It's been a rough year thus far for the Gold Miners Index (GDX), with the index falling ~80% annualized over the past four months, one of its most violent descents in the past decade (a 44% decline in 95 trading days). Some of this decline is justified with some companies continuing to report disastrous results, like continued capex increases for IAMGOLD (IAG) and Argonaut (OTCPK:ARNGF), which will likely lead to (Iamgold), and has already led to considerable share dilution in Argonaut's case. In addition, inflationary pressures have impacted costs, and combined with a lower gold price; margins are down across the sector.
However, as discussed in my most recent and comprehensive update on Agnico Eagle, the company reported blow-out results in Q2, maintained cost guidance, and is in a much better situation than its peers. This is because it's benefiting from a breakout in the USD/CAD exchange rate, it's seeing unit cost improvements from merger synergies, and it uses considerably less diesel than its peers (plus it hedges a large portion of its diesel usage).
Meanwhile, the company reported phenomenal exploration results across several of its assets, yet has found itself back near its lows, a move that makes little sense. Given that the stock continues to be thrown out with the bathwater and trades at its most attractive valuation in years, I see this pullback as a gift, and I have continued to accumulate on weakness.
Agnico Eagle released a comprehensive exploration update last month, and I could not possibly do the release justice in one update. For this reason, I have chosen to focus on just three of the assets (Detour Lake, Fosterville, and Hope Bay). However, for those interested in the opportunity at Canadian Malartic, this update on Osisko Gold Royalties (OR) helps put the recent results in context, which were very exciting, with ounces continuing to be added in the Eastern Gouldie Extension. Let's take a closer look at recent developments below:
While the exploration results out of Canadian Malartic (50% owned) could not be more encouraging and point to the potential upside to its long-term production profile at lower unit costs, Detour Lake ("Detour") is just as exciting with a very similar setup. For those unfamiliar, the mine is currently operating at ~25 million tonnes per annum, and the goal was to get this asset up to 28 million tonnes per annum through several initiatives.
This has been a work in progress even from the Kirkland Lake days under Natasha Vaz (Executive Vice President & Chief Operating Officer of Ontario/Australia/Mexico) and Larry Lazeski (General Manager Detour Lake). As of Q3 2022, most initiatives have been completed, with the last two pieces being runtime optimization and the addition of secondary crusher screens (both sets of screens are set to be commissioned in Q4 2022).
However, while growth to 28 million tonnes per annum was the primary goal and is nearly complete, this massive Ontario mine northeast of Cochrane is permitted to process 32.8 million tonnes per annum, ~5.0 million tonnes above the near-term goal for the asset. This is a big deal for Detour because it means that increased resources do not just add to a 30+ year mine life at this asset at the current run rate (21.0+ million ounces of reserves at ~700,000 ounces per annum), but it means pulling forward ounces, which is similar to the opportunity at Canadian Malartic if the partnership explores a second shaft given the torrid pace of underground resource growth.
Currently, Detour has 20.4 million ounces in resources, a 38% increase year-over-year. However, we should see further growth in reserves short-term and medium-term, with over 190,000 meters of drilling not included due to the February 5th, 2022, database cut-off for the most recent mineral resource/reserve update. On a company-wide basis, and when combined with initial reserves that should be declared at Canadian Malartic, Agnico should finish the year with over 52 million ounces of gold reserves. This is completely separate from another ~40 million ounces of measured & indicated resources, giving the company nearly 95 million ounces of reserves & resources combined across its properties (excluding inferred resources).
From a reserve growth standpoint, the major benefit at Detour is that the new life of mine plan adds 410,000 ounces of gold from 2028 to 2031, reducing the step-down in production in the previous mine plan (2020 LOMP). Additionally, two million ounces of gold have been added to the mine plan from 2037-2042, providing a significant boost to production in the latter years of the mine life. Some investors might look at the 2043-2052 mine life (averaging 327,000 ounces per annum) and proclaim that this isn't really a 30-year mine life with a much smaller production profile in the final decade, which relies on low-grade stockpiles.
However, given the resource growth in multiple areas, this lower-grade stockpiled material could be pushed out even further, with Detour able to maintain a 750,000-ounce production profile in this period as recently uncovered resources are converted to reserves. Hence, this is looking like one of the most valuable gold mines globally, and just as importantly, despite incorporating inflationary pressures, all-in sustaining costs are expected to average $875/oz (2023-2031), allowing Agnico to maintain an industry-leading cost profile.
Notably, this mine plan doesn't incorporate:
Hence, I would argue that there's the potential to beat these all-in-sustaining cost assumptions with the benefit of cost-savings initiatives and a further increase in annual throughput post-2026.
