Operator Series: Agnico Eagle Mines laying down roots in Mexico

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Tuesday, October 31, 2017

Agnico Eagle Mines ranks among the top five gold miners in Mexico.

While Agnico's three Mexican mines account for less than a fifth of companywide output, they are among the miner's lowest cost operations.

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MEXICAN MINES

Pinos Altos is Toronto-based Agnico's flagship Mexican asset and one of the country's top five gold mines.

The Chihuahua state mine (pictured), which comprises open pit and underground operations, started production in 2009.

The mine is well positioned to exceed 2017 guidance of 170,000oz gold, with 140,453oz produced in the first three quarters of the year.

Pinos Altos is also on track to outperform in terms of costs. Cash costs for the year were forecast at US$474/oz but are currently tracking more than US$100 lower, at US$369/oz in the first nine months, making it Agnico's lowest cost producer during the period.

Creston Mascota began operating as a satellite mine at Pinos Altos in late 2010. The open pit mine is also on track to beat guidance, with output of 34,372oz in January-September, compared to 40,000oz forecast for the year.

Cash costs of US$568/oz, while up nearly US$100 from 2016, are far below the 2017 forecast of US$812/oz.

La India is Agnico's newest Mexican mine. Production at the Sonora state open pit operation began in 2014.

Output in the first three quarters of 2017 of 75,650oz is on track to meet full-year guidance of 100,000oz, with cash costs at US$547/oz, compared to the forecast US$583/oz.

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PROJECTS

Agnico's main Mexican project is El Barqueño, which the company has tipped to become its fourth gold mine in the country.

The miner is investing heavily in exploration at the Jalisco state asset, with US$16.8mn planned for 2017, up from US$9.70mn originally budgeted.

Agnico plans to drill 14,000m during the year with the aim of building resources (currently 301,100oz gold in the indicated category and 362,000oz in inferred resources).

The company also has the Morelos Sur exploration asset in Mexico's Guerrero state, and is advancing the US$80mn acquisition of GoGold Resources' Santa Gertrudis gold project in Sonora, where it plans to begin an exploration program aimed at boosting resources.

Agnico has also acquired stakes in GoldQuest Mining, which has gold projects in the Dominican Republic, and Brazil-focused Belo Sun Mining.

PRODUCTION, COST TRENDS

Agnico's three-year guidance shows Mexican gold output falling, with costs rising.

The company produced 355,230oz gold in the country in 2016, which is expected to drop to 310,000oz this year (although the signs at all three mines in the country suggest this figure is too conservative).

Mexican gold output is expected at 315,000oz in 2018 and 290,000oz the following year (El Barqueño is not forecast to begin production during this period).

Total Mexican cash costs are guided at US$553/oz in 2017, a sharp increase from US$390/oz last year.

Agnico's three mines have seen cash costs rise this year, due to lower gold production and higher contractor costs, and reduced byproduct revenues at Pinos Altos.

However, all three Mexican mines are on track to beat guidance in 2017.

STRATEGY

Most of Agnico's gold production comes from its Canadian and Finnish operations.

But its Mexican operations (or Southern business) are key cash-flow generators for the company.

As such, the company is investing in exploration at its trio of Mexican mines with the aim of extending mine life.

Current estimates show Pinos Altos running to 2023, La India to 2022 and Creston Mascota to 2019.

On the M&A front, the El Barqueño acquisition in 2014 and planned purchase of Santa Gertrudis reflect the company's strategy of focusing on early-stage projects in areas where it can become a dominant player.

OUTLOOK

Agnico is set to maintain its position as one of Mexico's top gold miners and lower cost producers in the coming years, with potential longer-term growth coming from El Barqueño and other early stage properties in the country.