Agnico Eagle Mines Limited

Improved Prospects from increase Gold Prices: Agnico Eagle Mines Limited (TSX: 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. 

The Management declared a cash dividend of US$ 0.20 per share payable on June 15, 2020

Outlook: As highlighted by the company, productions were halted in its five mines across Canada and operating at minimum capacity. The Group expects recovery during the second half of the financial year. The Company expects the upswing in international gold prices to sustain throughout the year coupled with a weaker domestic currency which is likely to boost its cash flows. FY20 production is estimated within 1.63 to 1.73 million ounces, and capital expenditure is expected at ~US$690 million.

Q1FY20 Operational Highlights: Agnico reported higher gold production of 411,366 ounces during Q1FY20, as compared to 398,217 ounces in pcp. The Group reported revenues of US$ 671.87 million, as compared to US$ 532.22 million in pcp. The increase was primarily aided by higher gold sold at 410,883 ounces, as compared to 390,970 ounces in the previous corresponding quarter.  Agnico reported higher gold realization price of US$ 1,579 per ounce, as compared to US$ 1,303 per ounce in pcp, which further supported the top-line. Income before income and mining taxes stood lower at US$ 23.33 million, as compared to US$ 52.52 million due to an increase in production costs, exploration and corporate development expense and higher Amortization expenses. The decline was further driven by higher finance costs, loss on derivatives and foreign currency translation loss. AEM reported a net loss of US$ 21.56 million, as compared to a net profit of US$ 37.03 million in the previous corresponding period, primarily driven by a significant rise in income and mining taxes expense at US$ 44.89 million, as compared to US$ 15.48 million in pcp. The Group exited the quarter with a Cash and cash equivalents of US$ 1,255.27 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Recommendation: The stock remained resilient in the recent past despite heightened volatility in the market and generated a stellar return of ~47% in the last one year. Despite the shutdown, the Group managed to report higher production and higher sales volume, as compared to the previous corresponding quarter. We expect the international gold prices to remain strong, which augurs well for the company. The company is one of the leading gold producers across the globe and enjoys economies of scale. The temporary suspension of the production activities had resulted in a rise in cash costs per ounce during the first half of FY20. However, Agnico expects a sufficient decline in the cash costs in the later half. Hence, we recommend a ‘Hold’ on AEM stock at the closing price of CAD 81.33 on April 30, 2020.

AEM One-Year Daily Price Chart (Source: Thomson Reuters)

New Gold Inc.

Strong Liquidity to Support Current Operations: New Gold Inc. (TSX: NGD) is a Canadian-based intermediate gold mining company with a portfolio of two core producing assets in Canada, the Rainy River and New Afton Mines as well as the 100% owned Blackwater development project.

Q1FY20 Operational Highlights: New Gold reported a decent set of numbers amidst lower gold sales volumes that included the 12-day suspension at the Rainy River mine. The Company reported revenues of US$ 142.3 million, as compared to US$ 167.9 million in pcp. Total gold production stood at 103,435 gold equivalent ounces, declined from 123,263 ounces in Q1FY19 while copper production was lowered at 18.5 Mlbs, as compared to 19.5 Mlbs in the previous quarter. The average realized price of gold and copper stood at US$ 1,458 per ounce and US$ 2.56 per pound, as compared to US$ 1,301 per ounce and US$ 2.79 per pound, respectively in the previous corresponding period. The Company sold 52,782 ounces and 15,991 ounces of gold from Rainy River Mine and New Afton Mine, respectively. Net loss widened to US$ 28 million, from a net loss of US$ 13.40 million in Q1FY19, due to lower income and a spike in total cash costs. Operating cash flow per share stood lower at US$ 0.08 per share, as compared to US$ 0.13 per share on pcp.

Q1FY20 Operational Highlights (Source: Company Reports) 

Stock Recommendation: The NGD stock has soared ~56% in the last one month. The up move in its stock price is supported by rising international gold prices as the company generates majority of revenues from gold sales. We believe the favorable outlook for gold augurs well for the company as it is the biggest factor impacting its financials. The company is well funded and has ample of liquidity (~US$ 600 million) which seems sufficient to fund its operations in 2020. Though COVID-19 outbreak is expected to impact near-term sales volumes, it is likely to increase in the later part of the year. The NGD stock is trading at a lower valuation multiple when compared to peers. For instance, it is trading at a forward EV/EBITDA of 3.4x lower than industry median of 4.0x (metals & mining). Further, it is also trading at a lower price to cash flow ratio of 2.1x as compared to industry average of 3.0x. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 1.14 as on April 30, 2020.

NGD One-Year Daily Price Chart (Source: Thomson Reuters)

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