When an investor buys gold or an exchange-traded fund (ETF) that holds the precious metal, they're hoping to profit alongside an anticipated rise in its price. However, when an investor buys a gold mining stock, they're often seeking a much higher return driven by the view that the rising value of gold, when added to increased production, should yield a bigger payday. Unfortunately, many mining stocks have failed miserably at even keeping up with gold due to a myriad of missteps.
Agnico Eagle Mines (NYSE:AEM), however, is one of the few that has managed to outperform. Over the past two decades, Agnico Eagle's stock price has increased at a 12.5% compound annual rate compared to just 8.2% for the price of gold and less than 1.5% from the average gold stock tracked by the Philadelphia Gold and Silver Index, which is one of the most watched indexes in the sector. The company has been able to outperform by taking a different approach, which could enable it to continue delivering golden returns in the coming years.
Building a top-ten gold miner one project at a time
Agnico Eagle Mines traces its roots all the way back to 1953 when five struggling mining companies joined forces to create Cobalt Consolidated Mining company. Four years later the company renamed itself Agnico Mines, using the chemical symbols for silver (Ag), nickel (Ni), and cobalt (Co). In 1963, the company acquired Eagle Mines and changed its name to Agnico Eagle Mines.
Agnico Eagle Mines would go on to complete a steady stream of acquisitions over the next several decades. In 1993, it purchased the Goldex mine, which at the time gave it control of the largest unexploited gold deposit in Quebec, Canada. Another notable purchase came in 2007 when the company bought Cumberland Resources for its Meadowbank gold project in Canada. Three years later it purchased Comaplex Mineral for its Meliadine gold project, which was within a couple of hundred miles of Meadowbank.
Its most recent deal of note came in 2014 when it teamed up with Yamana Gold to buy Osisko Mining for its Canadian Malartic mine, which is one of the largest gold mines in Canada. The companies paid 3.9 billion Canadian dollars ($3 billion at the current exchange rate) in cash and stock for Osisko, which not only handed them Canadian Malartic but several exploration properties. Agnico Eagle would go on to buy out Yamana's 50% stake in those developmental assets in 2017 for $162.5 million.
Digging into Agnico Eagle Mines
Agnico Eagle Mines is primarily a gold mining company and ranks as the world's ninth largest gold producer in 2017 after digging up 1.7 million ounces. The company makes most of its money on this precious metal, which contributed 95% of total revenue in 2017, followed by silver at 4% and another 1% from various base metals, including zinc and copper.
The gold miner operates eight mines located in Canada, Finland, and Mexico. The biggest contributor to production in 2017 was Meadowbank, which is an open-pit mine in northern Canada that produced 352,526 ounces of gold and another 275,000 ounces of silver. However, while Meadowbank provided the most gold, it ranked as just the third largest contributor to the company's profit in the fourth-quarter of 2017 -- generating 18% of the total -- because its total cash costs were $614 an ounce, which was above the companywide average of $558.
The company's biggest money-maker was the LaRonde mine, which is also in Canada. This underground mine -- one of the deepest in the Western Hemisphere -- produced 348,870 ounces of gold along with 1.3 million ounces of silver, 6,510 tonnes of zinc, and 4,501 tonnes of copper in 2017. The mine was also one of the lowest cost in Agnico's portfolio, which enabled it to contribute 27% of the company's profits in the final quarter of 2017.
A third noteworthy mine is Canadian Malartic, which is also in Canada. The company owns this mine through a 50-50 joint venture (JV) with Yamana Gold (NYSE:AUY) that the companies formed to acquire the mine's previous owner Osisko Mining in 2014. Despite sharing the profits and production, this mine still supplied Agnico Eagle with its third largest amount of gold at 316,731 ounces last year. Meanwhile, with low costs of $576 an ounce, the mine contributed 20% of the company's profits in the final quarter of 2017, good for second overall.
