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Stong Operational Performance Makes This Gold Miner Attractive

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Over the last 10 months, gold companies have lost 40% of their capitalization on average. This opens an opportunity to search for companies with healthy operations despite the low-price environment. Agnico-Eagle Mines (NYSE: AEM  ) is one of those companies.

The company just reported an adjusted income of $60.5 million, a major improvement from a $4.6 million loss in the second quarter. Is this trend here to stay?

Raising guidance
Agnico-Eagle has stated that strong operating performance in its Meadowbank mine, as well as the restart of its Goldex mine, allowed it to increase its 2013 production forecast. The company now expects to produce 1.06 million ounces of gold, up 5% from the high end of the previous guidance range.

The Meadowbank mine, which is situated in Canada, is crucial for Agnico-Eagle's performance as it brought 42.3% of its total gold production in the third quarter. The Finnish Kittila mine, which was a main cause of the second-quarter loss, is now back on track. This mine produced 56,177 ounces of gold in the third quarter, compared with just 5,389 in the second quarter.

Higher grades at both Meadowbank and Kittila have allowed Agnico-Eagle to cut its 2013 all-in sustaining cost forecast from $1,100 per ounce to $1,025 per ounce. Given the fact that gold prices are near the $1300 mark, it's good to have the lowest costs possible.

Another miner that will see a production increase is Kinross Gold (NYSE: KGC  ) . Kinross Gold has recently announced that it opened its Dvoinoye mine in Russia. The mine is expected to bring 235,000 – 300,000 ounces of gold annually in the first three years of mine life. This would result in additional revenue of $315 million-$403 million at current gold prices. The ore from the mine would be processed at Kupol mill, just 100 kilometers south from Dvoinoye, which will positively affect the costs.

Providing income
Good performance and outlook have allowed Agnico-Eagle to reaffirm its dividend. However, some gold miners like Eldorado Gold (NYSE: EGO  ) , prefer to link their dividends to gold prices, as it enhances their financial flexibility. At current prices, Eldorado Gold yields 1.45% while Agnico-Eagle yields 2.88%.

It looks like Agnico-Eagle's dividend is sustainable if gold prices don't collapse. The company is operating profitably, and is expected to continue doing so. The debt load is easy. Agnico-Eagle has $800 million of debt, with the first $115 million payment coming in 2017.

Agnico-Eagle has trimmed its capital expenditures budget by $200 million this year in an effort to cut spending during difficult times. In comparison, Eldorado Gold also reduced its capital expenditures budget by $230 million. If these budget cuts remain short-term measures, they'll provide additional liquidity. The problems would occur should the companies remain under-invested over the long term. However, this is currently not an issue.

Bottom line
Agnico-Eagle is an interesting bet for an income investor who wants exposure to gold. A good yield in combination with rising production makes the company attractive. Agnico-Eagle has relatively low costs, which provide a safety cushion should gold prices drop even lower. The stock has lost more than 40% this year, and I think now is the time to rebound. 

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Related Tickers

8/25/2016 4:02 PM
AEM $52.47 Up +0.48 +0.92%
Agnico-Eagle Mines CAPS Rating: **
EGO $3.57 Down -0.08 -2.19%
Eldorado Gold CAPS Rating: **
KGC $4.34 Up +0.11 +2.60%
Kinross Gold CAPS Rating: **