From a resource growth standpoint, there were two major takeaways:
For starters, the westernly plunge of the deposit both below and west of the future West Pit (the pit west of the current main pit being mined) has continued to return impressive intercepts, and mineralization has now been intersected more than 2.0 kilometers west of the current mining area. Highlight intercepts included:
Detour Lake's average grade is ~0.90 grams per tonne of gold, so anything above 1.0 grams per tonne is great to see.
Agnico Eagle noted the following regarding its exploration success here, which is also encouraging:
"Continued drilling along the West Pit Extension has been encouraging, with mineralization occurring both within the Chloritic Greenstone (CG) unit, a marker horizon associated with mineral reserves and mineral resources in both the Main Pit and West Pit, and within altered mafic pillow flows, below and footwall to the CG unit, which is similar in nature to the mineralized zones in the West Pit."
- Q2 2022 Exploration Update
Secondly, in addition to resource upgrades and new resource growth below the current pit shell west of the Main Pit, where Kirkland Lake had success drilling its Saddle Zone between the two pits, the West Pit Extension opportunities are very exciting.
The above drill holes discussed were barely step-outs, sitting right near the current pit but still having the potential to add meaningful reserves. However, drill-hole DL22-453 (5.6 meters at 6.0 grams per tonne gold and 3.7 meters at 4.9 grams per tonne gold), drill hole DLM22-469 (13.1 meters at 5.8 grams per tonne gold), and DLM-22-471 (30.3 meters at 0.90 grams per tonne gold) are major step-out holes, as is DLM-22-448, which intersected 4.8 meters at 32.3 grams per tonne gold). Another impressive intercept was DLM22-430A, which intersected 7.3 meters at 3.6 grams per tonne gold at 669 meters depth. Notably, it looks like grades could be improving at depth.
This development could be similar to what we saw with Canadian Malartic, which prompted the company to head underground, with the company planning to see initial production from Odyssey. The significant difference here is that Detour still has 25+ years of open-pit resources left. Conversely, Canadian Malartic's pit was mostly mined out when the Odyssey Underground opportunity was delineated, meaning that it's replacing fewer tonnes mined from the main pits, even if considerable excess capacity is now available at the mill. Therefore, this underground opportunity and resource growth could be incremental to the production profile and not just extend the mine life, which is what Odyssey Underground is doing for now (unless the Malartic Partnership finds a way to fill some capacity at the mill, which is looking very likely).
The best hole from a grade standpoint at Detour, 4.8 meters at 32.3 grams per tonne gold, was drilled over 2 kilometers west of its open pit, making this a similar step out to the significance of East Gouldie Extensions at Canadian Malartic. The only difference is that these are 100% attributable to Agnico Eagle, making them more significant, vs. 50% at Canadian Malartic, which is a shared operation (50/50). As of the Q2 results, Agnico is now discussing the potential for a 1.0 million ounce per annum production profile. While this might seem high and ambitious vs. the current ~750,000-ounce production profile, it's actually not as far-fetched as some might think.
As shown in the chart above, Detour Lake has averaged quarterly production of ~185,600 ounces in Q2 2021, Q3 2021, Q4 2021, and Q2 2022. However, this was with average quarterly throughput of ~620,000 tonnes, translating to roughly 25.0 million tonnes annualized. Following a step-up to 700,000 tonnes per quarter (the 28.0 million tonne per annum goal) and assuming a grade of 1.0 gram per tonne, production would increase to 207,000 ounces per quarter or ~820,000 ounces per year. Longer-term, a move to 32.8 million tonnes per annum at a 0.98 gram per tonne head grade would increase production to 238,000 tonnes per quarter or ~950,000 ounces per annum. The Q1 2022 metrics are lower in the chart because it was a shortened quarter attributable to Agnico due to the timing of the closing of the merger of equals between AEM and KL.
While this is still 50,000 ounces shy of the stated goal, the underground opportunity at Detour is the game-changer, where grades could come in above 2.30+ grams per tonne gold and potentially as high as 3.0 grams per tonne gold. If Agnico were to displace ~1.65 million tonnes of lower-grade open-pit material with higher-grade underground material (2.3 grams per tonne gold, 4,500 tonne per day mining rate), we would see a 60,000+ ounce per annum lift in production and potentially more depending on whether the underground was displacing even lower grade sub 0.85 gram per tonne material. So, I see considerable upside in the production profile, reserve base, and NPV (5%) at Detour Lake on top of the massive upgrade (38% increase in reserves just reported).
