As Democrats celebrate Obama's win, gold is rallying on the expectation that Obama is about to send the economy to the edge of the fiscal cliff. At least, the economists are warning of deflation. The economic outlook is giving an extra lift to Agnico-Eagle Mines' (AEM) stock, which is trading at a high based on record operating and financial performance in 2012.
Agnico-Eagle has mined a record amount of gold this year while lowering production costs. Upping its 2012 estimate 5 percent, the Canadian gold miner expects to top over one million ounces of gold, raising full year estimates from 975,000 ounces to 1.03 million ounces. Total cash costs per ounce have fallen over the year from $690 to $660. Backed by strong operational maneuvering, the stellar year put the company back on the road to profitability. Net income rose to $131.5 million from $101.9 million in the year-earlier period, with earnings per share leaping from $0.60 to $0.77. For the first nine months of 2011, net income increased seven-fold to $228.10 over the same year-ago period, while its mines threw off $590 million in cash.
By diversifying gold mining project risks, Agnico-Eagle has corrected poor risk management practices that toppled it into the red last year. In 3Q 2011, it shut down production at its Goldex mine in Quebec due to instability caused by flooding and unstable rocks, and consequently registered a loss of $81.6 million, or 48 cents per share. CEO Sean Boyd says the company is now overseeing its mining assets as a 'true portfolio,' enabling it to better manage operating and technical risk going forward.
Putting 2011 losses behind it, in 2012, Agnico-Eagle's five remaining mines far outproduced the Goldex loss. Higher grade ores and improved operating costs have helped. While 2013 budgeting will be announced in coming months, the company is on course to lower cash costs further below $660 an ounce. With gold mining cash costs increasing 21% per year, or $81 an ounce, for the five years to 2011, this is admirable operating performance. 2011 cash costs averaged $657 per ounce for the gold mining industry, while gold major Barrick Gold (ABX) has cash costs around $580 an ounce.
The stock rallied up almost five points on the good earnings news. Agnico-Eagle has a market cap of $9.54 billion and a price-to-earnings ratio (P/E) of 49.51 versus 21.77 for the industry. Its gross profit margin is 59.01 versus Yamana Gold's (AUY) industry high of 62.13, and just below Goldcorp's (GG) 60.2. In the fourth quarter, Agnico-Eagle announced a dividend of 0.20 per share, up from an average $0.18 over the last three years.
The mid-tier gold players are all struggling with rising costs, Several low cost producers experienced low output and rising costs in the quarter. Competitor Eldorado Gold (EGO), market cap $10.7 billion, has a P/E ratio of 33.7 and a high EPS growth of 126.2. Several analysts have downgraded the stock viewing it as at 'fair value.' Its profits dropped 26 percent in the third quarter to $75.8 million or 11 cents per share, as it cited lower production volumes and prices for gold. The low cost gold producer at $465 an ounce only mined around 150,000 ounces in the quarter from its operations in Brazil, China, Turkey, Greece and Romania.
Yamana Gold's earnings suffered from falling prices in copper and silver while its cash costs rose from $94 an ounce to $201 an ounce in 2012. It has a market cap of $15.2 billion, a P/E ratio of 41.5 and negative five-year EPS growth. IAMGold (IAG), which Barclays Capital and Morgan Stanley have just initiated coverage on, is also seeing costs rise. It has a market cap of $5.8 billion and is trading at 16.3x earnings. Its investors have enjoyed earnings per share growth of 21.93% over the last five years.
Future growth will partly come from small-scale M&A. The miner is in a good position to fund acquisitions. Debt is low at under $900 million, and its debt-to-equity ratio at .24 times is below the gold mining industry average of .39. Its current ratio is healthy at 3.22. In 2012, it restructured its debt, taking out long-term debt and paying off a credit facility. The company has $320.8 million in cash and cash equivalents handy, plenty to cushion expected capital expenditures in the $500 to $600 million range in 2013, up slightly from $457 million in 2012. Record cash flow of $199.5 million was generated in the third quarter.
Prudently, the Canadian miner plans to fund growth in geographic areas it already has a presence in. It will continue to expand operations in Mexico where cash costs are below $300 an ounce - in the third quarter, Agnico-Eagles mined 600,000 ounces at $212 per ounce at its Pinos Altos mine, which also enjoyed record silver production. In the coming year, Agnico-Eagle will continue construction on its nearby La India project in Mexico.
Beginning in the fourth quarter, lower ore grades are expected at Meadowbrook Nunavut in the Canadian territories and Kittila in Finland but production is expected to be steady. Kittila is generating record production at attractive operating margins and costs of $500 an ounce. The earnings guidance for 2013, based on production of just under one million ounces, reflected these changes.
Higher ore grades are expected to be mined at a number of locations. Accessing higher gold grades at La Ronde in Quebec has been slower than anticipated but still on course for 2014 and 2015. Grades are expected to be 50% higher at the mine, which has another 10 to15 years of production. Additional Quebec production includes restarting two satellite zones at Goldex and extending Lapa mine production through to 2016.
With production flows from its gold mines expected to remain stable and costs and capital spending in check, Agnico-Eagle Mines is on the right track to earnings growth in 2013.