TORONTO (Reuters) - Agnico-Eagle is suspending operations at its Goldex mine at Val d‘Or, Quebec, indefinitely because of water inflow and ground instability, the Canadian gold miner said Wednesday, sending its shares sharply lower.
Toronto-based Agnico will write-off its investment in Goldex, resulting in a pretax third-quarter charge of about $260 million. On an after-tax basis, the charge will be about $170 million, or $1 a share, the company said.
The write-off prompted analysts at Credit Suisse and Macquarie to downgrade the stock, while analysts at a number of other brokerage firms lowered their price targets on Agnico-Eagle shares.
Dahlman Rose analyst Adam Graf, in a note to clients, said Goldex accounts for roughly 13 percent of Agnico’s net asset value and about 14 percent of next year’s gold production.
“This would appear to be a major blow to Agnico-Eagle,” Graf said. “While Goldex is only a minority of annual production and value, it is nonetheless quite significant.”
Both Agnico’s Canadian and U.S.-listed shares plummeted on the announcement. Its Toronto-listed shares fell 19.1 percent to C$46.89 in afternoon trading, while its New York-listed shares were down 19.3 percent at $46.09.
Agnico Chief Executive Sean Boyd, on a conference call, stressed that the move to halt operations was the right decision in light of the safety hazard the ground instability posed to its employees.
“Although we will be assessing the potential to extract a portion of the 13 million tonnes of broken ore that remains underground, there is really no guarantee that we will be able to do this,” he said.
With proven and probable reserves of 1.6 million ounces, Goldex was one of Agnico’s lower-cost operations. The company had expected the mine to account for 184,000 ounces, or roughly 17 percent, of its gold output in 2011.
“Goldex was an important mine and a good solid cash flow generator,” Boyd said. “Taking that out of the equation still doesn’t change the fact that we can fund all of our growth.”
However, Boyd said Agnico will now have to be very focused in deciding which projects it will allocate capital to.
The company said it would try to restart mining operations next year on the western side of the deposit, where the ore zone is still considered relatively stable, but there is no guarantee that this will occur.
Agnico said it expected its mill would continue to process ore that has been stockpiled on the surface until the end of October.
Agnico, which owns mines across Canada, Mexico and Finland, said a rock failure above its ore body had caused ground water to flow into the mine.
Last week, Agnico said a consulting firm advised that the water inflow had damaged the integrity of the rock mass. At the time, the company said it was ramping up its efforts to reduce water inflow and investigating the matter further.
The company said on Wednesday that it decided to halt operations on the advice of a second consulting firm.
Agnico said it had now halted all its previously planned grouting efforts and was focused on working to preserve the surface infrastructure in the area.
The company also plans to make an accounting provision for a portion of the anticipated costs of remediation in the third quarter. It will also reclassify as mineral resources, all of the remaining 1.6 million ounces of proven and probable gold reserves at Goldex.
To minimize the impact on its workforce of 233 permanent employees, Agnico plans to transfer some to its other Canadian operations, while using others to help with its remediation efforts at the site.
As announced last week, Agnico said it expects to spend about C$25 million ($24.5 million) on monitoring and remediation activities at Goldex this year, with another C$20 million being spent in 2012. Agnico will announce third-quarter results on October 26.
The collapse in Agnico’s share price has also muddied the waters around its attempt to acquire Canadian exploration company Grayd Resources, which owns the La India gold project in Sonora, Mexico.
Grayd shares were down 7.2 percent at C$2.31 in afternoon trading on the TSX Venture Exchange.
Last month, Grayd agreed to be acquired by Agnico for C$275 million. Agnico commenced the formal takeover bid last week, with one-third being paid in cash and the remainder funded via equity.
Grayd said on Wednesday it is reviewing the impact to the deal, caused by Agnico’s statement on Goldex. Grayd said it would communicate further with its shareholders once its board and management have concluded their review.
Agnico’s Boyd said the company has begun to talk with Grayd in light of recent developments.
“Basically, we said we would regroup later today,” he said. “Under our agreement with them there is no requirement for us to change anything, but we are mindful that it is a takeover bid. And we certainly see that as an important part of our company going forward.”
Additional reporting by Bhaswati Mukhopadhyay in Bangalore; Editing by Roshni Menon, Lisa Von Ahn, Peter Galloway and Jeffrey Hodgson