Gold stocks relative to the price of gold are depressed. Gold mining is a difficult business fraught with operational hazards. Meanwhile the fundamentals of gold continue to improve in a world of unsustainable government deficits and money printing. Agnico-Eagle Mines (AEM) shares have been hit especially hard after stumbling operationally last year and present an interesting opportunity.
Agnico-Eagle management has noted "2011 was a tough year for us…2011 was also a pivotal year for us as we made a lot of progress on our mines." Evaluating correctly whether the operational corner has been turned is the key consideration for the speculator in Agnico-Eagle shares.
Central to the story is the hyper growth phase Agnico-Eagle experienced in 2009 and 2010. It built and opened five new gold mines. Expectations were high as gold production doubled and doubled again. Declaring commercial production is easy. However, start-up risk is high with heavy duty industrial activity in remote areas.
Agnico-Eagle struggled to operate these new mines. A fire at the Meadowbank mine hurt production and the mine was partially written down in the fourth quarter. The stock gapped down 15% in October of 2011 on the closure and indefinite suspension of the Goldex Mine due to ground water flowing into the mine. Perhaps Goldex will be reopened in the future, but the possibility is not a reason to own the stock.
Mine optimization takes time. If the ore body is good then competent operators can get the task accomplished. Meanwhile, management has taken an attitude of under promise and over deliver. Modest projections of production growth out to 2017 because of higher grades does not include the expansion of existing mines nor new mine construction. With a 2012 exploration budget of $106 million the future can become bright again quickly.
Agnico-Eagle has a long history (pdf) of building and operating mines including four current cornerstone assets. The 30 consecutive years of cash dividends provides comfort and the current dividend yield of 2.4% is higher than 10-year treasury bonds. With a market cap of $6 billion and cash flow measured by EBITDA of $1 billion the valuation is tempting for a gold mining equity.
With Agnico-Eagle shares little higher than the 52-week low the company only needs to show stabilization for a meaningful bounce to occur. Management remains focused on per share value. The catalysts of the project pipeline, exploration upside and the depressed gold stock group rebounding add to the potential.
Risk is always high in small- and intermediate-size individual gold mining issues. The popularity of Market Vectors Gold Miners ETF (GDX) shows investor appetite for diversifying individual mine risk. On its own the GDX provides much beta. For the investor seeking alpha the individual securities provide opportunity. The Agnico-Eagle story is interesting.