Agnico-Eagle Mines Ltd
Agnico-Eagle Mines Ltd.
/ (AEM-NYSE)We are upgrading our recommendation on Agnico-Eagle to Neutral. The company’s loss narrowed year over year in the fourth quarter of 2014. Revenues rose by double-digits on higher gold production. Both sales and adjusted earnings beat Zacks Consensus Estimates. The company sees higher production in 2015. Agnico-Eagle maintains a solid exploration budget and is reinvesting in its assets to expand output. The company’s move to jointly acquire Osisko will also boost its production profile and improve cost structure. However, any potential delay associated with the development projects may jeopardize its future production. We also take into account the current weak gold price environment.
/ Equity Research / AEM | Page 3
Current Recommendation / NEUTRAL
Prior Recommendation / Underperform
Date of Last Change / 03/17/2015
Current Price (03/16/15) / $28.44
Target Price / $30.00
SUMMARY
/ Equity Research / AEM | Page 3SUMMARY DATA
52-Week High / $42.1252-Week Low / $21.80
One-Year Return (%) / -14.51
Beta / -0.56
Average Daily Volume (sh) / 2,281,268
Shares Outstanding (mil) / 213
Market Capitalization ($mil) / $6,058
Short Interest Ratio (days) / 1.00
Institutional Ownership (%) / 58
Insider Ownership (%) / 1
Annual Cash Dividend / $0.32
Dividend Yield (%) / 1.13
5-Yr. Historical Growth Rates
Sales (%) / 10.5
Earnings Per Share (%) / 0.4
Dividend (%) / 20.6
P/E using TTM EPS / 47.4
P/E using 2015 Estimate / 49.0
P/E using 2016 Estimate / 34.3
Zacks Rank *: Short Term
1 – 3 months outlook / 3 - Hold
* Definition / Disclosure on last page
Risk Level * / Above Avg.,
Type of Stock / Large-Value
Industry / Mining -Gold
Zacks Industry Rank * / 71 out of 267
OVERVIEW
Toronto, Canada-based Agnico-Eagle Mines Limited (AEM) is a gold producer with mining operations in Canada, Mexico and Finland, and exploration activities in Canada, Europe, Latin America and the U.S. Agnico-Eagle’s LaRonde mine in Quebec is one of Canada’s largest operating gold mines by gold reserves and has provided the company’s foundation for domestic and international expansion. The company produced 1,429,288 ounces of gold in 2014. Its proven and probable gold reserves (net of 2014 production) totaled 259 million tons at the end of 2014, containing around 20 million ounces of gold.
Agnico-Eagle operates through four regional units: the Quebec Region, the Nunavut Region, the European Region and the Latin American Region.
· The Quebec Region includes the LaRonde mine and the Goldex and Lapa mine projects situated in the Abitibi region of Quebec.
· The Nunavut Region comprises the Meadowbank mine project, which is administered by the office in Vancouver, British Columbia.
· Agnico-Eagle’s operations in the European Region are performed through its indirect subsidiary, Riddarhyttan Resources AB, which owns the Kittila mine project in Finland.
· In the Latin American Region, operations at the Pinos Altos project are conducted through the company’s subsidiary, Agnico-Eagle MexicoS.A. de C.V. The company also has the La India mine in the Mulatos gold belt in Sonora, Mexico.
On Apr 16, 2014, Agnico-Eagle and Yamana Gold Inc. (AUY) entered into an agreement to jointly acquire 100% issued and outstanding common shares of Osisko Mining Corporation for a total consideration of roughly C$3.9 billion, or C$8.15 per share ($3.55 billion or $7.43 per share). The acquisition closed in June 214. Under the agreement, Agnico-Eagle and Yamana acquired 50% of Osisko, and set up a joint committee to operate the Canadian Malartic Mine in Quebec.
REASONS TO BUY
Ø Agnico-Eagle’s sufficient cash flow is enabling it to maintain a strong exploration budget, primarily focused on Kittila. The company is also reinvesting in its assets to expand its output. The company also has consistently rewarded its shareholders by way of dividend payments.
Ø Kittila (with a reserve of around 4.5 million ounces) was the largest contributor to the company’s proven and probable gold reserves in 2014. The company expects production from the mine to rise over the 2015-2017 period. Agnico-Eagle has completed a 1,000 ton a day expansion at Kittila, which has boosted throughput capacity at the mine to 4,000 tons per day. The expansion is expected to cut total cash costs per ounce and offset the impact of a gradual reduction in realized grade on production over the next several years. To boost mine throughput, the company is also developing the Rimpi zone deposit through a ramp system to take advantage of better grades.
