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Agnico Confronts Adversity by Sticking to Its Strengths

The cultural divide between seasoned metal producers and the array of mining Johnny-come-latelies is never easier to spot than when disaster strikes. Predictably nearsighted, the market reacts harshly in either case. But for investors seeking value in a company that's picking up the pieces after a fall, I find invaluable comfort in a corporate culture that responds to challenges with poise.

Sean Boyd, president and CEO of Agnico-Eagle Mines (NYSE: AEM  ) , has been with the company since 1985, representing more than two-thirds of the miner's 40-year history. It shows in the steady hand with which he is guiding his company through adversity -- and I am not alone in that assessment. The sudden closure and writedown of Agnico's prolific Goldex mine had already blasted Agnico's shares when I asked Minefinders (AMEX: MFN  ) CEO Mark Bailey back in January to name a competitor whose work he particularly admired. Of Agnico and its management team, Bailey stated: "I like the way they do their work. They're professional."

For those unfamiliar with the story, Agnico ceased mining operations at one of its six gold mines after geological consultants found indications of weakening and movement in the rock mass overlying the main deposit. Then, in a second blow to shareholders, Agnico announced a partial writedown of the Meadowbank mine in Canada's far north due to a combination of cost pressures and ore grades that failed to meet prior expectations.

Earlier this month, I interviewed Boyd to discuss the fallout from a very difficult year behind the company. Given the poised and transparent nature of his remarks, I believe investors will find ample reason to take a fresh new look at this deeply downtrodden gold stock.

Agnico-Eagle Mines president and CEO Sean Boyd is sticking to the company's proven playbook for adding shareholder value over the long term.

When I asked Boyd to discuss the circumstances surrounding the closure at Goldex, I found his reply refreshingly nonpromotional in its effort to dissuade investors from speculating on the ultimate fate of the deposit. Boyd explained:

It was an easy decision based on their recommendations to suspend operations. The other question was, if we do that, what are the chances of resuming mining at some point. And the response was that there are no guarantees. So the next step was to really find out what was happening, and that required a lot of monitoring, a lot of assessment work, continuing to do some remediation work on surface with grouting, and all the while still doing some exploration underground because there are various zones of mineralization down there. It is a large resource at almost 4 million ounces. We actually continue to do some ramp development above the D zone, away from the affected area.

We continue to do that, and all we've been able to say to people is that the program of assessment and monitoring is ongoing. We will be in a position sometime during the second quarter to sit down, review all of the data, and then make a determination as to what happened and what it means going forward. But at this point there is really no change in our view there. We wrote it off for a reason, and people should continue to expect that we're not able to give a sense, one way or the other, of what can happen there because we haven't finished all of that work. All we can say is that we're getting close to completing all of our assessment work. And we'll be in a position during the second quarter to say our assessment told us this, and this is what it means.

But we've also been clear to say to people, 'don't buy Agnico stock because you're under the impression that we're about to announce a restart at Goldex', because we can't guarantee that at all. I've been clear with everybody we meet with to say that.

It is the mark of seasoned professionals, furthermore, to openly own up to mistakes. During our conversation, Boyd volunteered: "We had a very tough 2011. Some of that was our doing. We should have done a better job at Meadowbank." In my experience, an unsolicited mea culpa of this sort is an extremely rare find in the mining industry.

In the final excerpt I will share with you today, Boyd displays the sort of constructive, nonreactionary, and long-term perspective that I consider essential to any successful process of rebuilding growth momentum in the wake of adversity.

To ensure that investors themselves apply an appropriately long-term perspective to the recent weakness in the shares, however, I first wish to highlight Agnico's outperformance of the world's major gold producers over the trailing 10-year period. As the following chart shows, even after retreating dramatically over the past year, Agnico-Eagle Mines has outperformed both Barrick Gold (NYSE: ABX  ) and Newmont Mining (NYSE: NEM  ) by advancing 159%, and it cruised past Gold Fields' (NYSE: GFI  ) stunted return of just 40% over the period. Unfortunately, none of these miners has managed to outperform a 468% increase in the price of gold over the corresponding 10-year period.

But by sticking to the practices that made Agnico-Eagle Mines a noteworthy success story before the recent spate of challenges, I believe Boyd and his team remain in a solid position from which to turn trailing adversity into the company's next foundation for growth. In Boyd's words:

We have the right strategy. It's worked for a couple of decades. We created a lot of value for 20-plus years. So, let's just keep driving on and focus on maximizing Kittila, focus on our business in Mexico which is getting better. La Ronde is actually going to be a more profitable mine going forward on a profit-per-ton basis given that the rock that we're going to be mining over the next 10 years is a lot more valuable than the rock we've been mining over the last couple of years.

The No.1 thing we said to our people when Goldex happened is that the worst thing we could do is panic. Stick to the strategy. Focus on the asset base. We still have five mines. They're still generating about $1 billion in operating profit at the mine level. There's a whole bunch to work with here, and several of them are quite big. They will continue to grow. We still have growth. We're still going to generate increasing cash flow going forward in this type of gold-price environment. We're going to redeploy that cash flow into exploring some of these big assets. Our dividend yield is over 2%. We're going to continue allocating capital to advance expansions at some of these projects, and we're going to continue to stick with the strategy that's worked for us for many years.

Agnico-Eagle Mines has received only three stars (out of five) from the talented community of investors at Motley Fool CAPS. I did my part by issuing a bullish CAPScall on the stock all the way back in 2007, and now I ask you to cast your vote.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Agnico-Eagle Mines. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Try any of our Foolish newsletter services free for 30 days.

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  • Report this Comment On March 29, 2012, at 11:02 AM, rfaramir wrote:

    my broker: "Your request to change the dividend reinvestment instructions for this security was not accepted because this security is ineligible for dividend reinvestment."

    Phooey. I'm long AEM, but I wish the recent dividend were reinvested in more of it. It looks like a good price.

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