Agnico Eagle Mines, one of the few gold stocks not hugely over-priced

Agnico Eagle is a leading Canadian gold mining company having an extensive experience of more than six decades. The company has mines in Canada, Finland, and Mexico. Agnico’s exploration activities are conducted across these countries as well as in the US and Sweden. 

Agnico Eagle operates mines in Canada (70% of total mineral reserves), Finland (20%), and Mexico (10%). Gold accounts for more than 96% of revenues, silver 3%, and base metals at 1%. Agnico Eagle operates in a single industry, namely exploration for and production of gold. The company’s segments are Northern business (accounting for nearly 80% revenues from mining operations), Southern business (~20%), and exploration. The northern business comprises of LaRonde mine, LaRonde Zone 5 mine, Lapa mine, Goldex mine, Meadowbank Complex, Meliadine mine, Canadian Malartic joint operation and Kittila mine and the southern business includes Pinos Altos mine, Creston Mascota mine and La India mine.

Investment Data

Revenue Growth & Market Exposure

As an operator of the high-quality gold mining business, Agnico has superior gold reserves and its gold grade is more than double that of its peers in North America. The company focuses on low cost high potential regions to drive future growth. Agnico has a soundtrack record of exceeding its production targets. The company exceeded its production forecast for the eighth consecutive year delivering 1.78 million ounces of gold in the last year. Agnico is expecting to drive a new growth phase, over the next five years, driven by its current project pipeline. 

Over the years, Agnico has developed good relations with its many stakeholders. The company has a strong track record of growing its gold reserves and resources through exploration. 2019 marked the fourth consecutive year of improved gold grades. Its reserves stood at 21.6 million ounces of gold at the end of 2019. The company targets to maintain its global mineral reserves at nearly 10 times its annual gold production rate and is forecasting an 18% increase in gold production from 2019 to 2022.

The company is using technology to support future automated mining activities. It is currently developing the Amaruq and Meliadine projects in northern Canada, which are expected to add significantly to the overall production as they ramp up during 2020. Agnico’s bottom line will be driven by its strong project pipeline which is expected to improve the company’s growth over the next five years. Its high-quality gold reserves should also support future growth. 

Agnico closed or reduced its mining operations at seven out of its eight mines in the wake of the pandemic outbreak. The company expects gold production to gradually ramp up in Q2 2020 and average ~480koz to 500koz per quarter in H2 2020. Total cash costs are expected to decline to $690 to $740/oz in H2 2020. Key pipeline projects are also expected to drive future production growth.

Dividends

Agnico Eagle has declared dividends each year since 1983 and has been paying them regularly for 37 consecutive years. The company last announced a 14% increase in its quarterly dividend. It sports a dividend yield of 1.3% and has a payout ratio of 46%. Agnico achieved a dividend growth rate of 15% CAGR in the last three years.

A high-quality business with a solid production base, long-life assets, and a proven business strategy are Agnico’s strengths. Strategic mine locations in politically stable countries that are supportive of the mining industry, is an added advantage. The company is looking at growing free cash flow beyond 2020 by increasing its mineral reserve base and advancing its project pipeline.

Agnico is in a good position to generate high cash flows on the back of increasing gold sales volumes and prices currently. The average realized price of gold increased by 11.1% from $1,266 per ounce in 2018 to $1,406 per ounce in 2019 and the average market price per ounce of gold in 2019 was 9.8% higher than in 2018. It has plans in place to improve productivity and optimize operations as they continue to ramp up during 2020. 

With Agnico’s Nunavut platform now built and ramped up to full production, the company is expecting strong gold production growth over the next few years. It is looking at using its free cash flow to advance key near-term pipeline projects to drive future production growth. Several expansion opportunities at Goldex, Canadian Malartic, and Kittila as well as, additional mining opportunities at LaRonde positions Agnico well for future growth. The company has reduced its capital expenditures to $690 million from $740 million, for 2020.

Agnico has outperformed both its production target and cost guidance in the past. An investment-grade balance sheet with sufficient financial flexibility should grant enough room for future growth.

Competition

Agnico competes with the likes of Newmont Gold Corp., Franco-Nevada Corp, Wheaton Precious Metals Corp, and Royal Gold. Franco Nevada is the leading gold-focused royalty and streaming company. Newmont is a leading gold producer headquartered in Colorado, while Royal Gold is another precious metals stream and royalty company focusing on gold. Wheaton Precious Metals is the world’s largest pure streaming company providing exposure primarily to silver and gold. Agnico Eagle continues to have one of the highest mineral reserve grades among its North American peers which provides it an edge over the competition.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
TSE:ABXABXBarrick GoldBasic MaterialsGold0.3638.7151.4011.9621.313.240.00970.970.115940.280.009714IntermediateNONONONOCanada1
TSE:FNVFNVFranco-Nevada CorpBasic MaterialsGold0.40214.1040.67166.3921.311.290.00630.631.039741.000.050365IntermediateYESYESYESNOCanada1
TSE:WPMWPMWheaton Precious Metals CorpBasic MaterialsGold0.2472.6724.36197.5921.310.370.00740.741.449940.400.074631IntermediateNONONONOCanada1
TSE:AEMAEMAgnico Eagle MinesBasic MaterialsGold0.45106.3719.1038.7221.312.750.01011.010.390240.800.124555IntermediateNONONONOCanada1
TSE:PAASPAASPan American Silver CorpBasic MaterialsSilver0.2150.057.85244.5421.310.200.00540.541.341240.200.005421IntermediateNONONONOCanada1
TSE:FMFMFirst Quantum Minerals Ltd.Basic MaterialsCopper0.1711.327.800.0021.31-0.790.00090.091.000020.010.000921IntermediateNONONONOCanada1
TSE:TECK.BTECK.BTeck ResourcesBasic MaterialsOther Industrial Metals & Mining0.2213.575.390.0021.31-3.520.01471.471.000040.200.014712IntermediateNONONONOCanada1

Bottom Line

Agnico faced a somewhat challenging Q1 given the COVID-19 pandemic impact. Investors, however, always want a piece of gold in the form of diversification. Gold production is expected to gradually ramp up in the second half of the year and return to more normalized levels. Agnico Eagle is expecting to generate significant free cash flow supported by a strong pipeline of growth projects in the near future. It provides its shareholders with full exposure to gold prices and should continue its 37-year dividend payment streak in the future.

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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