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Agnico Eagle Mines Is Poised to Outperform

- By Alberto Abaterusso

Over the past five days, the U.S. stock market has declined on fears about a trade war between the U.S. and China. Following the decision of President Donald Trump's administration to increase tariffs from 10% to 25% on $200 billion worth of Chinese goods, the S&P 500 index lost 0.8% and the Dow Jones Industrial Average index decreased 0.9%.


The effect is only temporary, as the stock market will be driven by a rising U.S. economy that doesn't seem to be at the end of the cycle. The gross domestic product continues growing at an annualized pace. In the first trimester of 2019, it was 3.2%, topping market expectations of 2%, and followed 2.2% growth for the final trimester of 2018.

Further signs of an expanding U.S. economy also come from 263,000 new jobs created in April, or 74,000 more than in March, versus market expectations of 185,000. Inflation pressures have also been muted.

Led by a rebound in energy prices due to the U.S. decision to stop sanction exemptions for large importers of oil from Iran, the U.S. annual inflation rate rose from 1.9% in March to 2% in April 2019, just below the forecasts of 2.1%. However, the U.S. inflation rate is still too low, so the Federal Reserve will not resume tightening monetary policy.

Muted inflation supports the intention of the U.S. Central Bank not to proceed with additional increases in interest rates this year.

This environment is positive for gold, as investors see the precious metal as a more appealing investment vehicle than U.S. bonds and other fixed-income securities.

In fact, following a tough beginning to May, bullion is rising again on the London market. It closed at $1,298.40 per troy ounce on Tuesday, up 1.6% or $20.63 per ounce from the average price of $1,277.77 over the first three days of May.

The average price of $1,285.21 per ounce for the beginning of May through May 14 is still below the average price of $1,320.07 for February. However, the persistence of the listed macro factors will push the price of gold up to February's level again and maybe even beyond.

In order to gain exposure to changes in the price of the commodity, investors may want to consider increasing their shares in publicly traded gold mining companies and specifically in those that have demonstrated more volatility than the precious metal.

A valid idea for the coming weeks is the Toronto-based gold explorer and producer Agnico Eagle Mines Ltd. (AEM).

The stock has already topped the VanEck Vectors Gold Miners ETF (GDX) index, a benchmark for the gold mining industry, by 4% so far this year when gold averaged $1,298.20. It also beat the index by 1.5% for the 52 weeks through May 14 when the metal averaged $1,276.59.

There isn't any reason why Agnico shouldn't continue to beat the market in the coming weeks as well.

At $1,299 per ounce in early trading on Wednesday, gold is on track to exceed the $1,303 that Agnico earned in the first quarter. The average realized price of $1,303 per ounce of gold allowed non-GAAP earnings per share of 14 cents to top estimates by 8 cents, and revenue of $532.2 million to be $16.7 million above expectations.

Thanks to a strong U.S. dollar versus local currencies and to efficient operations demonstrated by the sustainment of lower costs at several mines, the miner produced operating cash flow of $148.7 million in first-quarter 2019, up 6% sequentially.

Agnico performed better than expected, even though lower sales volumes were reported due to lower gold production. Excluding 17,582 ounces of pre-commercial gold production from the Meliadine project in Canada, production declined 2.2% year-over-year to 380,635 ounces.

The production decline was the result of reduced throughput levels at its mill facility of its Meadowbank mine in Canada due to the company gradually moving operations to its adjacent Amaruq satellite deposit.

Agnico Eagle Mines also produces some silver, zinc and copper from its mineral deposits located in Canada, Mexico and Finland.

For full-year 2019, Agnico Eagle Mines reaffirmed production guidance of 1.75 million ounces at an all-in sustaining cost of $875 to $925 per ounce. Expected gold production includes about 100,000 ounces of pre-commercial output that the company will derive from reserves hosted at Meliadine and Amaruq deposits.

The key driver for the share price of Agnico in the coming weeks will be the gold price, which, helped by lower mining costs and a strengthening U.S. dollar versus local currencies, will propel earnings and revenue beyond expectations.

The U.S. dollar will likely strengthen against local currencies as the U.S. administration increases its value to give a boost to GDP, not being able to obtain the same result through a cut in the Fed's interest rates. Further, keeping the U.S. dollar low for the upcoming period will not be strictly necessary, as t he monthly U.S. trade deficit (US Imports - US Exports) has recovered from a 10-year low of $59.9 billion in December 2018 to $50 billion in March 2019.

Wall Street is also bullish on the stock, issuing an overweight recommendation rating that suggests the stock will keep outperforming the industry. Analysts established an average target price of $50.77 per share, which reflects 22.3% upside from the share price of $41.52 at close on Tuesday.

The stock is not trading at its cheapest as indicated by the chart below and its ratios. It would be best to buy at any significant weakness in the share price.

The share price at close on Tuesday is slightly below the 50 and 100-SMA lines though still significantly above the 200-day line. It is nearly 29% above its 52-week low of $32.18 and 15.3% from its 52-week high of $47.83.

The price-book ratio is 2.19 versus the industry median of 1.62, and the EV-Ebitda ratio is 31.18 compared to the industry median of 8.71.

The 14-day relative strength index of 50 indicates that shares of Agnico Eagle Mines Lyd. are neither overbought nor oversold.

Disclosure: I have no positions in any security mentioned.

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This article first appeared on GuruFocus.