To summarize, Agnico has two assets with existing infrastructure in Tier-1 jurisdictions that have the combined potential to add the equivalent of another "Tier-1 asset". This is based on an incremental 275,000 ounces per annum from Detour at full capacity plus 180,000 attributable ounces from Canadian Malartic (360,000 ounces on a 100% basis) if a second shaft is sunk, translating to 455,000 ounces per annum combined in the early 2030s. Notably, the benefit of having significant growth potential from existing assets is that it's a relatively low capex growth opportunity vs. building a completely new mine like Iamgold is doing at Cote, which has turned out to be a very expensive endeavor. If successful at both Malartic and Detour, Agnico would maintain its ownership of two of the world's top-10 gold mines globally while also owning three of the top 25 highest-grade gold mines globally (Hope Bay, Fosterville, Macassa) and two of the top 10 (Macassa, Fosterville).
Moving north to Nunavut, Agnico Eagle appears to be quite excited with what it's seeing at its newly acquired Hope Bay Project (Q1 2021), evidenced by increasing its exploration budget for 2022, with 80% of those incremental dollars going to Hope Bay ($24 million of $30 million). The company noted that it would be allocating this capital to drilling and developing exploration drifts at Doris to accelerate exploration from underground in high potential areas. The goal is to allow for easier resource conversion and mine development for when it resumes production in the future at this asset (production was suspended to focus on exploration this year).
Agnico noted that the results are exceeding expectations, with drill results confirming the potential to grow the main Doris deposit at depth below the dike (brown shaded area) in the BTD Extension and BTD Connector Zones, where there are limited mineral reserves in place currently. The company also noted that it's confident in growing the size of the deposit above the dike in the West Valley Zone. For those unfamiliar, Hope Bay is already home to 3.32 million ounces of reserves (6.50 grams per tonne gold), acquired at a fire-sale price of $70.00/oz. However, it also locked up existing infrastructure and an 80-kilometer by 20-kilometer Archean greenstone belt, bolstering its Nunavut footprint. It's hard to put a figure on this type of exploration upside, and while Agnico has always done smart M&A (Meliadine, Riddarhyttan), this was a brilliant transaction, given the price paid.
As the above map shows in the first figure, highlight intercepts included 32.2 meters at 6.9 grams per tonne of gold north of the BTD Connector Zone and 15.3 meters at 9.4 grams per tonne of gold. Agnico also intersected 7.1 meters at 12.2 grams per tonne gold in a current mineral resource block in the BTD Connector Zone and several high-grade intercepts above the dike in the West Valley Zone. Finally, Agnico intersected 3.5 meters at 20.9 grams per tonne of gold and 2.3 meters at 20.9 grams per tonne of gold in the vicinity of current mineral reserves and just north of mineral reserves in the BTD Extension Zone.
These results are very encouraging, but they are at just one deposit at Hope Bay (completely separate from Boston and Madrid). So, while not representative of average grades, they appear to be better than what Agnico was looking for when it acquired TMAC. To summarize, while Hope Bay may not be contributing again until H2 2024, I am confident that this asset will return to production by 2025, coming back online stronger than ever. This is because it will be under a team with considerable Nunavut experience and a more robust geological model.
While 275,000+ ounces at sub $1,000/oz all-in sustaining costs look achievable (~4,000 tonnes per day), this could be the tip of the iceberg, with additional upside long-term. This is because the current internal evaluations are focused solely on Doris and Madrid, the two deposits at the northern end of the land package on the Hope Bay Belt. The upside to this production profile comes from Boston (55 kilometers south of Doris), which hasn't received enough attention (only ~200,000 meters drilled historically). The reason is that TMAC was not as well-financed as previous operators. Plus, there was more than enough gold to go around at the two deposits that were closest to the plant. However, Boston is a very impressive deposit, with ~4.7 million tonnes at 7.6 grams per tonne of gold as of the 2019 TR completed by TMAC (~1.18 million ounces of gold).
In February 2020, TMAC released additional high-grade drilling results from Boston. This included 13.6 grams per tonne of gold over 14.2 meters in a drill hole targeting the plunge of the B3 Zone. TMBBO-19-00001 is a phenomenal intercept considering that the B3 Zone is the lower grade at Boston vs. B2, with B2 benefiting from being directly adjacent to the Cambridge Deformation Zone. Meanwhile, TMAC's 2019 drill-hole TMBBO-19-0002 intersected 1.1 meters at 274 grams per tonne of gold below the current resource outline and 6.8 meters at 14.2 grams per tonne of gold.
These results are quite encouraging, but there are also several impressive historical drill holes below the mineral resource outline, which include the following:
Agnico Eagle noted in its most recent discussion of Boston that it's compiling and validating. The updated geological and structural models will help inform new drill targets for its 2023 exploration campaign. In a base case scenario, this asset should add 8% production growth for Agnico vs. its current ~3.3 million ounce production profile. In an upside case scenario, at the end of this decade, once Agnico has had a better opportunity to study the asset, there is an outside chance this could be another 375,000+ ounce per annum asset like Meliadine and Meadowbank (10%+ production growth on a company-wide basis). Hope Bay's expected production is highlighted with the green shaded bar below, with no contribution until 2025 to be conservative.
