Agnico Eagle bulks up Arctic presence with purchase of troubled TMAC mine

Toronto-based Agnico Eagle Mines Ltd. has agreed to buy a faltering gold mine in Nunavut just weeks after the federal government blocked a Chinese company’s offer for the goldfield on national security grounds.

Agnico will pay $2.20 per share to purchase TMAC Resources Inc., which started producing gold at its Hope Bay Mine in Nunavut in 2017 but has never met performance or output expectations.

The cash deal, valued at $286 million in equity, represents about $60 million more, or a 26 per cent premium, to what China’s state-owned Shandong Gold Group offered for TMAC earlier this year, and a 66 per cent premium to TMAC’s 20-day volume weighted average trading price.

The deal is expected to close swiftly, as early as the end of the month according to the parties, and shines a light on the rising development of natural resources in Canada’s Arctic region. In the past decade or so, Agnico has built three gold mines in Nunavut, and adding TMAC’s mine further cements its status as the dominant player in the region, where various resource companies are prospecting.

“We didn’t buy it for synergies,” Sean Boyd, chief executive of Agnico Eagle, told the Financial Post. “We bought it because we think there’s a potential to find a lot more gold, in a part of the world we already know, and it’s already got infrastructure up and running.”

The property represents the smallest mine in Agnico’s portfolio of scattered operations, mostly in Canada, but also in Mexico and Finland. Boyd said it would attribute capital to explore the geological potential of the land based on the merits.

The company stock fell 2.3 per cent to $93.95 on Tuesday. Meanwhile, TMAC stock jumped 38 per cent to $2.18 on the Toronto Stock Exchange.

Boyd said the company would move slowly. TMAC has long faced operational issues with its mill that have prevented it from recovering the expected amount of gold from its ore, and is currently operating at 40 per cent of its previous capacity. A report last year suggested the operations need $600 million in investment.

TMAC also had roughly $167 million in debt, and about $71.5 million in cash at the end of the third quarter.

Still, the purchase price represents about one per cent of Agnico’s $23.3 billion market cap, and the Hope Bay mine, even at its reduced operating level, could add 100,000 ounces, or roughly five per cent, to Agnico’s expected 2021 gold production of two million ounces.

“We come into it with our eyes wide open because we know Nunavut is not an easy place to do business,” said Boyd, adding that his senior team plans to travel to Hope Bay on Wednesday to assess the property again.

Fahad Tariq, an analyst with Credit Suisse Group AG, wrote that Agnico should be able to use its cash and available credit to purchase TMAC and retire its debt, calling it a “relatively small” deal.

“Agnico’s management team has consistently communicated that the company’s M&A strategy is to acquire earlier stage projects with geological potential (so it can leverage its technical capabilities), with a preference for Canada,” Tariq wrote. “Hope Bay meets this criteria, with exploration upside from an 80 kilometre greenstone belt.”

Still, the deal also highlights how Chinese mining companies’ patient investment horizon has sometimes worked to its advantage.

In March, when Shandong made its offer for TMAC, Boyd said Agnico was focused on ramping up operations at its Amaruq mine, which had launched in Nunavut in 2019, but the company faced talent shortages.

The coronavirus pandemic was also just beginning at the time, and gold prices wobbled not long after the deal was announced. But roughly nine months later, optimism about gold prices is once again rising amid low-interest rates in the U.S., and Agnico agreed to pay roughly $60 million more for the same asset.

Spot gold was up 0.3 per cent at US$1,947.18 per ounce Tuesday.

China deal blocked by Ottawa

In December, the federal government had blocked Shandong’s deal on unspecified national security grounds, with several commentators suggesting that the purchase could raise questions about Canada’s Arctic sovereignty.

As a result of global warming and a longer shipping season, marine traffic through Canada’s Arctic waters has reached record levels and the region increasingly holds commercial and potentially military significance.

In December, the Embassy of the People’s Republic of China in Ottawa released a statement to the National Post, saying it was “wrong” for the Canadian government to block the deal, calling it a “politicization of normal economic co-operation” between the two countries.

“The Canadian side should provide a fair, open and non-discriminatory market environment for enterprises from all countries, including China,” the statement said.

But tensions between the two countries have been fraught ever since Canadian authorities arrested Meng Wanzhou, the chief financial officer of Chinese telecom giant Huawei Technologies Ltd., in December 2018, who faces accusations in the U.S. of violating Iran sanctions.

In apparent retaliation, China arrested two Canadian citizens, Michael Spavor and Michael Kovrig, on espionage charges; and has applied trade restrictions on a range of Canadian exports including canola and pork.

The Chinese embassy was not immediately available for comment.
Arctic Challenges

Meanwhile, TMAC, a single asset company, always faced long odds by opening its first mine in Nunavut. With little available infrastructure, developments costs remain high: When operational challenges with its mill led to lower than expected gold production, the company’s debt quickly piled up and its investments in expansion and exploration suffered.

“I think the big thing for Agnico is there’s no rush to spend a bunch of capital,” Jason Neal, the chief executive of TMAC Resources, told the Financial Post Tuesday. “They can make some incremental improvements.”

Neal, a former investment banker, will leave TMAC once the deal is finalized. He serves on the board of one junior gold mining company but has no immediate plans for another executive role.

Neal added that TMAC has spent little on exploration because of its challenges with the mill. But recently, in the reduced state, the mill has recovered gold more in line with initial expectations, and has been generating cash.

There are challenges for Agnico, too. In September and October, there were coronavirus outbreaks at the mine site, and workers from the local communities were all terminated by the company earlier this year.

Boyd said there was no rush to invest until after Agnico’s technical team assessed the situation.

“We look at this more as a call on the geological upside on that belt and trend,” he said. “We’re certainly happy that there’s built infrastructure … we’ll try and optimize the opportunity.”