Agnico-Eagle Has Upside Potential

Jan.28.14 | About: Agnico Eagle (AEM)

After the FOMC meeting, it was finally announced that the Fed is going to reduce its stimulus program by $10 billion each month in 2014. This will create an added bond market for investors, which has previously been out of reach due to limited or no supply of high grade treasury bonds. It has also been assured that there will be no changes in the interest rate for the short term and it will be kept close to zero until there is further recovery in the unemployment and inflation rates. This means that the gold market will be provided with a little room to breathe in the immediate future. The price of gold had already been so severely affected by the early speculations of tapering that the announcement did not cause it to change as much as expected and it still kept above the $1200/oz. border. But since the start of 2014, gold has started to show some signs of recovery and has risen to around $1,259/oz. (this may have been caused by the investors' rising confidence in gold).

Introduction

Agnico-Eagle Mines Limited (NYSE:AEM) is a Canada-based company operational in Québec, Nunavut, Northern Finland and Northern Mexico. The company's mines and projects include LaRonde mine, Lapa mine, Goldex mine project, Kittila mine, Pinos Altos mine, La India mine project and Meadowbank mine; six of which are 100% owned by AEM. The company acquired a 9.27% interest in ATAC Resources Ltd. (OTCPK:ATADF), a 11.07% stake in Sulliden Gold Corp. Ltd. (SDDDF) and the entire share capital of Urastar Gold Corp. (OTC:URNRF) in the year 2013. In 2012, AEM was able to produce a record level of 1.0438 million ounces of gold and 4.7 million ounces of silver, while still having huge reserves amounting to 18.7 million ounces of gold, 96 million ounces of silver, 220,000 tonnes of zinc and 73,000 tonnes of copper. The company has planned to boost its output by 16%, increasing to 1.2 million ounces of gold.

Fundamentals

Agnico-Eagle Mines has been showing a strong performance, with an EBITDA of $484.7 million in 2010, $192.7 million in 2011 and $505.8 million in 2012. However, the company's revenues have declined due to nervous market conditions and the downward pressure on the price of gold. AEM earned $440.8 million in revenues in Q3 of 2013, which is a 18% decrease from last year. Furthermore, the company was able to report a net income of only $47.3 million, which is 55.5% less as compared to the same quarter of 2012. AEM's share price has followed a downward trend, reflecting the industry, and is approx. 50.5% negative during 2013. But the company has started to recover, as it has shown an almost 8% increase in share price (from $27.59 per share to $29.79 per share) from year-to-date.

AEM Chart

AEM data by YCharts

The company's revenues were badly affected during the second quarter of 2013 when the Kittila mine was shut down for scheduled maintenance, leading to high costs (compared with revenue generated) from this particular mine. AEM was able to close the year with a positive net income, but the combination of low prices and reduced production levels had a significant impact on the company's financial performance.

Agnico-Eagle Mines is focusing on reducing its costs in order to bring flexibility in its financials so that the company may be able to outlast these uncertain times. It has decreased its capital and operating costs by $50 million, exploration expenses by $20 million and plans further reductions by reducing 2014's capital expenditure within the range of $200 million-$600 million. However, company CEO Sean Boyd has assured that these cost reductions will not affect the planned growth in 2014 and 2015.

Agnico-Eagle Mines is planning to sell its minority interest in the Meliadine gold project, located in the territory of Nunavut. This mine has proven and probable reserves of 3 million ounces of gold, which make it one of AEM's largest projects. The reason behind the selling of interest in such a big project is the cutting down of expenses. Many companies, including AEM, have taken measures to reduce the burden from bigger projects in order to improve their overall stability and protect their balance sheet. However, this decision will not been finalized until a feasibility study on the Meliadine project is completed and submitted to Nunavut Impact Review Board (NIRB) which, according to the company, will be ready by mid-April of 2014.