Finally, while investors continue to pray for a repeat of the bonanza-grade intercepts that we saw coming out of Fosterville last decade, results continue to be encouraging, even if not measuring up from the nearly insurmountable comparisons from 2016-2019 with multiple 1,000+ gram-meter intercepts.
1. An impressive intercept was drilled 80 meters from current resources in the Lower Phoenix Zone (main mining area) with 1.4 meters at 226 grams per tonne gold, likely adding to resources. Another solid was 8.0 meters at 31.5 grams per tonne of gold. While this certainly doesn't match the phenomenal hits in 2016/2017 that set this up to be a 500,000+ ounce per producer, they are encouraging and well above current reserve grades, which have dropped as high-grade areas of Swan were mined out.
2. Robbins Hill, which lies north of the current mining areas and where the decline has been completed, hit 1.8 meters at 58 grams per tonne gold in current resources (just below reserves), a very solid intercept for what is a lower grade deposit than the main mining area at Fosterville (6.0 grams per tonne gold vs. ~12+ grams per tonne gold). Secondly, we saw another exceptional intercept of 4.9 meters at 68 grams per tonne gold in drill hole UDR015 (10x current reserve grade at Robbins Hill) which was drilled down-plunge of current resources. Agnico noted that this intercept exhibited visible gold in quartz mineralization, the style of mineralization present at the ultra-high-grade Swan Zone (20+ grams per tonne gold).
Obviously, one hole does not make a discovery, but this builds on what Kirkland Lake was saying in Q3 2021 in its final Conference Call as a public company, which was that just as Phoenix got better at depth, Robbins Hill is potentially following this pattern. Therefore, this is certainly an encouraging development. However, to be conservative and assuming that no new major discovery is made at this incredible asset, I have modeled a production profile of just 250,000 ounces on average for the remainder of the decade (2024-2029).
That said, the best place to make a major gold discovery is next to what was previously the world's highest-grade gold mine (intercepts of 15.2 meters of 1429 grams per tonne gold in 2017) and 30+ gram per tonne head grades. So, with its aggressive exploration program, I am cautiously optimistic that Agnico Eagle can surprise investors to the upside here and return to 370,000+ ounces per annum later this decade with a blend of mid-grade and ultra-high-grade material.
I continue to see Agnico Eagle as the top gold producer in the gold sector, not only because it trades at a cheaper valuation than in 2015 despite adding three of the best mines globally to its portfolio with modest share dilution, but also because it's one of the only 2.0+ million ounce producers with clear organic growth. Even more importantly, the company is laser-focused on production growth per share, is arguably the most disciplined team sector-wide from an M&A standpoint, and will continue to see reserve and resource growth per share, given its continued exploration success.
Finally, it operates in the best jurisdictions, benefits from industry-leading AISC margins, and it is less sensitive to energy/labor inflation due to benefiting from hydroelectricity at multiple mines and being an employer in choice with a long history in Ontario/Quebec. This means it has a higher ratio of employees to contractors. This ratio is a big deal when you operate in prolific mining jurisdictions like Agnico does (Ontario, Quebec) if one wants to avoid wage inflation during periods of labor tightness.
Plus, with its 20+ year mine lives at some assets, it's also an employer of choice, providing strong visibility into future employment. The latter should allow the company to benefit from industry-leading retention levels as well.
Suppose Agnico had seen AISC margin compression since 2015 or only limited margin expansion. In that case, it might justify the stock trading at ~7.3x FY2023 cash flow estimates ($5.78), where it traded in September 2015, before bottoming and going on a five-year run, where it returned over 325%. However, Agnico Eagle has increased AISC margins by 125% in the same period, increasing from $346/oz in FY2015 to estimates of $775/oz in FY2023, even at a $1,760/oz gold price assumption (2023 average to be conservative).
To summarize, the current pullback is a gift, and given the upgrade to the portfolio with three exceptional mines/increased diversification, this buying opportunity looks even more attractive than in March 2020 from a valuation standpoint. In fact, I believe this is the best buying opportunity since the secular bear market for gold ended in 2015. For these reasons, I see AEM as a must-own name. For patient investors, I believe it's possible to lock in a 5.0% yield on cost long-term, with the potential for the annual dividend to grow to $2.10 by 2026, a phenomenal yield for a growth story (~24% production growth looking out to 2029 vs. flat production for most of its peer group).
This article was written by
Disclosure: I/we have a beneficial long position in the shares of AEM, OR either through stock ownership, options, or other derivatives. 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: Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing. Given the volatility in the precious metals sector, position sizing is critical, so when buying small-cap precious metals stocks, position sizes should be limited to 5% or less of one's portfolio.