One Large Cap Basic Materials Stock to Hold- AEM

Agnico Eagle Mines Limited (TSX: AEM) is a Canadian gold mining company which produces precious metals since 1957. The group’s operating mines are situated in Canada, Finland and Mexico, while its exploration and development activities are located in each of these countries as well as in the United States, Sweden and Colombia.

Key Updates:

• Surge in Gold production: The Company’s Gold production in Q1FY22 increased to 660,604 ounces, as compared to 516,804 ounces in the Q1FY21, driven by the higher contribution of the Detour Lake, Fosterville and Macassa mines because of the Merger.

• Increase in Dividend Distribution: In Q1FY22, the company reported paid a higher dividend distribution of USD 154.7 million, as compared to USD 72.9 million in pcp. This is impressive as most of the companies are lowering their dividend distribution in order to retain liquidity. Moreover, the stock of AEM carries an annualized dividend yield of ~2.742%, which looks impressive considering the ongoing interest rate scenario.

• Rise in cash balance: At the end of Q1FY22, the company reported its cash balance of USD 1,061.9 million, which is higher than USD 185.7 million in Q4FY21. A higher cash balance denotes a higher liquidity, which is a key positive for the company.

Risks associated with the Investment:

The company’s operations might be impacted due to lower commodity prices, currency volatility, high input costs, etc. Moreover, changes in drilling and well-servicing technology, along with the impact of any adverse weather conditions, might also dampen the ongoing operation of the company.

Q1FY22 Financial highlights:

Q1FY22 Income Statement Highlights (Source: Company Report)

• AEM announced its Q1FY22 results, wherein the company posted its Revenues from mining operations of USD 1,325.6 million, higher than USD 949.6 million in FY20. The increase in revenues from mining operations was due to a higher gold sale from the Detour Lake, Fosterville and Macassa mines.
• The quarter was marked by a higher production cost, surge in exploration and corporate development, coupled with an increase in General and administrative expense, partially offset by lower finance costs. Income before income and mining taxes stood at USD 174.5 million, lower than USD 243.1 million in Q1FY21. This was primarily due to higher input costs as mentioned above.
• Net income for the period stood at USD 109.7 million, declined from USD 145.2 million in Q1FY21, due to lower income before income and mining taxes while offset by a lower income tax expense.

Valuation Methodology (Illustrative): Price to CF based

Analysis by Kalkine Group

Stock Recommendation:

In FY21, the company reported its EBITDA margin, and operating margin of 46.9%, and 26.2%, respectively, as compared to the industry median of 40.2% and 20.1%, respectively. This indicates that the company has a better cost management, which resulted in better margins than the industry median. Moreover, the company reported a net margin of 14.2% in FY21, slightly higher than the industry median of 14%.

We have valued the stock using the P/CF-based relative valuation method and have arrived at a single-digit (in percentage terms) upside. For the said purposes, we have considered peers like Yamana Gold Inc, Alamos Gold Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of AEM at the last closing price of CAD 74.78 on April 29, 2022.

One-Year Technical Price Chart (as on April 29, 2022). Analysis by Kalkine Group

Note: The reference data in this report has been partly sourced from REFINITIV

Disclaimer

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