NUNAVUT
Gold may be down but relatively low cash operating costs across Agnico Eagle Mines Ltd's. (TSX:AEM) global production base, combined with increasing gold production and strong exploration results, leave plenty of room for the company to breathe.

An aerial view of Agnico Eagle Mines Ltd.'s Meadowbank gold mine near Baker Lake. The company reported a solid third quarter and has upgraded its expected 2014 global gold output to more than 1.4 million ounces. - photo courtesy Agnico Eagle Mines Ltd.

This is the take-away message from the company's third quarter earnings report released last week.

Agnico Eagle reported a third quarter net loss of $15 million, primarily as a result of increased exploration spending, lower gold prices, and revised bookkeeping (a switch to international financial reporting standards) that resulted in a one-time increase in the book value of depreciable assets.

Net income from operations is up over the first nine months of this year to $104.3 million from $93.6 million last year, mainly on the back of increased gold production, particularly at Meadowbank.

"At Meadowbank, (we saw) very strong performance in the mill," said Sean Boyd, Agnico Eagle's president and CEO, during an earnings call with investors last week. "Cost performance continues to be very good, (averaging) $74 per ton. The mine used to have costs in excess of $100 per ton."

Boyd said Agnico Eagle has bumped expected gold output across all its mines for the remainder of 2014. The company now expects to produce 1.4 million ounces of gold by the end of the fiscal year, up from the 1.1 million ounces the company expected at the start of the year.

For 2015, the company expects to produce 1.6 million ounces, with Meadowbank at the heart of that production.

"Next year we expect a nice bump in production (at Meadowbank) up from the original guidance of 375,000 ounces," Boyd said. "We're looking to average 100,000 to 110,000 ounces per quarter next year."

Production of between 400,000 and 440,000 ounces of gold in 2015 would see Meadowbank potentially duplicate last year's record production of 430,613 ounces of gold.

Meadowbank's end of mine life is 2017 but ramped up exploration at Amaruq, approximately 50 km northwest of Meadowbank, has shown positive results and could soon be tied into a revised Nunavut strategy.

"At Amaruq, we drilled 144 holes - over 31,000 metres of drilling. The (exploration) budget increased from $1.5 million to $9 million with $7.4 (million) of that in (the third quarter)," Boyd said. "We continue to work on preliminary engineering for an all-weather road to connect the project to Meadowbank. We're also looking at. incorporating this project into the mine plan at Meadowbank and possibly linking it to the Meliadine project."

Agnico Eagle's Meliadine project received approval from the Nunavut Impact Review Board last month. Located 24 km northwest of Rankin Inlet, the 750-employee mine would have a 13-year mine life based on current resource estimates.

But it is positive results at Amaruq that have caught the company's attention.

"We're reviewing the entire Nunavut strategy because of the exploration success at Amaruq," Boyd said. "We'll have further information in November. We expect to calculate a preliminary resource on the project around the end of the year."

How quickly Agnico Eagle will advance on new projects depends almost entirely on the price of gold, Boyd said.

With all-in cash and sustaining capital costs, including future reclamation liabilities, across all operations of $990 per ounce, the company is well positioned to ride out the slump in gold. Boyd added that conditions which affect the price of gold can actually be positive for the company.

Boyd noted that a drop in the price of gold is often accompanied by a strengthening U.S. dollar. With approximately 80 per cent of Agnico Eagle's gold production coming out of Canada and Finland, a weaker Canadian dollar and Euro creates a natural buffer for the company against a decline in the price of gold.

"If we are to see further weakness in the gold price based on the stronger U.S. dollar, we would anticipate. a weaker Canadian dollar and a weaker Euro. So we have a built-in buffer with a lot of our operations focused in Europe and Canada," Boyd said.

But weak gold would have an impact on capital expenditures, with the Meliadine project the most significant capex on the company's radar.

"The only big capital (expenditure) on the horizon is Meliadine and that still remains to be decided," Boyd said. "That will be driven largely by the price of gold."

Although Meliadine's future is yet to be decided and is closely tied to the price of gold, Boyd added that Meadowbank's mine life could be positively impacted by the Amaruq deposit.

"Amaruq is the interesting wrinkle," Boyd said. "For relatively low capital compared to Meliadine we could still see an ability to maintain a production base up there and to generate. cash flow. That gives us some flexibility we didn't have a year ago."