A Better Way to Make a Mint

Compared to the overheating printing presses of Ben "Just Say When" Bernanke and Hank "Make the Market Tank" Paulson, the precious-metal miners provide a very different definition of "making money."

While gold and silver miners fashion large sums of tangible money from earthbound ores, it takes a heap of greenbacks to get these projects running and keep them in shape. Surprisingly low metal prices are plaguing miners' near-term results, particularly as base metal byproducts plunge in value. Now, even the strongest miners, with unimaginable riches in the ground, are clearly strapped for capital.

Agnico-Eagle Mines (NYSE: AEM  ) this week resorted to a private placement of 8 million of its Toronto-listed shares, aiming to raise $252 million for mine development and capital expenditures. After reporting back in May that development projects were fully funded, this surprise announcement led me to examine the company's balance sheet, and those of its competitors, to gauge the impact of this financial tsunami.

In just six months, Agnico had added $300 million in long-term debt (as of Sept. 30). The cash position dwindled by 62% to $112 million over the same period. Based upon Agnico's sensitivity to zinc and other byproduct prices, I expect a lean fourth quarter, even as the company's Kittila mine in Finland moves into production.

As frustrating as the dilutive offering must be for Canadian shareholders, the problem appears manageable in scale compared to the $1 billion loan AngloGold Ashanti (NYSE: AU  ) announced this week, or Teck Cominco (NYSE: TCK  ) 's truly unenviable  $9.8 billion burden.

After digging into Agnico's balance sheet, I decided to take a closer look at its rivals as well. One favorite among CAPS members, Yamana Gold (NYSE: AUY  ) , reported a similar cash position of $126 million at the end of the third quarter, with a higher total long-term debt burden of more than $496 million. Kinross Gold (NYSE: KGC  ) 's long-term debt of $842 million may feel high, but it dwindles in the context of the company's $705.7 million cash position.

Goldcorp (NYSE: GG  ) , meanwhile, retains the cleanest balance sheet I've encountered in the sector, after using proceeds from the sale of its Silver Wheaton (NYSE: SLW  ) stake to pay down a $1 billion loan balance early in 2008. Goldcorp's miniscule $6 million long term debt makes the company a compelling pick under these market conditions. Still, I won't be taking my eye off of Agnico-Eagle as its production growth heats up like Ben's printing press.

Further shiny Foolishness:

Four-star Motley Fool CAPS pick Agnico-Eagle Mines boasts nearly 900 faithful fans. Whether you agree or disagree, as a seasoned investor or an eager novice, this friendly community of investors would like to know your thoughts.

Fool contributor Christopher Barker wonders whether Hank Paulson is aware that money doesn't actually grow on trees. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of Agnico-Eagle Mines, Kinross Gold, Silver Wheaton, Teck Cominco, and Yamana Gold. The Motley Fool has a disclosure policy.


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  • Report this Comment On November 23, 2008, at 10:46 AM, XMFSinchiruna wrote:

    A reader provided the following update on Yamana's balance sheet, revealing actions taken since the third quarter results were posted. I am grateful for the update:

    "For the record AUY has divested some non core assets and cashed in some copper hedges which has resulted in a rise in cash to over 210 million as of the London gold conference about 1 week ago, says their CEO. They claim they are fully funded through cash flow and no long term debt due till 2012—FYI?"

    Fool on!

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