Ø The strategic investments made by Agnico-Eagle in several junior gold explorations will help it to have a continuous pipeline of potential growth opportunities. The company, in January 2012, completed the acquisition of Grayd, a Canadian-based natural resource company, thus adding the La India project and Tarachi exploration property to its portfolio. These projects will strengthen Agnico-Eagle’s Mexican operations as a key contributor to its operating and growth profile.
Ø The acquisition of Osisko is a strategic fit for Agnico-Eagle as the company has a good operating hold in Quebec. The acquisition is expected to be accretive to Agnico-Eagle and will also improve its total cash cost and all-in sustaining cost profiles. The company has also secured access to Canadian Malartic, the largest producing gold mine in Canada which has the potential to produce an average of roughly 600,000 gold ounces per year for 14 years. Agnico-Eagle will also optimize the Canadian Malartic mine plan. The company expects its overall production to expand roughly 12% in 2015 factoring in the contributions from Canadian Malartic.
Ø Agnico-Eagle has developed a revised life of mine plan. The new plan forecasts lower gold production over a shorter mine life but is still expected to allow the company to generate significant free cash flows over the next six years. The company believes that the new life of mine plan for the Meadowbank mine lowers operating risk.
REASONS TO SELL
Ø The prevailing weak gold price environment represents a major concern. Gold prices slumped to four-and-half year lows to $1,143 per ounce in November 2014 due to a strong U.S. dollar and a steady climb in the equity market. Average gold price in 2014 stood at $1,266.4 per ounce, a 10% drop from the average price of $1,411 per ounce in 2013. Lower realized gold prices continue to weigh on Agnico-Eagle’s bottom line. Weak gold pricing continues to serve as a headwind.
Ø Agnico-Eagle suspended operations at the Goldex mine in October 2011 due to suspected rock subsidence in the hanging wall above the GEZ orebody. Considering the safety of its employees, and the integrity of surface infrastructure, the company decided to stop production at the mine. Following an investigation and review by a team of consultants and company representatives, the Board of Agnico-Eagle approved two zones (M and E) in the mine for gold production. Mining operations resumed in these two zones in Sep 2013 and achieved commercial production in October 2013. However, production at the original GEZ orebody remains suspended.
Ø Although Agnico-Eagle is making a good progress with its cost containment measures, it is still seeing rising costs across a number of mines. Total cash cost per ounce rose 12% year over year in the most recent quarter with higher costs witnessed across Meadowbank, Kittila, Pinos Altos and Creston Mascota mines.
Ø Commodities are generally priced in U.S. dollars, but Agnico-Eagle has a cost structure that is primarily denominated in Canadian dollars, Euros or Mexican Pesos. If the Canadian dollar strengthens relative to the U.S. dollar, Agnico-Eagle’s cost structure would be impacted (after translating into U.S. dollars). As a result, Agnico-Eagle’s financial performance may be significantly affected by exchange rate swings. Moreover, mining faces high risk, especially from the political environment and metal prices.
Ø Agnico-Eagle expects capital spending of $481 million for 2015, an increase from roughly $475 million in 2014. Roughly 34% of the projected capital spending is expected to be allocated on new projects and expansions. Exploration is success driven and thus these estimates could change materially based on the success of the various exploration programs.
RECENT NEWS
Agnico-Eagle's Q4 Earnings and Revenues Beat Estimates – February 11, 2015
Agnico-Eagle incurred a net loss of $21.3 million (or $0.12 per share) on a reported basis in the fourth quarter of 2014, compared with a net loss of $780.3 million (or $4.49 a share) recorded in the year-ago quarter.
Barring one-time items and other than stock-option expenses, adjusted net income came in at $16.6 million or $0.06 per share in the quarter. Earnings per share beat the Zacks Consensus Estimate of $0.04.
For 2014, the company recorded net income of $83 million, or $0.39 per share, as opposed to a net loss of $686.7 million or $3.97 per share logged in 2013. Adjusted earnings were $0.60 per share.
Revenues and Operational Highlights
Agnico-Eagle registered revenues of $503.1 million in the quarter, up 15.1% from $437.2 million in the year-ago quarter. The results exceeded the Zacks Consensus Estimate of $470 million.
For the full year, revenues were up 15.8% year over year to $1,896.8 million.
Payable gold production increased 20.2% in the quarter to 387,538 ounces.
