AEM Details

Record Production to Aid Improved Business Prospects: Agnico Eagle Mines Limited (TO: AEM) is a mining company which operates in the exploration and production of gold. The company is a leading gold producer in Canada and is focused on operational activities in Nunavut. Other than Canada, the company has mining and development activities in Finland and Mexico. In addition to these, the business has development activities in the United States and Sweden.

Area of Operation: The company operates in a single-segment, namely exploration and production of Gold. However, the business is categorized into two segments, namely Northern Business, Southern Business.  Northern Business include operations across Canada, Finland and Sweden. Southern Business includes operations of Mexico and the US. During FY19, northern business accounted for more than 80% of its gold production.

Investment Rationale:

 Agnico Eagle Mines Limited has a track record of delivering consistent dividend and free cash flows irrespective of the volatility in the gold price. The group is continuously focusing on increasing its portfolio via acquisition and development of exploration properties across the Americas and Europe.

• One of the Highest Mineral Reserve Grades within the Industry: The company holds one of the highest mineral reserve grades within North America while several project pipelines are likely to deliver value addition for the business. During the last twelve years, the Company has successfully converted into a multi-mine international gold producer from a single mine producer. Going forward, the group intends to seek growth opportunities within the gold production and exploration.

• Improvement in the Gold reserve grade and Gold Production: The business reported an overall improvement in the mineral reserve by 4.8% to 2.83 g/t from 2.7 g/t, aided by higher mineral reserve grade across Nunavut project. The group expects its production to increase ~18% through 2020. On a yearly basis, the expected production numbers are as follow, 2020 – 1.88 million oz; 2021 – 2.05 million oz; 2022 – 2.10 million oz. 

• Lower Unit cost to Drive Margin in the Medium Term: The management is planning to ramp up Nunavut operations and other facilities, which in turn will result in higher production. As a result, the cost is expected to remain under pressure till 1Q2020. Post that cash cost is likely to decline through 2022, thereby driving the margins.

• Consistent Dividend Payout: The company paid a dividend of US$ 0.80 per share in FY19, as compared to US$ 0.44 distributed in 2018. The company has consistently paying dividend since 1983. The business has paid ~US$1.1 Billion as cumulative dividends in the last 37 years.

• Solid Medium-term Outlook Backed by New Project Pipeline: For FY20-22, The group expects higher production aided by the projects pipeline which includes Meliadine Phase 2 expansion, Kittila expansion and construction activities at Odyssey, East Malartic & East Gouldie U/G and Amaruq U/G. The estimated capital expenditures for 2020 stand at ~US$740 million, including ~US$332 million of sustaining capital, ~US$382 million on growth projects and ~US$26 million for exploration.

Looking at the past performance over the period of FY15-FY19, the company’s total revenue improved from $1,985 million in FY15 to $2,494.89 million in FY19, posting a CAGR of 5.9%. Net Income grew from $24.58 million in FY15 to $473.17 million in FY19.

Recent Updates: Recently, the company informed that it has subscribed for 15,391,605 units of Rupert Resources Ltd through a non-brokered private placement for US$0.85 per Unit and a total consideration of US$13,082,864.  Following this transaction, the company would own 15,391,605 Common Shares and 11,543,703 Warrants, representing approximately ~9.9% of the total issued capital.

Q4FY19 Financial Highlights for the Period Ended 31^st December 2019: AEM came up with its quarterly results, wherein the company reported cash provided by operating activities of US$257.5 million, as compared to US$140.3 million in the previous corresponding quarter. Revenue increase ~40% and reached US$753 million, from US$538 million in Q4FY18. The increase in revenue was primarily due to an increase in volumes due to the completion of the Meliadine project in FY19 and higher realization of gold prices. However, the positives were partially offset by higher expenses related to the ramp up activities across the Amaruq satellite deposit and the Meliadine mine. In Q4FY19, the company reported net income of US$332 million, as compared to a loss of US$394 million in Q4FY18. The company reported a cash balance of US$327.9 million followed by US$1.2 billion available for undrawn credit lines. Operating margin from the gold production stood at US$378.13 million, which constitutes of US$333.97 million from Northern Business and US$44.16 million from Southern Business.

