Agnico-Eagle: Showing Bullish Signs
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The most striking feature of Agnico-Eagle Mines' (NYSE: AEM) business strategy is its "no forward gold sales" policy. This policy has allowed the company to profit tremendously from higher gold prices. The company has also been a consistent dividend provider.
Agnico-Eagle is a strong stock going forward. I like that it is producing in stable environments. The company is avoiding the sorts of problems that plague mining operations in less stable areas and in areas that are not nearly as friendly to mining companies. Barrick Gold (NYSE: ABX) has seen a large decline in its price in large part because of the trouble it is having with the Chilean government surrounding its Pascua-Lama project on the border of Chile and Argentina. The project has been plagued with delays as the Chilean government has suspended construction operations several times. The project continues to increase its price tag and is now expected to run over $8.5 billion.
Freeport-McMoRan (NYSE: FCX) has also struggled in areas that lack stability. The mining giant owns the Grasberg mine in Indonesia, which is believed to hold the world's largest reserves of recoverable copper and gold. This mine is in the Indonesian province of Papua on the island of New Guinea. That province has a problem with separatists who have been blamed for attacks in the area around the mine but the biggest headache for the company came in the form of a miners strike in July of last year that lasted for three months as workers demanded an increase in pay. Production was again halted in the first quarter for two weeks after more violence and there was another one-day strike at the beginning of October.
Another of Agnico-Eagle's competitors is also plagued with labor and environmental problems. Newmont Mining (NYSE: NEM) is beset with labor problems in Indonesia. Earlier this year a strike shut down the company's Batu Hijau mines. The company was also forced to pay almost $14 million in back overtime pay. The company has also been sued by the Indonesian government over pollution in Buyat Bay. These sorts of problems have largely avoided Agnico-Eagle in large part due to the areas where it conducts its operations. While operating in more developed countries result in higher labor costs, this is more than made up by avoiding much of the labor strife and environmental problems other mining companies face in developing countries.
Agnico-Eagle's LaRonde mine, in Quebec, 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, such as Canada, the United States, and Mexico. 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 third quarter of 2012, the company reported net income of $106.3 million ($0.62 per share). This was a solid improvement over a net loss of $32.5 million ($0.48 per share) in the third quarter of 2011. This is on the heels of a $43.2 net income gain in the second quarter and makes for total income of $228.1 ($1.33 per share) so far for the year.
The higher level of production during 2012 has come 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 third quarter of 2012 were $556 per ounce. This compares with $563 per ounce in the third quarter of 2011 ($580 per ounce from the currently operating mines). The improvement in total cash costs at the operating mines in 2012 is largely the result of significant per ounce cost reductions at Meadowbank, Kittila and Pinos Altos, partially offset by higher costs at LaRonde (which are mainly associated with lower by-product revenues, as planned). These costs show a nice decline per ounce, and will make investors very happy going forward.
Agnico-Eagle Mines' increase in production is impressive. Production at four out of six mines increased in the third quarter. Production at the Pinos Altos mine in Mexico rose by 24% year-on-year, while productions 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. As gold prices remain around the $1700 per ounce price this increased production means a very bright future for the company. The company is also shielded from the volatility in other mineral prices that other mining companies face. For example, BHP Billiton (NYSE: BHP) has been hurt by its exposure to iron ore prices. As China's demand for steel has sunk, iron ore prices have declined. BHP has paid a heavy price in its stock value because of this.
The biggest problem the company has had recently surrounds shutdowns at its Goldex mine in northern Quebec. This mine shut down last year after the mine was flooded. This resulted in a loss of $161.5 million. Production is scheduled to begin next year, but it probably will not be as productive of a mine as it was before the shutdown.
Given its high and stable production, along with its avoidance of many problems facing competitors involved in operations in developing countries, I am very bullish on Agnico-Eagle. The company is trading around $52 per share, which is close to its 52-week high of almost $57. I expect to see a steady increase in share price, reaching $60 in early 2013. If gold prices show any sort of rise, then I anticipate the stock will top $70 in the summer. This is a good stable stock to own now.
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