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Gavin Graham's Golden Gains

Gold has benefited from the recent weakness in the U.S. dollar, as the end of rising interest rates has reduced its attraction. Political uncertainty and concerns over growth have led to increased interest in perceived safe-haven assets, explains Gavin Graham, contributing editor to Internet Wealth Builder.

In addition, the revival of takeover activity among large capitalization gold stocks indicates that management in the sector feels that now is a good time to position themselves for possible higher gold and precious metal prices.

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Agnico Eagle (AEM) is a senior Canadian gold mining company that operates eight mines in Canada, Finland, and Mexico. It also has exploration and development activities in each of these countries as well as in the United States and Sweden.

Performance: Agnico's share price has recovered from a sell-off in the fourth quarter that saw the stock hit a low in Toronto of $42.90. It is now 12% ahead of the last update in August.

Recent developments: Agnico Eagle's fourth quarter (to Dec. 31) saw a strong operational performance. The company produced 410,712 oz. of gold, at an all-in sustaining cost (AISC) of $852 per oz. (Note that the company reports in U.S. dollars.)

Production for the full year was 1.63 million ounces at an AISC of $877 per oz. compared to guidance of 1.6 million ounces and an AISC of $915. This marks the seventh year that gold production and costs have been better than forecast, a tribute to Agnico's disciplined management of projects and costs.

Cash generated was $140.3 million for the quarter compared to $166.9 million in 2017, due to lower gold prices and sales and higher costs at La Ronde, Meadowbank, and Mexico. For the year, cash generated was $605.7 million versus $767.6 million in 2017.

The company recorded a loss for the year of $326.7 million (-$1.40 per share) against a profit of $240.8 million ($1.05 per share). This was due in part to a non-cash impairment charge of $389.7 million ($1.66 per share) on write downs of Malartic, El Barquanero, and La India.

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The forecast for gold production for 2019 was increased from 1.7 million ounces to 1.75 million at an AISC of between $875-925 per oz. With its two Nunavut mines at Amaruq and Meliadine coming on stream this year, production will grow strongly to 2 million ounces in 2020 and 2.05 million in 2021.

The increased production is forecast to reduce AISC to $840-890 per oz. in 2020 and lower still in 2021.
Dividend: Management showed its confidence in the future by increasing the dividend 14% to US$0.125 a quarter (US$0.50 a year) from US$0.11. This gives the stock a yield of 1.1%.

Agnico remains a "buy" as the best managed major gold miner in North America, with substantial growth in production from its new mines.

Franco-Nevada (FNV) is a gold royalty and streaming company. It owns a large and well diversified portfolio of cash flow producing assets in Canada, the U.S., Mexico, Australia, Africa, and Latin America. It derives approximately 80% of its revenues from precious metals and the remainder from oil and gas.

Franco-Nevada will report its 2018 results in mid-March but updated its expected gold equivalent ounces (GEO) forecast and its oil and gas royalty revenues recently.

GEOs for 2018 are expected to total between 445,000-450,000, as previously forecast. This is due to processing of lower grade ore at Candelaria and lower deliveries at Guadalupe due to less mining on properties where Franco-Nevada receives royalty payments.

However, oil and gas revenues are forecast to be $85-88 million, up from previous guidance of $75-85 million.

In the third quarter (to Sept. 30), Franco-Nevada received 120,021 GEOs, which generated $140.1 million in revenue. Another $30.5 million came from oil and gas and other minerals.

Adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) totaled $134.7 million ($0.72 per share). Net income was $52.1 million ($0.28 per share). Revenue was sourced 82.1% from precious metals and 82.7% from the Americas.

With Franco-Nevada making the final $104 million payment of its $1 billion commitment to the capital costs of the giant Cobre Panama mine, and $214.8 million to purchase oil and gas assets from Continental Resources, the company has continued to invest in increasing production and revenues.

CEO David Harquail anticipates a 30% increase in revenues in 2019 from Cobre Panama coming on stream (it began production this month), the Candelaria assets returning to normal production, and oil and gas growing further.

The shares pay a quarterly dividend of $0.24 ($0.96 per year) to yield 1.25%. Franco-Nevada remains a Buy for its geographical and commodity diversification, its growing revenues, and as a lower risk way to play a rise in precious metal prices.

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