Can Agnico-Eagle shine again?

by Gavin Graham, contributing editor Gordon Pape's Internet Wealth Builder

Gold mining stocks have been lagging the price of the precious metal badly. Bullion has risen by 50% over the last three years while the gold mining ETF has fallen by the almost the same percentage!

They have underperformed so badly they now seem likely to produce returns at least equal to those from owning gold itself, and probably substantially higher. One miner we now recommend is Agnico-Eagle Mines Ltd. (AEM).

For several years, under its experienced management team led by long-term CEO Sean Boyd, this major Canadian gold miner was regarded as one of the most attractive companies in the sector.

Using the cash flow from its long life, low-cost La Ronde underground mine in Quebec which began operations in 1988, Agnico expanded dramatically in the last five years.

During that period, it brought four new mines on stream including the Kittila mine in Finland, now its largest gold deposit; the Pinos Altos mine in Mexico, its largest producer; a mine at Lapa in Quebec; and its Meadowbank operation in the Canadian Arctic in Nunavut.

That these mines came on stream on time and approximately on budget was a major positive, as was the fact that they were all located in politically stable countries with long histories of mining development.

Therefore, the reaction when Agnico stumbled last year was rapid and brutal. The first blow, in the spring of 2011, was a fire at Meadowbank which curtailed production. That was followed by the complete suspension of operations at its Goldex mine in Quebec in October owing to unsafe ground conditions.

These operational failures were regarded as a major disappointment from a management team that had built up a reputation for delivering results.

Agnico eventually wrote off Goldex completely. Then, in a bigger blow to its asset value, the company wrote down more than half the value of its Meadowbank mine at a gross cost of $907 million.

Investors fled the stock in droves and the share price plummeted from a high of $85.75 in December 2010, to a low of $31.50 in February of this year, a fall of more than 60%.

Subsequently, the share price has recovered to $55.80 as investors have overcome their initial unhappiness and Agnico has continued to run its remaining mines in its usual efficient manner.

Announcing its third-quarter results in October, Agnico actually raised its forecast gold production for 2012 from 975,000 oz. to 1,025,000 oz. at cash costs of $660 per oz..

Sean Boyd didn't alter the forecast output for 2013, which projects a slight fall back in gold production to 990,000 oz. due to lower by-product revenues at the La Ronde mine. However, this looks conservative for several reasons.

First, Meadowbank's output is higher than anticipated when Agnico made its write-down. Second, Goldex is expected to be back in production at lower levels of output in the first half of 2014. Third, Another new mine in Mexico is expected to be producing 90,000 oz. annually from the second half of 2014.

Lastly there is another project in Nunavut called Meliadine where the indicated resources are growing rapidly as exploration drilling proves up more areas. The indicated reserves have grown from five million oz. to seven million and management believes there could eventually be 10 million, as every drill-hole has found gold traces.

With an estimated annual production of 300,000 oz., Meliadine would be Agnico's largest mine in production terms. Therefore, the company is more concerned with optimizing the mine output plan than hitting an arbitrary start date in 2017.

CRBC has estimated the company is selling around 1.1 times its net asset value which is below its historical average of 1.5-1.8 times. It sells at 31 times this year's depressed earnings. Its quarterly dividend of $0.20 per share, which was raised by 25% last year, gives it a yield of 1.44%.

Action now: Agnico-Eagle is a Buy for investors who believe that it and other gold stocks are selling too cheaply compared to the metal itself and that it will enjoy growth in gold production while keeping costs under control over the next few years, as had been its historical track record before last year's stumble. We rate it as higher risk.

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