The Q4 Earnings Season for the Gold Miners Index (GDX) has finally come to an end, which means that many companies are busy reporting their Reserve & Resource statements for FY2020. One of the first companies to update its reserves was Agnico Eagle (NYSE:AEM), and it was one of the few miners to grow reserves year-over-year. This growth was driven by a ~6% increase in reserves at LaRonde, and the development-stage Hammond Reef moving into the reserve column. While this was a positive development, Agnico Eagle continues to look expensive relative to peers, trading at ~17x FY2021 annual EPS estimates. So, while I see Agnico Eagle as a top-10 gold producer in the sector, I believe there are better deals out there currently.
Agnico Eagle released its FY2020 Reserve & Resource statement in late February, reporting global mineral reserves of ~24.1 million ounces of gold (GLD) at an average grade of 2.15 grams per tonne gold. This translated to a 12% increase in reserves from 21.6 million ounces at ~2.80 grams per tonne gold in FY2019, which is quite impressive given that Agnico Eagle depleted ~1.9 million ounces in FY2020 through mining, and most companies struggled to complete their exploration programs. The main catalyst for the increased reserves was added ounces at LaRonde, and initial reserves declared at the lower-grade Hammond Reef Project, with 3.32 million ounces of gold at 0.84 grams per tonne gold. Let's take a closer look at the report below:
As shown in the chart above, Agnico Eagle saw a marginal decline in reserves at most of its operations, with the most significant decline being Amaruq and La India, where gold reserves fell by 430,000 and 234,000 ounces, respectively. Partially offsetting this, Agnico Eagle added 198,000 ounces at its LaRonde Complex and maintained Kittila's reserves despite record gold production of ~208,100 ounces. Notably, while Kittila reserves were relatively flat year over year, the current reserve base supports a 16-year mine life at the operation, even at a higher production level of ~250,000 ounces per year. The biggest difference in reserves, though, was the inclusion of the massive Hammond Reef Project in the reserve column. As it stands, Hammond Reef has more than ~2.2 million ounces of gold and over ~3.3 million ounces of reserves, translating to a 5.5 million ounce resource base.
On a strictly operating basis, Agnico Eagle's reserves fell by mid-single-digits year-over-year, which in some cases could be a cause for concern. However, I do not see this as a worry for Agnico Eagle. This is because if Agnico Eagle included Hope Bay in its reserves from its TMAC acquisition, operating reserves actually increased substantially year-over-year, and total reserves would have increased by more than 20%, from ~21.6 million ounces to ~27.6 million ounces. This calculation assumes that Hope Bay's reserves come in at ~3.55 million ounces, which is where they stood at the time of the acquisition. Given that Agnico Eagle has not completed its own independent study by a qualified person, it has excluded Hope Bay's resources and reserves from its update for the time being. However, even if we assume a 20% decline in reserves if Agnico Eagle uses more rigid reserve modeling, this should still lead to a significant bump in reserves in FY2021.
Finally, while operating reserves did decrease marginally, the company has significant organic growth potential with multiple projects in the wings. These projects are Upper Beaver, Hammond Reef, and material upside from the current conservative production profile for Hope Bay. The company is currently assessing which project of Hammond Reef and Upper Beaver is the best fit to bring online next while also doing additional work at Hope Bay to see if the mine can grow into the company's 250,000-ounce - 300,000-ounce long-term production goal. Therefore, while reserves did decline if we adjust for Upper Beaver moving into reserves despite being a development asset, they will grow further in FY2021 with the likely addition of Hope Bay.
For those unfamiliar, Hammond Reef is an impressive project in Northwestern Ontario that was previously explorer by Brett Resources before being acquired by Osisko Mining 1.0. The ownership of the project was transferred to Agnico Eagle and Yamana (AUY) when they tag-teamed to acquire Osisko Mining 1.0 and its Canadian Malartic Mine before Agnico bought out Yamana's remaining interest in Hammond Reef. The project is a low-grade bulk-tonnage project with a 2.0% net smelter return that envisions a 30,000-tonne per day plant with mining focused on two pits. The project has provincial and federal environmental approvals but still requires additional permits to start construction, and the key will be to see if Agnico can optimize the project further before making any construction decision, with ore-sorting being one potential way to improve the project.
