion-dollar mergers. Agnico-Eagle would rather build its own new projects than buy someone else's "tired, old properties," said Sean Boyd, Agnico-Eagle chief executive.

"We don't see this as a race, because what would we be racing to? Doing a multi-billion-dollar deal is the worse thing we could do. Being bigger is good only if it's focused on quality," Mr. Boyd said.

"We have an edge. We don't need cash and we have demonstrated that we don't need anyone else's help to build a mine."

Until this past year, Agnico-Eagle was long seen as a single-asset company -- something that kept the stock off the radar screens of investors hunting for growth stories.

Perceptions changed rapidly during the past year as Agnico-Eagle launched an ambitious development plan. The stock has risen 177 percent during the past 12 months, hitting a record $50.67 last week. It closed at $49.76 on Friday on the Toronto Stock Exchange.

The benchmark Philadelphia Stock Exchange gold and silver index has risen about 30 percent in the same period, while the price of gold is up about 35 percent.

Miners have been producing gold at Val d'Or since 1923. According to the Quebec government, the area surrounding Val d'Or has already produced 25 million ounces of gold. Mining head frames surround the town and line the highway stretching west toward the town of Malartic.

The Val d'Or camp includes Agnico-Eagle's flagship LaRonde mine, which is one of Canada's largest gold deposits and one of the country's deepest mines. It takes a six-minute elevator ride to descend the 2.2 kilometres underground to the mining stopes.
The mine is a rich one, sometimes glittering with the flecks of copper that the untrained eye might mistake for gold. Yet at current soaring prices for base metals, the copper and other minerals within the mine, such as zinc and silver, can subsidize the cost of recovering the bullion.

It cost about $63 to dig up a tonne of rock at LaRonde during the third quarter. But after selling off the copper, zinc and silver, the cash cost of mining the gold at LaRonde was less than nil -- an eye-popping minus US$709 an ounce. In effect, they were mining gold for free.

LaRonde produces about 250,000 ounces of gold a year. Last May the company launched a $210-million project to deepen the mine and expand production of gold and other metals. The project, called LaRonde II, will extend the life of the mine to 2021.

Ebe Scherkus, president of Agnico-Eagle, said the expansion will boost Agnico-Eagle's output to 320,000 ounces a year.

"It's like doing a home reno," Mr. Scherkus said as he led analysts and bankers through the underground construction workings last week. "It's nothing complicated."

Enhancements to the processing mill on the surface will also boost the amount of copper, zinc, and silver that are recovered from the ore each year. The new mine is expected to recover 670,000 ounces of silver, 4,000 tonnes of copper and 8,600 tonnes of zinc.

LaRonde has been in production since 1988, and operating the mine has not always been easy. There have been at least 10 rockfalls, including a 40,000-tonne collapse in early 2003 that forced the company to reconsider production targets for that year. No one was hurt.

Agnico-Eagle has also survived the lean years of the late 1990s and early 2000s, when the price of gold tumbled toward US$250 an ounce. Agnico-Eagle lost money for 18 consecutive quarters. The company has been consistently profitable since the first quarter of 2004.

Other Canadian miners began to shun the higher cost of Quebec's low-grade deposits in the 1990s, and flock to countries in South America and Africa that were opening their arms to foreign mining investors, said Michael Fowler, analyst with Desjardins Securities in Toronto.

Quebec tends to have low-grade underground mines that are more expensive to operate than large, open-pit operations in developing countries.

"Canada lost out while Latin America and Africa emerged. So you had this big exodus in the 1990s," Mr. Fowler said. "Now that the gold price has gone back up, you've got companies looking back at Val d'Or and that whole area."

Agnico-Eagle's decision to remain rooted in Val d'Or and focus on patient, organic development dates back to the company's founder, Paul Penna.

An energetic gold bug, Mr. Penna shunned hedging -- the practice of promising to sell future gold production at a fixed price -- and instead preferred to tie the company's fortunes to the floating spot price of gold. "Gold doesn't rot and it doesn't eat," he used to say. "It just stays in the ground and waits for the price to go up."

Mr. Penna directed the company to focus on developing LaRonde before undertaking anything else. He also put a premium on returning cash to shareholders. The company has paid dividends for 26 years straight. It also avoided the headlong rush into other booming areas for mining.

In 1994, Mr. Penna joked about all the juniors leaving Canada for properties in Latin America and Africa. He said he was glad the other companies were shunning Quebec because "it leaves all the more properties for us."

Catherine Gignac, analyst with Toronto-based Wellington West Capital, said Agnico-Eagle has always been a conservative company that avoids wasting money or running with the pack.

"Typically in the mining business, you get waves where first the company is run by a miner when times are tough, then an investment banker or a financial guy when times are good," Ms. Gignac said.

Agnico-Eagle could have changed direction and brought in new vision, especially after Mr. Penna died of cancer at age 73 in 1996. Mr. Boyd was promoted to CEO from within the management ranks. "Agnico-Eagle has a very interesting culture," Ms. Gignac said. "They haven't changed their strategy."

Agnico-Eagle doesn't shun acquisitions entirely. It's willing to buy properties, but so far it has shown interest only in smaller development properties that it can easily take under its own wing. "There is a pattern to the way we like to do things," Mr. Boyd said. "We like to apply our own skills to building things piece-by-piece. We buy things to develop and to build them ourselves, to grow the opportunity ourselves."

It's a strategy that seems at odds with the current trend. There have been more than $30-billion worth of mergers and asset deals in the Canadian gold sector this year. Last month, Toronto-based Kinross Gold Corp. announced a friendly $3.5-billion offer for Vancouver-based Bema Gold Corp. The two biggest deals saw Toronto-based Barrick Gold Corp. pay about $11-billion to buy Vancouver-based rival Placer Dome Ltd. in January, while Vancouver-based Goldcorp Inc. early last month wrapped up a friendly $9.6-billion merger with Nevada-based Glamis Gold Ltd.

With its $4.5-billion market cap, Agnico-Eagle could be in a comfortable position to consider deals with its peers, perhaps Nevada-based Meridian Gold Inc.

Yet Mr. Boyd remains adamant about the company's preference for an organic strategy. The company is jealous of its stock position and a large merger would dilute the stock.
"Meridian is a fine company. But why merge with them just for the sake of merging?"

Agnico-Eagle's strategy has led the company to root out projects that seemed to have escaped the attention of others. It bought the Pinos Altos property in Mexico for US$65-million this year. And in late 2005, it wrapped up a US$130-million purchase of Riddarhyttan Resources, which is developing the Kittila property in Finland. Agnico-Eagle is developing mines on both the Mexican and Finnish properties.

Back in Quebec, Agnico-Eagle is spending $135-million to build the Goldex mine, which will produce 170,000 ounces a year starting in 2008. It is also working on the $90-million Lapa mine, which will produce 125,000 ounces a year starting at the end of 2008.

The company has about 10 million ounces of gold reserves, but expects ongoing exploration to boost this to about 15 million ounces by 2009. "Our guys just seem to have a nose for finding gold," Mr. Boyd said.

Geoff Stanley, BMO Nesbitt Burns analyst, said Agnico-Eagle's stock took off once word got around that Agnico-Eagle will no longer be a single-asset story.

"All of a sudden the market has woken up to the fact that this is a company that used to have one mine, but is soon going to have five," Mr. Stanley said.

The run-up in the share price has been a bit much for some analysts. According to Bloomberg, six of the 22 analysts following Agnico-Eagle rate it has a "hold." The remainder recommend it as a "buy."

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