AEM has been paying dividends for the last 31 years and has announced a dividend of $0.22 per share (for a total of $38 million in dividends) at a time when other big gold miners are suspending their dividends. The company's current dividend yield of 3.43 is very high when compared with the industry average but its share price is on the decline, which indicates limited prospects for further dividend growth. The operating cash flow for the quarter was $80.98 million, 59% less compared to the same quarter of 2012. This cash flow will be enough to sustain the current level of dividend yield but if the decline in cash flow from operations is not controlled, the company might have to suspend the payment of dividends.

Company

Industry

Sector

Dividend Yield

3.43

2.39

2.4

Total Debt-to-Equity (MRQ)

25.20

48.63

26.98

Click to enlarge

If the company has higher earnings than interest expenses, a high Debt-to-Equity ratio is favorable. However, due recent volatility in the gold market, a lower Debt-to-Equity can depict a better position for the company. Recently AEM has increased its long-term debt by $120 million, for a total of $950 million. Despite having a good D/B ratio, it still needs to decrease its debt because of the deteriorating market conditions.

Company

Industry

Sector

Quick Ratio (MRQ)

1.64

1.56

2.67

Current Ratio (MRQ)

2.93

2.98

3.34

Click to enlarge

The company's liquidity is in line with the industry, which means that it is in a strong financial position.

Valuation

AEM has the following reserves:

Proven

Probable

Total

GOLD

Goldex

3

346

349koz

Lapa

227

168

395 koz

LaRonde

602

3604

4206 koz

Meadowbank

88

2206

2294 koz

Meliadine

8

2979

2987 koz

Pino Altos

250

2464

2714 koz

Kittila

216

4567

4783 koz

Bousquet

-

178

178 koz

La India

-

776

776 koz

SILVER

LaRonde

6263

14832

21095 koz

Pino Altos

8018

66424

74442 koz

ZINC

LaRonde

67000

153000

220000 tonnes

COPPER

LaRonde

19000

54000

73000 tones

Click to enlarge

*koz = Kilo ounce

To estimate the value of the reserves, we will use the average price, i.e. $1200/oz for gold and $20/oz for silver (which is being used by other gold miners for valuation) due to the unavailability of the company's assumed price.

(Amount'000x Price per ounce)

Amount in ( $ Million )

Amount in ( $ Million )

Revenue

GOLD

18682 x 1200

22418.4

SILVER

95537 x 20

1910.7

24329

Production Cost of Sales

20274.3 x 1025

20781

20781

Gross Profit

3548

Click to enlarge

*All-in Sustaining cost is used as the basis for cost of production.

*It is considered that all the minerals are mined and there are no extra costs incurred.

*it is assumed that both proven and probable materials are extracted.

From our estimates, it can be seen that the company will benefit in the long run even though the current market conditions are not favorable, as it can still earn $3.5 billion in profits.

Amounts in ($ Millions)

Market Capital

5167

Long-term Debt

950

Cash and Cash equivalents

(141.7)

Enterprise Value

5975.3

Click to enlarge

The enterprise value of the company is $5975.3 million and the total number of outstanding shares is 173.43 million. It can be calculated that the EV per share will be around $34.45. The current share price of $29.79 is undervalued, according to our estimates, due to the depreciation of gold prices. This gap between the estimated and current share price shows that it still has potential for growth (if the market conditions become favorable).

Conclusion

AEM has announced that it will be initiating production from two mines, namely Goldex and La India. Goldex's production was suspended for care and maintenance in 2011 and will start again in October 2013, with an average annual production of 85,000 ounces at an expense of $900 per ounce. La India was acquired in November 2011 and is expected to start commercial production in the first quarter of 2014. It is expected to produce 90,000 ounces annually at the cost of $500 per ounce.

If AEM manages to keep the costs of these mines in control it can benefit from the expected increase in output and if gold prices get a rebound, additional production in the future will help the company in recovering last year's losses. Looking at the increase in production and the planned reduction in costs, Agnico-Eagle Mines Ltd. is a good buy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Equity Flux is a team of analysts. This article was written by our Basic Materials analyst. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.