Description

Agnico Eagle Mining (AEM) is the largest gold miner in Canada and the world’s third largest gold miner (behind Newmont and Barrick).  AEM operates 11 Mines in Canada, Australia, Finland and Mexico.  AEM is a high quality operator in safe jurisdictions with a proven track record of expanding production and reserves and a number of near to mid term opportunities to grow the business.  As a gold miner, AEM provides a traditional hedge against inflation and geopolitical tensions.

Key Investment Characteristics

Low risk geographies

Strong management team

Conservative capital allocation strategy

Tailwind from higher gold prices

Opportunities to grow production

Gold has been a store of value for thousands of years.  While “sophisticated” savers in the developed world may prefer to use Bitcoin or other forms of crypto to hold their wealth, billions of people in countries such as China and India have a long tradition of buying gold either in the form of coins or jewelry as a means of preserving wealth.  Central banks, which historically used gold as their primary reserve asset had shifted to using U.S. dollars (in the form of Treasury Securities) for reserves. In the light of the U.S. governments increasing “weoponization” of the dollar, many foreign governments have increased their purchase of the yellow metal. The result, which we have seen over the past few months, has been a significant increase in the price of gold, which has run from the low $2000s in December to Slightly over $2300 today.

Gold miners, with their operating leverage, generally increase (or decrease) faster than the underlying commodity. 

AEM is concentrated in the lowest risk geographies.  In 2023 83% of the company’s operating margin  was derived from Canada, 7% from Australia, 7% from Finland, and just 3% from Mexico

Mark Twain reportedly said “a gold mine is a hole in the ground with a liar on top”.  This is undoubtedly true of many of the more junior miners. Fortunately, AEM has a stable and reputable management team.  Sean Boyd, the company’s Chairman has been with the company since 1985, and is a former controller and CFO. Ammar Al-Joundi, the company’s President and CEO is also a former CFO, both at AEM and at Barrick.  Management is clearly focused on shareholder value and building the business within existing geographies. 

 While AEM has grown via acquisitions, the track record has been very good. In early 2023, AEM bought the Canadian assets of Yamana including Yamana’s 50% of Malartic (AEM owned the other half and was Malartic’s operator) for $1 billion in cash plus 36.2 million shares. The deal was struck in November 2022 when gold was trading around $1700 per ounce.  AEM now has 31.5 million ounces of proven and probable reserves in the Abitibi gold belt in Canada (approximately 60% of its total proved and probable reserves). 

Production has been relatively stable. In 2023, AEM produced 3,440k ounces compared to 3,155 in 2022.  Management forecasts production of between 3,350 and 3,550 thousand ounces in 2024.  This essentially flat projection seems conservative given the 879,000 ounces produced in Q1, which annualizes at the top of the range.

The company realized $2,062 per ounce in Q1, in line with the average gold price in the quarter, but about $240 lower than today’s spot price. All-in sustaining cost of production was $1190 per ounce, lower than management’s full year guidance of $1200 to $1250 per ounce.  Earnings for the quarter were $.76 per share versus consensus of $.60  

Full year estimated EPS is around $3.00, so essentially assuming the remaining three quarters are similar to Q1.  Assuming that $150 of the $240 gap between Q1’s realized price and current spot prices falls to the bottom line after taxes, royalties and other variable costs, AEM could earn closer to $3.75 per share in 2024. (Obviously this is heavily dependent on the price of gold.)

AEM is undertaking considerable exploration and development of its existing geographies.  Management was very optimistic on the recent quarterly call. Ammar Al-Joundi said "some, frankly, pretty amazing drill results at Malartic, at Detour, and at Hope Bay. Big assets in good parts of the world that really just continue to deliver. We think that these are potentially big enough to move the needle" I'd encourage you to read the transcript. 

Catalyst

Additional drilling data and analyst site visits in July should confirm management's optimism.

Earning should continue to exceed Street estimates if gold remains elevated