In addition to those core producing mines, Agnico Eagle has several expansion projects under way and new mines in development. The most notable in the near-term is Meliadine, which is in northern Canada and should start producing next year.
Digging up value when others haven't
Agnico Eagle Mines has been a rare find in the gold mining sector over the past couple of decades. While top-five gold producers like Barrick Gold (NYSE:ABX) and Goldcorp (NYSE:GG), as well as smaller ones such as Yamana, have all underperformed the price of gold (significantly in some cases), Agnico is one of the few that managed to outperform:
One reason Agnico has thrived while rivals haven't is due to its focus on creating value for investors on a per share basis. Many competitors issued boatloads of new shares to buy companies with operating mines that would boost production immediately. Agnico Eagle, on the other hand, focused on purchasing promising gold projects, which are mines in earlier stages of development. Because of that, the company didn't pay a premium for the current production, which kept its overall acquisition costs low.
The company took this approach due to its focus on growing the value of the company, not necessarily its size. Instead of aiming to increase production to an absolute level, the company measures its success by the rate at which it grows production per 1,000 shares. Since 2005, the company has delivered an 8.4% compound annual growth rate in this metric, increasing it from 2.47 ounces per 1,000 shares up to 7.36 ounces in 2017. This focus on growing production per share instead of aiming for an absolute number has helped steadily increase the net asset value (NAV) of each share. In fact, since 2005, Agnico Eagle's NAV has grown at an 11% compound annual rate versus just a 2% average rate for its peer group.
Agnico Eagle Mines plans to continue focusing on creating value for shareholders in the coming years. One way it will do that is by steadily increasing production per 1,000 shares, which it aims to boost up to 8.34 ounces by 2020. While the company expects output to drop in 2018 due to the expected depletion of the Lapa mine in Canada and the winddown of Meadowbank through 2019, this will only be a temporary blip since the company sees production reaccelerating by 2020.
Partially replacing Lapa's output will be the recently finished Zone 5 development of the LaRonde Mine, which should add 20,000 ounces in 2018 and produce as much as 45,000 ounces in 2020. Then in 2019, the company expects to bring the Amaruq Deposit at Meadowbank online. Agnico Eagle is investing $330 million into this project, which will help replace the lost output from that legacy mine by adding up to 190,000 ounces in 2019 and as much as 270,000 ounces in 2020. The Meliadine mine should also come online in 2019. The company is investing $900 million into this project, which should start producing by the second quarter of 2019 before adding 385,000 ounces of low-cost gold by 2020.
These investments will likely cause Agnico Eagle Mines to outspend cash flow in 2018, with it on pace to invest more than $1 billion, which would be slightly higher than anticipated cash flows at a gold price of $1,320 an ounce. However, as Amaruq and Meliadine go from cash consumers to cash producers in 2019, they'll help significantly increase the company's free cash flow as long as the price of gold holds up. These new additions will also boost companywide output up to 2 million ounces by 2020 as well as reduce the company's all-in sustaining cost (which is the overall production cost) from $915 an ounce to $850 an ounce by 2020. Because of those factors, the company could generate as much as $1 billion in free cash flow in three years, which would give it ample capital to fund additional expansions, pay down debt, or increase the dividend.
Does this make Agnico Eagle Mines' stock a buy?
Agnico Eagle Mines appears poised to produce a motherload of cash in the coming years as long as the price of gold cooperates. That value-creating growth has the potential to continue pushing the stock price higher over the next few years.
However, the company's stock price reflects a good bit of that upside. Shares recently traded at more than 13 times trailing twelve-month (TTM) cash flow from operations (CFO) per share. For comparison's sake, most larger peers changed hands closer to eight times that level while Yamana Gold traded at less than six times that number. Because of that pricier valuation, Agnico Eagle's stock could underperform its fellow miners even if the price of gold holds up. That's why investors might want to dig into the dirt cheap Yamana, which also has significant upside ahead thanks to an upcoming mine, before paying up to buy Agnico Eagle's stock.