Outside of the high upfront capex of ~$1.0 billion, Hammond Reef could increase Agnico's production by more than 10%, with projected average annual gold production of ~272,000 ounces per year over 12-years. It's worth noting that Hammond Reef is relatively low grade at below ~0.90 grams per tonne gold; the estimated strip ratio is quite low at 1.39, which translates to impressive all-in sustaining costs. Based on current estimates, all-in sustaining costs are expected to come in at $810/oz, which is 20% below the current industry average (~$1,010/oz). The construction timeline is estimated at 2.5 years, and Agnico noted that it could be ready for production by 2027. Let's take a look at how Agnico's reserve base compares to its peers:
As shown above, Agnico Eagle has one of the largest reserve bases in the sector. The company has maintained its lead on Kirkland Lake Gold (KL) and Northern Star Resources (OTCPK:NESRF), Agnico's closest peers in the million-ounce producer category. As noted earlier, this lead should be extended even further, assuming that Hope Bay is added into reserves in Agnico's FY2021 reserve update.
In terms of reserve size & grade combined, Agnico stacks up even better against other producers in the sector, with one of the highest-grade reserve bases among its peers. The only company with a larger reserve base at higher grades is Gold Fields (GFI), but Gold Fields is discounted due to its partial reliance on Tier-3 jurisdictions. As shown on the chart, Hope Bay's inclusion in reserves will increase Agnico's reserve size and reserve grade, which explains why it gets such a large premium relative to peers.
However, while Agnico clearly wins for reserve grade and jurisdictional profile in the sector, the stock is not cheap, trading at nearly ~$660.00 per reserve ounce on an enterprise value basis. Meanwhile, Kirkland Lake Gold (which beats Agnico on jurisdictions) trades closer to $400.00/oz, with its lower grade reserve base being offset by much higher-margin production. This is based on Kirkland Lake's all-in sustaining cost guidance of ~$800/oz in FY2021, compared to Agnico's cost guidance of $975/oz. Agnico should get some points added for its significant organic growth potential, which Kirkland Lake lacks unless additional high-grade reserves are added at Fosterville, or Kirkland Lake makes another bolt-on acquisition. Still, this large discrepancy (~$660/oz vs. ~$400/oz) suggests that Kirkland Lake offers better value than Agnico, in my opinion.
Finally, it's important to note that Agnico Eagle's reserve growth was achieved despite maintaining a conservative metals price assumption of $1,250/oz for more than 80% of its reserves. As shown above, the industry average metals price assumption for miners in the Gold Miners Index is $1,300/oz, and Agnico's reserves (ex-Hammond Reef at $1,350/oz) were calculated using a $1,250/oz gold price. So, if we were to see further strength in the gold price above $2,000/oz and Agnico chose to bring its metals price assumption to $1,350/oz, there is lots of room for additional reserve growth. This is not the case for other much less conservative names like McEwen Mining (MUX) and First Majestic (AG), who are currently using a $1,550/oz and $1,700/oz gold price assumption.
So, is Agnico Eagle a Buy?
Based on significant organic growth potential with multiple advanced projects and Hope Bay which is not included in its FY2021 guidance, Agnico Eagle easily makes the cut for top-10 gold producers in the sector. This argument is further emboldened by Agnico's improving margin profile and earnings trend thanks to higher gold prices, with annual EPS up 93% last year to $1.86. Looking ahead to FY2021, higher production and higher margins should translate to massive annual EPS growth, with FY2021 annual EPS estimates sitting at $3.62. However, even assuming Agnico can meet these estimates, the stock is trading at ~17x FY2021 annual EPS projections at a share price of $61.30. Even if we apply a fair earnings multiple of 21 to Agnico Eagle, the conservative fair value is $76.02. Given that this represents less than 30% upside from current levels, I don't see the stock as a Buy at these levels, regardless of its top-10 producer status.
Agnico Eagle had an exceptional year, and the recent acquisition of TMac Resources has only emboldened the investment thesis. However, while the stock has an exciting few years ahead with the potential to increase production to more than ~2.30 million ounces with Hope Bay at lower costs, the stock is not cheap relative to some of its peers. So, while I would consider taking a position in the stock if we see further weakness and re-test of the US$55.00 level, I believe there is better value out there in the sector currently from an investment standpoint.