Will Production At Agnico-Eagle Mines Outmatch Price Increases This Quarter?

| About: Agnico Eagle (AEM)

Agnico-Eagle Mines Limited (NYSE:AEM) is an established gold producer headquartered in Canada, with exploration and development activities in Canada, Mexico, Finland, and the United States. Agnico-Eagle Mines follows a policy of 'no forward gold sales' in order to enable it to profit from higher gold prices. The company's corporate strategy is focused on increasing the exposure of shareholders to gold on a per share basis. Dividends have been consistently paid out over the last 30 years.

Agnico-Eagle has 100%-owned long life gold deposits in areas that are stable and conducive to friendly mining, including Canada, northern Finland, and northern Mexico. The LaRonde mine provides a strong operating base, consistently generating profits and operating cash flows. The company follows a consistent and low-risk strategy to strengthen its gold mining business and create value for shareholders. It looks to produce more gold and enhance its gold reserves in regions that have proved to be friendly to gold mining. Agnico-Eagle is aiming to enhance gold mineral reserves to 20 million ounces by the end of 2012 through aggressive exploration on 100%-owned properties in Canada (Ontario, Quebec, the Yukon, and Nunavut), the United States (Nevada), Finland, and Mexico (Chihuahua). The company is constantly seeking to add quality projects and assets to its portfolio, and is well positioned to move if an opportunity well matched to its technical skills can significantly strengthen its business. The company's focus is on smaller companies or projects, where value can be added through exploration and expediting production.

For the second quarter of 2012, Agnico-Eagle reported quarterly net income of $43.2 million (earnings per share [EPS] of $0.25 a share). These results include an impairment loss of $18.3 million ($0.11 per share), stock option expenses of $7.8 million ($0.05 per share), a non-recurring tax loss of $4.3 million ($0.03 a share), and other non-recurring expenses of $11.6 million ($0.04 per share). These exceptional losses were partly offset by a non-cash currency translation gain of $11 million ($0.06 per share). If these exceptional items are excluded, adjusted net income works out to $68.9 million ($0.40 per share). For the same quarter of the previous year, the company reported net income of $68.8 million ($0.41 per share). Cash flow generation remained strong and cash from operating activities was $194.1 million compared to $162.8 million year-on-year. For the first six months of 2012, net income was $121.8 million (EPS of $0.71 per share), compared to $114.1 million (EPS of $0.68 per share) for the first six months of 2011. Cash generated from operating activities during this period reached a record high of $390.6 million compared to $337.6 million year-on-year. The company's strong operating performance was attributed to higher gold production as well as higher price realization, though this was partly offset by a lower level of byproduct revenues.

The higher level of production during 2012 was primarily because of record high production at Meadowbank, higher grades at LaRonde, and the ramp up at Pinos Altos' Creston Mascota operation (commercial production commenced on March 1st, 2011), resulting in record gold production at Pinos Altos. In the first half of 2012, payable gold production was 520,305 ounces, compared to the first half of 2011 when payable gold production was 491,690 ounces. The higher production in 2012 was achieved despite the stoppage of production at Goldex.

Total cash costs for the second quarter of 2012 were $660 per ounce, compared to $565 per ounce in the second quarter of 2011. The higher costs in 2012 were attributed to lower byproduct revenue at LaRonde (35% lower zinc production and 16% lower zinc price realization) and the cessation of production from the relatively lower cost Goldex mine. For the first half of 2012, total cash costs amounted to $628 per ounce, compared to $548 per ounce in the first six months of 2011. Agnico-Eagle is raising its production guidance for 2012, which was expected to be between 875,000 to 950,000 ounces of gold, to around 975,000 ounces of gold. Total cash costs per ounce are expected to be near the lower end of the previously indicated range of $690 to $750.

Agnico-Eagle Mines' increase in production is impressive. Production at four out of six mines increased in the second quarter. Production at the Pinos Altos mine in Mexico rose by 24% year-on-year, while production at the Meadowbank mine in Canada's Nunavut Territory increased by an impressive 66%. The Kittila mine in northern Finland also achieved a production increase of 14% over the previous year. However, Agnico-Eagle has had its own share of problems. The company's bottom line has been negatively impacted by the problems at its Goldex mine in northern Quebec. The Goldex mine shut down last October after the mine was flooded by water seepage, which could not be controlled. The company took a hit of $161.5 million due to these problems. Up until the shutdown, Goldex had been one of Agnico-Eage's most profitable assets, with cash costs of just over $400 an ounce. The company hopes to resume production next year, but inevitably, production will be lower, while costs could be anywhere between $565 and $660 per ounce. The rising costs are a matter of some concern, because Agnico-Eagle operates in developed countries with higher labor costs, and it also operates a large number of underground mines, which are costlier to operate. This produces a competitive disadvantage when compared to companies like Freeport-McMoRan (NYSE:FCX) and Newmont Mining (NYSE:NEM), which operate in developing countries with lower labor costs.

Despite the continuing high price of gold, I believe that Agnico-Eagle Mines will have problems in increasing production significantly this quarter, and may not be able to fully offset the cost increases. Shares of Agnico-Eagle Mines, which are currently trading around $51.00, are fully priced, and there is a limited upside. If you are interested in gold stocks, I think you will find much more value in companies like Goldcorp (NYSE:GG) or Barrick Gold (NYSE:ABX). Investors should avoid Agnico-Eagle Mines unless there is a sharp pullback in share price.

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. I have no business relationship with any company whose stock is mentioned in this article.