Agnico Eagle Mines (NYSE:AEM) shares are among the best performers in the gold mining sector this year following the recent acquisition of Osisko Mining, which the company purchased together with Yamana Gold (NYSE:AUY). However, even with the recent upside in gold prices, the precious metal remains at modest levels, which is not great for gold miners' earnings. Have Agnico Eagle Mines shares ran ahead of themselves?

Production growth and free cash flow distinguish Agnico Eagle Mines from peers
What do investors like about Agnico Eagle Mines? Production growth and free cash flow. At a time when gold mining giants like Barrick Gold (NYSE:ABX) and Newmont Mining (NYSE:NEM) are trying to scale back and optimize their portfolios, quality production growth is paramount. Agnico Eagle Mines is on track to deliver such growth with the help of the Malartic mine, which was acquired with the purchase of Osisko Mining.

The recent rebound in gold prices has also lifted shares of Agnico Eagle Mines' partner in the Osisko acquisition, Yamana Gold. However, Yamana Gold's position is inferior to Agnico Eagle Mines'. Yamana Gold recorded a 6.5% production decline in the first quarter, and free cash flow remains a target to be reached.

Agnico Eagle Mines and Yamana Gold completed the acquisition of Osisko Mining in the middle of June, so one should not expect that the purchase would contribute to second-quarter results. Nevertheless, the Osisko deal guided investor sentiment on both companies in recent months, so any news on the performance of the Malartic mine will have an immediate effect on valuation.

Rising gold prices will lead to lower premium
Agnico Eagle Mines is surely one of the best performing businesses in the gold mining field. Thus, the company trades at a premium to other gold miners, be it similar-sized peers like Yamana Gold or major miners like Newmont Mining and Barrick Gold. The question is not whether Agnico-Eagle Mines performs better – it does – but whether the premium that investors pay for Agnico-Eagle Mines will increase further.

If gold prices continue their rebound, the premium that investors pay for better-performing miners is likely to decrease. Higher prices make less-effective businesses profitable, thus increasing the demand for their shares. In the case of continued gold upside, shares of miners like IAMGOLD (NYSE:IAG) will likely outperform their cost-efficient peers in the short term. IAMGOLD's problem is high costs, so the company's valuation was under big pressure when gold was heading toward the $1,200 per ounce mark. As the precious metal moves away from dangerous levels, IAMGOLD's business gets a boost.

Even as other gold miners' shares could start making up on valuation metrics, Agnico Eagle Mines' upside will continue in the case of higher gold prices. The same is not true if gold remains range-bound. Following a more than 40% rise this year, Agnico Eagle Mines shares have become richly valued. It's also worth noting that the Osisko transaction led to dilution to Agnico Eagle Mines shareholders and increased the company's debt level.

That said, it looks like the positive benefits of having the Malartic mine in the portfolio have been already priced into Agnico Eagle Mines shares.

Vladimir Zernov has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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.

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