On Sep 2, we reaffirmed our Neutral recommendation on Agnico-Eagle (AEM). While the company’s strategic investment in several exploration projects should usher in meaningful growth opportunities, we remain on the sidelines considering high operating costs across a number of mines and a still weak gold price environment.
Agnico-Eagle, which is among the prominent Canadian gold miners along with Barrick Gold (ABX), slipped to a loss in second-quarter 2013 (reported on Jul 24) on lower gold production and prices as well as higher cash costs. Both revenues and adjusted loss miss Zacks Consensus Estimates. The results were impacted by extended maintenance outage at the Kittila mine. Payable gold production declined by double digits in the quarter. The company backed its production guidance for the full year.
Agnico-Eagle’s sufficient cash flow is enabling it to maintain a strong exploration budget, primarily focused on Kittila. The company is currently exploring expansion opportunities in Kittila, its largest contributor to proven and probable gold reserves. An expansion of throughput capacity is currently underway which is expected to cut total cash costs per ounce over the next several years.
In addition, the development and construction of the La India mine in Mexico is currently in progress with commercial production is expected to begin in first-quarter 2014.
Agnico-Eagle is also reinvesting in its assets to expand its output. Moreover, its revised life of mine plan is expected to yield significant free cash flows over the next several years.
However, one of Agnico-Eagle’s main issues has been persistently high operating costs across a number of mines. Total cash cost jumped around 19% year over year in the second quarter, mainly due to lower by-product revenues at LaRonde and Pinos Altos mines.
Agnico-Eagle is seeing higher costs in LaRonde due to lower byproduct metal production and prices. Moreover, lower realized silver prices are contributing to higher costs at the Pinos Altos mine. Cash costs are expected to increase across a number of mines in 2013.
Agnico-Eagle is also exposed to a weak gold price environment, which may continue to affect its bottom line. Moreover, any potential delay associated with the development projects may jeopardize its future production.
Other Stocks to Consider
Other companies in the mining industry with favorable Zacks Rank are US Energy Corp. (USEG) and Denison Mines Corp. (DNN). Both retain a Zacks Rank #2 (Buy).
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