News that the Goldex Mine is to be written off as hammered Agnico-Eagle Mines Limited (AEM) today. The loss is estimated to be around $1.00 per share, however, investors moved fast to dump the stock, taking it down $10.58 or 18.55% on volume of 13 million shares traded in today's session on the NYSE. If ever we needed a reminder of just how difficult a mining operation can be, this is it.
For disclosure purposes, we do own this stock, and it has been good to us over the years; however, we are surprised by the magnitude of this sell off. As we can see from the chart below, AEM has fallen hard on this news release.
Below is an excerpt from the company's news release, which summarizes the situation and estimates the cost per share to the company:
Agnico-Eagle Mines Limited announced today that it is suspending mining operations and gold production at its Goldex mine in Val d'Or, Quebec effective immediately. This decision follows the receipt of an opinion from a second rock mechanics consulting firm which recommended that underground mining operations be halted until the situation is investigated further.
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.
"Considering the safety of the Company's employees, and the integrity of the mine's infrastructure and that of the surrounding area, the decision was made to stop production indefinitely" said Sean Boyd, Vice-Chairman and CEO.
It is estimated that the mill will continue to process feed from the remaining surface stockpile until the end of October.
The Company 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 reserves1 at Goldex (approximately 10 years of mine life), other than the ore stockpiled on surface, will be reclassified as mineral resources.
In after-hours trade, the stock dropped another 0.5%. We will allow a week or so for the dust to settle before we re-evaluate the situation. If this sell-off is truly overdone, then it could be a buying opportunity, but it does take a brave person to take on such risks.
Agnico-eagle Mines Limited has a market capitalization of $9.97 billion, a 52-week trading range of $45.78 - $88.20, a P/E ratio of 24.72 with EPS standing at 1.88.
Stay on your toes. Volatility will be the order of the day.
Disclosure: I am long AEM.