On November 26, Agnico-Eagle (AEM) received a steep upgrade from Morgan-Stanley with its price target boosted from $28 to $36 / share, 32% above its closing Nov. 29 close at $27.54. AEM is notable for multiple 100%-owned sites in great mining jurisdictions: Canada (4), Finland (1) and Mexico (1). This article will examine its output, growth prospects, sites and profitability with a few comparisons to its main mid-tier peers, Yamana (AUY), Eldorado (EGO), New Gold (NGD) and IamGold (IAG).
Like other miners, AEM finished November strongly. November 27 it rose 1.85% and 2% in shortened trading November 29. NGD (+1.81%, +5.13%) and EGO (+1.38%, +3.74) also were strong as they came off recently made 52-week lows. AEM has remained 13% above its secular low made in mid-October. In this it differs from most of the sector that bottomed in late June and in some cases, made new lows in the week before Thanksgiving. AEM has seen troughs and spikes the last five weeks from $24 - $32. With its upgrade from Morgan Stanley that tops the HSBC upgrade of October 21 that cited improving EPS, low costs and productive sites it appears poised for accretion and initiation of quarterly dividends.
AEM's flagship site LaRonde is an underground mine in Val d'Or Quebec, a few miles north of the Trans-Canada highway. It is a long-lived, low cost mine on a production calendar currently stretching to 2026. It has 4.2 million oz. gold proven and probable reserves with 2013 output of about 175 k oz. projecting from 130k oz. through September. AEM anticipates growing output to 300k oz. / year in 2014-15 as richer veins of mineralization are tapped and technological upgrades increase metal recovery. LaRonde also produces significant amounts of silver, 1.6 million oz. YTD projecting to 2.1 million for 2013, similar to 2012 output. LaRonde also has substantial base metal output with 2013 projecting to 31 million lbs. zinc and 7.2 million lbs. copper.
The Goldex underground mine, also in northern Quebec had its first gold pour in October. Production of 15k oz. gold is expected by year's end. With .3 million oz. proven and probable gold reserves and 1.7 million oz. measured and inferred, AEM expects a minimum 4-year production from Goldex with additional output as operations expand.
The Lapa underground mine also is in the Abitibi region of Quebec. It contains AEM's highest grade ores and is another low-cost producer: $697 total cash costs and about $1020 AISC (all-in sustaining costs). It has 400k gold oz. proven and probable reserves. With annual production averaging near 90k oz. the mine life now extends through 2016. There are 147k gold oz. indicated reserves and 201k oz. inferred. One keynote of AEM's mines, excepting LaRonde, Pinos Altos in Mexico and Kittila in Finland, is the near horizon of its operations which gives urgency to E&D for the company to sustain and improve its position.
Far to the north of AEM's Quebec sites, in the Meadowbank open pit mine about 100 miles from the Arctic Ocean and 200 miles west of Hudson Bay. Meadowbank has 2.3 million oz. gold reserves with an annual production at 360k oz. extending through 2018. AEM's largest annual producer, the mine is surrounded by extensive exploration properties with additional mineralization holding 440k gold oz. inferred.
AEM's Kittila site in northern Finland began producing as an open pit mine in May 2009. That phase of operations ended in November 2012 and mining there now is underground. AEM's first major site outside Canada, Kittila also has its largest resource: 4.8 million oz. proven and probable gold reserves with annual output growing from 165k to 300k oz. during the next 23 years. It also has 3 million gold oz. indicated and inferred. An aside: fine mines like Kittila highlight the significance of Barrick Gold's (ABX) Pascua Lama that has c. 14 million proven and probable gold oz. and 675 million oz. silver. At Kittila, the total cash costs of production are $565 / oz. giving AISC near $900 for this key site, similar to low-cost sector reserves leader ABX.
AEM's Pinos Altos site in northern Mexico began open pit production in 2009 and underground operations in 2010 with a mine life extending to 2029. It holds 2.7 million proven and probable oz. gold reserves and 74.4 million oz. silver. It will increase output to 200k oz. gold / year and more than 3 million oz. silver including ore from its satellite mine at Creston Mascota. There are an additional 40 million oz. silver and 1.8 million gold oz. indicated and inferred at the complex. Total cash costs were $405 at the main mine and $511 / oz. gold at Creston Mascota. Increased drilling, shaft extension and exploration to increase proven reserves are ongoing. The strong silver holdings should power AEM earnings as technical uses continue to increase, fiat currencies fail and bullion prices rise from today's extremely and artificially low levels.
There are two notable exploration projects: the Meliadine site 200 miles southeast of Meadowbrook already presents 3 million proven and probable gold oz., 2.2 million indicated and 2.9 million inferred gold oz. La India in Sonora, Mexico is set to begin production 1Q 2014. It is an open-pit heap leach operation that holds 720k probable oz. gold, 582k oz. indicated and 1 million oz. gold inferred. There are numerous prospective areas including silver deposits on the 58k square hectares site (1 hectare = 2.47 acres).