Q4FY19 Financial Highlights (Source: Company Reports)

Q4FY19 Operating Highlights (Source: Company Reports)

Production Highlights: For FY19, the business reported total gold production of 1.8 million oz at an AISC of $938. Total Cash Costs during the period stood at US$673. The northern business contributed 1.5 million out of total production with a cash cost of US$672/oz, while the production from the Southern business came in at 0.3 million oz with a cash cost of US$678/oz. During the fourth quarter of FY19, the business reported total production of 494,678 oz at an ASIC of $1,039 while cash cost stood at $745. The business reported Realized Gold Price of US$1,489 and US$1,235 for Q4FY19 and FY19, respectively.

Key Production Highlights (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 29.49% of the total shareholding. BlackRock Investment Management (UK) Ltd. and Van Eck Associates Corporation holds the maximum interests in the company at 5.73% and 5.40%, respectively.

Top 10 Shareholders (Source: Thomson Reuters)

Key Metrics: The Company reported decent numbers in FY19, wherein AEM posted Gross margin at 50%, higher than the industry median of 39.7%. Operating margin stood at 32.8%, higher than the industry median of 10.6%. Net Margin stood at 19% in FY19 was significantly above the 4.1% of the industry median. Additionally, ROE of the company stood at 9.8%, as compared to the industry median of 3.8%.

Key Metrics (Source: Thomson Reuters)

Key Risks: The business witnesses’ risks like frequent and larger seismic events during deeper mining activities primarily at LaRonde mines. During early December 2019, the business witnessed increase in seismicity across the West mine area outside of normal protocols. However, over the years, the company has adapted and manage this risk in a healthy manner while expects discovery of additional geological structures depending upon the development in the Western Mining Area.

Guidance: The group expects its debt to reduce in 2020 as US$360 million of debt maturing in April 2020. The company expects its FY20 depreciation and amortization expense within the range of US$625 million and US$675 million. The company expects its general and administration expenses within the range of US$85 million to US$95 million, which excludes share-based compensation. The company expects its share-based compensation expense in between ~US$25 million and ~US$35 million. The company expects its effective tax rate in the range of 40% to 45% for 2020.

Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology 1: EV/EBITDA Based Relative Valuation

Price to Earnings Based Relative Valuation (Source: Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months 

Valuation Methodology 2: Price to Cash Flow Based Relative Valuation

Price to CF Based Relative Valuation (Source: Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months 

Stock Recommendation: The stock of AEM closed at CAD58.69 with a market capitalization of CAD14.09 billion. The stock made a 52-week low and high of CAD 53.23 and CAD 86.39 and is currently trading close to the lower band of its 52-week’s trading range. With the ongoing projects and approval of Meliadine Phase 2 expansion, the business is expected to deliver higher production volume in the coming years while the total cash cost is expected to decrease in the medium term. The business intends to sustain its investment grade credit rating and has ample financial flexibility to finance capital requirements for the mining and development activities from operating cash flow, cash and cash equivalents, short-term investments and undrawn credit lines. Considering the aforesaid facts, current trading levels, price correction and improvement in operational efficiencies, etc., we have valued the stock using EV/EBITDA and Price to Cash Flow based relative valuation method. For this, we have considered peers like Newmont Corporation (TO: NEM), Barrick Gold Corp (TO: ABX), Yamana Gold Inc (TO: YRI), etc., and arrived at a target price which is offering a lower double-digit upside (in % terms).  Hence, we give a ‘Buy’ recommendation on the stock at the closing price of CAD 58.69, down 5.79% as on 12^th March 2020.

AEM Daily Technical Chart (Source: Thomson Reuters)

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