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Agnico Eagle Mines Will Outperform

Gold is up trending.

The bullion closed at $1,497.70 per troy ounce on Friday, which was 4.8% up since the beginning of August and 12.6% above the year to date cumulative average of $1,329.79.

The precious metal has also gained 13.7% so far this year and 23.3% year over year.

Undoubtedly, the decision taken by the Federal Reserve on July 31 to reduce the interest rate by a quarter of percentage point to 2.25% gave a boost to the price of gold as lower yields make the precious metal more appealing than bonds and other fixed-income securities.

What also sent the metal price to such levels were ongoing trade-wars between the U.S. and China as an investment in gold works as safe-haven against global uncertainties created by these geopolitical conflicts.

With more interest rate cuts ahead and a high likelihood of other U.S.-China trade wars to come in the following months the metal is, therefore, set to continue to rise over the next quarters.

Investors may want to take advantage of rising gold through investments in publicly traded gold mining companies, preferring those stocks that report higher returns than the average peer.

The Canadian large gold producer Agnico Eagle Mines Ltd. (NYSE:AEM) represents a good opportunity to gain exposure to changes in the price of gold for the following reasons.

Agnico Eagle Mines beats the VanEck Vectors Gold Miners (GDX) exchange-traded funds when gold rallies.

The stock has outperformed the benchmark for the gold mining industry by 8% so far this year and by 5% over the past year through Aug. 9, as illustrated by the following two charts.

Chart 1. Agnico Eagle Mines versus VanEck Vectors Gold Miners ETF from the beginning of 2019 through Aug. 9, 2019:

Chart 2. Agnico Eagle Mines versus VanEck Vectors Gold Miners ETF over the past year through Aug. 9, 2019:

Agnico Eagle Mines has an overweight recommendation rating in Wall Street indicating that the stock is forecasted to outperform either the industry or the overall market within 52 weeks.

Higher gold prices will allow the miner to beat analysts on earnings and revenue for the third and fourth quarter of 2019, similar to the second quarter when earnings per share of 12 cents topped estimates by 11 cents and revenue of $526.6 million topped expectations by $35.67 million.

The beat produced a strong 11% upside in the share price of the stock over the week that followed the earnings announcement.

In addition to 1.9% yea-over-year rise in the average realized gold price to $1,318 per ounce sold, strong second-quarter earnings and revenue beats were also helped by 1.8% growth in payable gold production to 412,300 ounces. The company produced the precious metal at an all-in sustaining cost of $953 per ounce versus an AISC of $921 per ounce in the prior-year quarter.

Further catalysts to watch for the second part of 2019 are the ongoing ramp-up in the production of the Meliadine mine and the achievement of commercial production at the Amaruq open-pit satellite deposit of Meadowbank which is expected to occur in the current quarter.

These operations, which are in northern Canada, position Agnico Eagle Mine very well for the second part of 2019. Not to mention that Meliadine hosts one of the largest gold deposits in terms of resources in Canada.

Meliadine began commercial production in May and is expected to mine 230,000 ounces of gold for full 2019 representing about 13.1% of total output guidance of 1.75 million ounces of gold that the company forecasted to produce enduring an estimated AISC of $875 to $925 per ounce sold.

To develop the underground of Amaruq, advance other mineral projects and maintain a good state of operations, Agnico Eagle Mines will use total funds of approximately $750 million, up $90 million from the previous capex guidance of $660 million.

Agnico Eagle Mines will produce the metal also from other four mines located in Canada, two mines located in Mexico and one situated in Finland. The Canadian gold operator also holds mineral projects in Canada.

Its deposits host total proven and probable gold reserves of 22.04 million ounces at 2.7 grams per ton of ore average grade and total proven and probable silver reserves of 44 million ounces at 23.04 grams per ton of ore average grade. The company also holds total proven and probable copper reserves of 88,563 tons at 0.3% average ore grade and total proven and probable zinc reserves of 140,226 tons at 0.86% average ore grade.

The company is strongly positioned to go through the third quarter and the final quarter of 2019, also from a financial standpoint as the balance sheet had $125.6 million in cash on hand and short-term securities and gold inventories valued $508.4 million as of June 30, 2019. The total debt amounted to $1.72 billion and total equity was worth $4.65 billion. Thus, the debt-to-equity ratio is 39%, up 1,400 basis points from the industry median of 25%.

The financial burden doesn't go unnoticed, but the company has a trailing twelve months interest coverage ratio of 2.05 indicating that Agnico Eagle Mines doesn't have any problem in paying interest expenses on the outstanding debt.

Sell-side analysts issued an average target price of $61.38 which reflects 3.6% upside from Friday's closing price of $59.24. The stock has a market capitalization of $13.98 billion. The share price has grown 53% over the past year through Friday, Aug. 9, to above the 200-, 100- and 50-day simple moving average lines.

The share price at close on Friday was 28.14% off the middle point of the 52-week range of $32.18 to $60.17. The price-book ratio is 2.95 versus the industry median of 1.43 and the enterprise value-Ebitda ratio is 43.68 versus the industry median of 8.17.

The stock is not cheap.

The 14-day relative strength indicator is 76, suggesting the stock is not far from overbought levels.

Agnico Eagle Mines will pay 12.5 cents cash quarterly dividend per common share on Sept. 16 to shareholders of record Aug. 30 and on Dec. 16 to shareholders of record Nov. 29. The distribution generates a forward dividend yield of 0.84% compared to the industry median of 2.47% based on Friday's closing price.

Disclosure: I have no positions in any security mentioned.


This article first appeared on GuruFocus.