Total cash costs per ounce of gold produced on a by-product basis for the reported quarter were $662 compared with $591 a year ago. The higher cash cost per ounce in the reported quarter was primarily due to lower production at the Meadowbank mine, the inclusion of Canadian Malartic production, reduced mill recoveries at the Kittila mine and lower by-product metals production and sales.
Northern Business
Gold production at the LaRonde mine in northwestern Quebec, Canada, was 59,316 ounces in the reported quarter, compared with 51,336 ounces in the year-ago quarter. The new cooling and ventilation infrastructure that was commissioned in early 2014 helped to enhance productivity in the deeper parts of the mine. Total cash costs per ounce were $590 on a by-product basis, down 9.6% year over year.
Production at the Canadian Malartic mine (in which Agnico-Eagle has a 50% ownership) in the reported quarter was 66,369 ounces of gold at a total cash cost per ounce of $684 on a by-product basis.
Payable production in the fourth quarter at the 100%-owned Lapa mine in northwestern Quebec was 25,611 ounces of gold, down 2.7% year over year. Total cash costs per ounce were $607 on a by-product basis compared with $626 in the year-ago quarter.
The Goldex mine in northwestern Quebec produced 29,463 ounces of gold in the quarter at a total cash cost per ounce of $583 on a by-product basis. Production in 2014 was ahead of guidance due to a greater-than-expected ramp up in mining rates.
Payable production of 87,742 ounces of gold at the 100%-owned Meadowbank mine in Nunavut, Canada was down 33% year over year. Total cash costs per ounce were $757 on a by-product basis in the quarter, up 20.3% year over year. Production exceeded guidance in 2014 mainly due to the mining of higher than expected grades in the Goose pit in the first half of the year.
Gold production at Kittila in the reported quarter was up nearly 3.4% from the year-ago quarter to 43,130 ounces with a total cash cost per ounce of $809, up 18.9% from the fourth quarter of 2013 on a by-product basis. Production in 2014 missed the company’s expectations due to the advancement of a 2015 planned mill shutdown in Sep 2014, the inability to access the remaining high-grade stopes in the high-grade Suuri crown pillar, and fluctuations in mill productivity during the mill ramp up in the reported quarter.
Southern Business
Payable production at the Pinos Altos mine in northern Mexico in the reported quarter was 40,670 ounces of gold, down 12.5% year over year. Total cash cost per ounce was $597 on a by-product basis, up 34.8% from $443 in the year-ago quarter. A series of improvements at the mine resulted in increased production and cost reduction in the mining and processing areas.
Payable gold production at Creston Mascota was 12,989 ounces, up about 21.8% year over year. Total cash cost per ounce was $556 on a by-product basis, up 23.6% year over year.
The La India mine in Mexico started commercial production in Feb 2014. Payable gold production in the fourth quarter was 24,019 ounces at a total cash cost per ounce of $496 on a by-product basis.
Financial Condition
Agnico-Eagle’s cash and cash equivalents totaled $177.5 million as of Dec 31, 2014, up 12.1% from $139.1 million as of Dec 31, 2013. Long-term debt increased to $1.32 billion as of Dec 31, 2014, from $0.99 billion as of Dec 31, 2013.
Cash provided by operating activities in 2014 was $668.3 million compared with cash provided by operating activities of $481 million in 2013. The rise was mainly due to significantly higher gold production in 2014 resulting from the takeover of the Canadian Malartic mine.
Dividend
Agnico-Eagle’s board of directors announced a quarterly dividend of $0.08 per share to be paid on Mar 16, 2015, to shareholders of record as of Mar 2.
Developments
The Amaruq project, located near northwest of the Meadowbank mine in Nunavut, declared its first resource within roughly 18 months from the commencement of exploration drilling.
The reserves at the Meliadine mine near Rankin Inlet, Nunavut, increased around 500,000 ounces to 3.3 million ounces.
Outlook
Agnico-Eagle announced its production and cost guidance for the three-year period (2015-2017). Production in 2015 is expected to increase by about 12% from the 2014 levels.
In 2015, payable gold production is expected to be roughly 1,600,000 ounces.
Total cash costs per ounce on a by-product basis in 2015 are expected to be in the band of $610 to $630. Cash costs are expected to be lower in the second half of 2015 due to slightly higher production. Earlier guidance for 2015 which did not include the Canadian Malartic mine, was 1,250,000 ounces at a total cash cost on a by-product basis of around $678 per ounce.
Agnico-Eagle Misses Earnings and Revenue Estimates in Q3 - October 29, 2014