Agnico-Eagle: Best Positioned to Manage Escalating Mining Costs

Sep. 5.07 | About: Agnico Eagle (AEM)

This report reflects the research and analysis I've performed on Agnico-Eagle (NYSE:AEM). It is provided for informational purposes only and does not constitute personalized financial advice nor an endorsement or solicitation to purchase stock in this or any other company. Please do your own due diligence or hire a financial advisor before making any investment decisions.

Results for Q2 2007 (all numbers US$ unless noted)

  • Net income came in at $37.8M vs. $37.1M YOY for the quarter. Earnings per share was down 12.5% though due to dilution from the Cumberland acquisition.
  • Operating cash flow increased 66% for the quarter, 100% for the six months YOY.
  • Gold production relatively flat for the quarter YOY, 56,392 oz vs. 55,966 oz. The company maintained guidance for gold production and raised silver production guidance by 4% but balanced that with -7% & -10% cuts in zinc and copper production, respectively.
  • Total cash costs per ounce of production came in at -$699 vs. -$975 YOY. The strong Canadian dollar, increased minesite costs and lower byproduct credits revenue factored into the weaker number.
  • Costs per tonne came in at C$71, which is higher than the full year guidance of C$63. Management raised guidance on these costs to C$65 for the year, with moderation expected in the 2nd half.
  • CapEx came in at $106.4M and expected to top $400M for the year, which is a bit higher than the $336M forecasted at YE 2006.
  • 30 months without a loss-time accident.
  • Here are the performance measurements I laid out for Agnico-Eagle in my investment report:

    Performance Measurements

  • Stay on schedule for Goldex, Lapa, Kittila mines.
  • Maintain production at LaRonde as well as keep expansion on-track.
  • Keep production costs inline.
  • Increase dividend without compromising business position.
  • Deliver exploration results.
  • The company updated us on the status of various projects. Goldex is on-schedule with no cost overruns thus far. Kittila is also on schedule but in terms of the local currency, costs have crept up 7-8%. Both mines are scheduled to be in production within a year. On Lapa, the news wasn't as good as production has been pushed back into 2009 from Dec 08. The delivery schedule of some processing equipment was the cause of the problem and that production in 2008 would be nominally affected (~6,000 oz au).

    The company announced the staff additions of Dan Kivari and Martin Bergeron to manage the Meadowbank project gained from the Cumberland acquisition. Kivari comes over from Yamana Gold after having managed Yamana's marquee Chapada project. The two men have 60 years of mining experience between them and further strengthens Agnico's prospects at the Meadowbank site.

    Agnico-Eagle announced the results of the Pinos Altos feasibility study after the conference call and the news is good. They expect an after-tax investment return rate [IRR] of at least 18% and project positive income with a gold price of $375/oz. After the study was completed, they boosted reserve numbers by 21% on the gold side and 18% on the silver as well as upping grade quality by at least 10%. They also expect to find additional resources at the Mascota and Creston sites and will announce those results by year-end 2007.

    The company dispelled any rumors about getting involved with the Meridian Gold acquisition, saying that they expect to add as many ounces as Meridian currently has in reserves by drilling on their own property.

    Overall, I like what I'm hearing from management. The potential going forward is looking better as they continue working on their resource. Most of the projects are moving along nicely and Pinos Altos is especially good news. Hopefully, this will position them better for using Pinos Altos as a beachhead to establish a core operations base in the region.

    It's not all roses, though. Production costs jumped 20.4% from the quarter last year and for the 1st 6 months, those costs are 15% higher YOY. For the 1st half of 2007, operating income is down 20% and the main reason net income numbers looked decent was due to tax shelters gained from the Cumberland transaction.

    While I am concerned that operating expenses jumped so markedly, this is an industry-wide concern. Of all the intermediate gold producers, I would put AEM at the top of the list in terms of their ability to manage this cost escalation environment.

    Disclosure: Please see our portfolio page for all disclosures.