Among mid-tiers, AEM's $4.7 billion market cap puts it third behind AUY at $6.4 billion and Kinross Gold (KGC) whose negative 7.1% growth and negative $5.1 billion cash flow have crushed its cap to $5.3 billion. EGO, a close peer with a $4.2 billion cap has a tiny debt/equity of .1, barely a third of AEM's .28. EGO's low P/B, .72 relative to AEM's 1.32 in my view reflects under-valuation, lower expectations for growth from its global sites and doubts about its projects and mines in Greece and Romania rather than its actual performance. This link provides facts and fallacies about its Balkan sites. AEM's $419 million cash flow is about 25% of its $1.65 billion revenues, similar to EGO's $301 million cash flow on $1.24 billion revenues. AUY and EGO have the lowest cost production in the mid-tier space, about $780 and $990 AISC respectively, 37% and 22% below bullion prices. AEM is about $750 total cash costs / gold oz. and $1070 AISC, 15.5% below spot bullion.
A few words on relative merits in the mid-tier gold space: what distinguishes EGO in profitability, in addition to its minute debt/equity is impressive 12% growth while AEM now is minus 18.2%, similar to AUY at minus 16.7%, a residuum of crushed bullion prices. AUY boasts a $700 million cash flow a bit more than a third of its $2.04 billion revenues, the best ratio in the group and the lowest costs. In low debt ratios and growth EGO stands out with AUY nearly as good at .14 debt /equity. NGD with $347 cash flow on $830 million revenues at 7.6% growth shows well. Its debt / equity at .29 is nearly identical to AEM's, very good while EGO and AUY have excellent profitability. IAG has controlled debt at the cost of a deeply -25% growth. Kinross Gold has -7.1% growth, less than half as haltered as that of AEM and AUY but KGC's negative $5.1 billion cash flow is an alarming 20% greater than its $4 billion revenues. Its negative $6 billion net income, reflecting crushed bullion prices and the dropped Fruta del Norte site is a chilling 50% more than revenues. AEM's .22 / share dividend leads its peers and yields 3.3%. As to dividends, compared to AEM only IAG, at 6% from its crushed share price reflecting deeply negative growth, yields more at .13/ share, 50% less generous than AEM which went ex on November 27. Consider these factors in ranking the merits of these mid-tiers.
As to management, AEM's sole ownership of its sites should maximize strategic flexibility and decisiveness. President and CEO Sean Boyd has been at AEM since 1985. CEO since 1998, prior to that he served as CFO. Several of the Senior VP's have degrees and decades of experience in Mining, Geological and Metallurgical Engineering. Along with Mr. Boyd, the other senior VPs with training and experience in accounting and commerce should facilitate profitable application of the Board's engineering expertise.
AEM had its origins in the merger of five small silver companies into Cobalt Consolidated during 1953. It became Agnico Mines in 1957 to highlight its products, silver (AG), nickel (NI) and cobalt (CO). In 1963, Paul Penna became President and began decades of acquisitions beginning with Eagle Mining Co in 1973 in order to develop its Joutel Mines under the name Agnico-Eagle. It has been a significant gold producer in northwestern Quebec since 1974 and its acquisitions include the Dumagami mines (now LaRonde), Goldex and Contact Diamonds which has properties in Nevada. It initiated its presence in Finland in 2005, the Pinos Altos complex in 2006 and the sub-Arctic region by acquiring Cumberland Resources in 2007, giving it 100% ownership of what has become the Meadowbank mine. AEM is a fulfilled vision of a sustainable and low-cost mid-tier gold company with steady growth. Since 2008, starting with Goldex it has initiated a series of production start-ups which continue. In 2013 it became known formally as Agnico Eagle Mines Limited.
AEM's challenges at this point include fulfilling its ongoing plans to increase production and extend the life of its mines. New acquisitions or E&D also can achieve this goal. Restoring positive revenue growth also depends on rising bullion prices which in the mid to long term, if not immediately should occur from a mix of new monetary and fiscal arrangements globally, continuing increase in the already large tech-industrial uses of silver and desire for gold by Sovereigns, major banks and retail investors.
AEM is one of the three or four top mid-tier gold producers and like AUY has received a recent strong upgrade from Morgan Stanley. AEM's relatively low costs, good jurisdictions and growth potential commend it. Its trailing and forward PE are high among peers, 36% and 36.4% respectively (this may reflect expectations of strong growth). Its 41% gross margin is not yet as strong as that of EGO, AUY and NGD (57%, 56% and 48% respectively). Still, its quality sites in supportive locales, on-track plans to grow revenues 16% by 2015, minimize share dilution, skilled leadership and drive to expand reserves should help it prosper, especially when bullion prices rise.