In light of the recent dramatic drop in gold spot price, concerns about the profitability of gold miners have been raised. While some commentators see precious metal prices rebounding to pre-drop levels others are not so optimistic and predict a further decline. For example, on April 25 ABN Amro published a press release predicting a gold price of $1000 per ounce for 2014. We decided to use publicly available financial data and perform a back-of-the-envelope stress test of selected gold mining companies.
In the present article we will be examining Agnico Eagle (AEM).
We used data for the past three years as filed on the SEC website. The table below gives an overview on revenue and cost positions for the past three years.
(all values in 1000$)
For 2012 revenue amounted to $1.9B and cost positions added up to $1.5B leaving income before tax of $435M. A handsome recovery from the annus horribilis of 2011 and in the same order of magnitude as 2010.
For our stress test we first took a look at the cost positions. We considered three scenarios as detailed in the table below. We assumed no impairments and no gains on acquisition for either scenario. The three scenarios can be briefly described as follows.
- Scenario 1: Cost remains the same as in 2012.
- Scenario 2: Cost follows the trend of the past three years. We computed a trend line using the data points provided by the three previous years and extrapolated to 2013.
- Scenario 3: Costs are cut where this could be reasonably assumed. All other cost positions remained on 2012 levels or were averaged over the past three years as indicated in the table below.
(all values in 1000$)
As can be seen from this table total cost predictions for the three scenarios range between $1.38B and $1.74B.
In turning to the revenue side of the equation we note 2012 production and 2013 forecast for gold, silver, zinc and copper and associated realized spot prices as listed on the company web site.
We considered three spot price scenarios for our study:
- Scenario 1: Realized spot price for 2013 remains the same as 2012.
- Scenario 2: Realized spot price is equal to the closing spot price on April 15 2013, the bottom of the year so far. It is important to remember that more than three months have already passed in 2013 with significant higher spot prices. For the April-low price to become the average realized price for the year a prolonged period of time below that level would be necessary.
- Scenario 3: The spot price drops again by the same margin as on April 25. The values after such a drop are used as assumptions for the realized spot price in this scenario. The same comment as above applies.
We noted, that multiplication of the sold metals with the realized price yields a value 3% greater than the stated revenue. We assumed, that this 3% discrepancy is caused by various fees and used the same 3% discount in our considerations.
Revenue predictions for the guidance range and the three spot price scenarios are given in the table below.
(all values in 1000$)
The diagram below illustrates these results. The three horizontal lines show the three cost scenarios. The inclined range shows revenue for the three scenarios and guidance ranges.
Depending on the revenue scenario and the assumption on production numbers within the given guidance the computed revenue ranged from $1.14B to $1.84B.
Depending on the cost scenario the computed sum of costs ranged from $1.38B to $1.74B.
- If cost positions remain at the 2012 level a spot price at the April-low level would lead to zero-income before tax.
- Spot price scenario 3 would cause revenue to fall below our cost-cut scenario by about $250M. Obviously, such a dramatic decline in spot price would necessitate cost-cutting measures beyond those envisaged in our model.
- If cost trends of the past three years are followed only a spot price scenario yielding similar prices as 2012 will generate enough revenue to offset costs.
In conclusion, we observe that Agnico Eagle's balance sheet is in a healthy condition and the recent drop in spot price should not cause serious problems for the company at the present point in time. Costs need to be controlled, however. Should the spot price drop further, then serious cost cutting measures will become a necessity.
It is also important to remember that none of our scenarios included room for impairments.