Agnico-Eagle Mines (AEM) Plunges 20% on Goldex Mine Suspension

While most gold shares posted considerable losses on Wednesday, with the AMEX Gold Bugs Index (HUI) off 3.2% this morning, the HUI’s decline paled in comparison to that of Agnico-Eagle Mines (AEM.TSX, NYSE: AEM).

Shares of AEM plunged as much as 19.8% to $45.78 after the Canadian-based gold producer announced that it is suspending mining operations and gold production at its Goldex mine in Val d’Or, Quebec effective immediately due to a ground stability issue.

Agnico-Eagle reported that “While the Company continues to assess the situation, it appears that a weak volcanic rock unit in the hangingwall of the Goldex deposit has failed.  This rock failure is thought to extend between the top of the deposit and surface.  As a result, this structure has allowed ground water to flow into the mine.  This water flow has likely contributed to further weakening and movement of the rock mass.”

The Company went on to note that “It will assess the potential for restarting the mining operations next year on the western side of the deposit where the ore zone is narrower and still considered to be relatively stable, however, there is no guarantee that this will occur.  As a result, Agnico-Eagle will write off its investment in Goldex.  It is expected that this will total approximately $260 million (or approximately $170 million after tax, or $1.00 per share) and will occur in the third quarter 2011 financial results, scheduled for release on October 26. Additionally, the Company expects to make an accounting provision for a portion of the anticipated costs of remediation in the third quarter of 2011. All of the remaining 1.6 million ounces of proven and probable gold reserves at Goldex (approximately 10 years of mine life), other than the ore stockpiled on surface, will be reclassified as mineral resources.

Following the announcement, GMP Securities analyst George Albino lowered the firm’s price target on AEM.TSX to C$73.00 from C$87.00, but did maintain a Buy rating.  In the firm’s report, Albino wrote that “The move to write the project’s carrying value to zero, as well as taking a provision for reclamation (as indicated in the release) strongly suggests there is a low likelihood of this mine reopening. Any potential upside could come from (as suggested in the release) the mining of narrower zones at the west end of the deposit or potentially from mining the D zone beneath the orebody currently being exploited.”

“That said, we see the only reasonable approach for investors is to assume a zero (in fact a negative) value for Goldex,” Albino added.  ”“Our model indicates that Goldex comprises 11% of our NAV6% for Agnico – we are assuming a ($40mm) value for closure (this may be low), reducing our NAV6% to C$47.06/sh from C$52.99/sh.”

While the tone of GMP’s report was clearly negative, Albino did caution investors on getting too bearish on the company.  ”We see the likelihood of the stock trading off at least 7-8% today and likely more. If the reaction is greater than the 11% drop in NAV we would be buyers…In the medium to longer term we do expect investors to recognize that the loss of Goldex, while significant, still leaves a company that will show production and cash flow growth through 2015.”