While plenty of people have undoubtedly resolved to adopt new fitness plans in the new year, some gold-minded investors have decided that 2020 will be the year in which they add exposure to the yellow metal. From the purchasing of bullion to picking up shares of a gold ETF, there are a variety of ways to make this new year's resolution a reality. One of the most common options for investors, though, is the purchase of a mining company's stock.
Since there are numerous names from which investors can choose, it can feel overwhelming trying to find the right candidates, so let's start off with one of the more recognizable miners, Agnico Eagle Mines (AEM +2.51%), one of the largest gold mining companies by market capitalization. Climbing 53% in 2019, Agnico Eagle's stock certainly helped shareholders' portfolios shine a little brighter last year, but is now still a good time to pick up shares?
Image source: Getty Images.
Bulls are betting on...
Having generated average annual free cash flow (FCF) of $207 million from 2014 to 2016, Agnico Eagle's inability to sustain the trend in 2017 and 2018 may appear to be a red flag. Management, however, contends that the company's cash flow woes are attributable to its large capital commitment to constructing two new mines in Nunavut -- something Agnico Eagle characterizes as "the largest capital spending program in its history."
With completion of the mines coming in Q3 2019 and lower planned capital expenditures, management believes Agnico Eagle is poised to return to strong FCF generation in the coming years.
Image source: Agnico Eagle investor presentation.
Another alluring aspect of Agnico Eagle is management's commitment to rewarding shareholders. Raising its quarterly dividend 40% to $0.175 per share for Q4 2019, Agnico Eagle's distribution has risen steadily over the past few years, reflecting a compound annual growth rate of 11.4% from 2014 through 2019. Currently, the stock offers shareholders a forward dividend yield of 1.14%. While this is lower than the current S&P 500 yield of 1.77%, prospective gold investors should remember that gold mining stocks are not known for their high dividend payouts, so in terms of its peers, Agnico Eagle's payout seems more compelling.
With the expansion at Nunavut complete, Agnico Eagle foresees strong gold production growth over the next two years, and based on the numerous projects in its pipeline, it projects continued growth in 2023 and beyond. Besides additional mining opportunities at LaRonde, Agnico Eagle recognizes expansion opportunities at Goldex, Canadian Malartic, and Kittila as ways in which the company can add to its gold pile. Those who are bullish on Agnico Eagle believe the company's strong pipeline is attractive since it provides it with organic growth opportunities, enabling it to avoid the oftentimes more costly option of acquiring assets.
While bears believe...
Although Agnico Eagle's dedication to its dividend glitters brightly in some investors' eyes, bears are more cautious. While the company maintained its quarterly payout of $0.11 per share in each quarter of 2018, it generated a net loss of $327 million, resulting in a payout ratio of negative 31%. Through the first three quarters of 2019, the company has returned to net income, and its payout ratio is a more reasonable 63%; however, it has yet to report Q4 earnings, so the full-year payout ratio is still unknown.
An additional source of concern for some investors is the company's reliance on leverage. With about $1.47 billion in net debt on its balance sheet as of the end of Q3 2019, the company has a net debt-to-EBITDA ratio of about 3. Though this may not have more risk-tolerant investors reaching for a red flag, those who are more circumspect may be inclined to consider other mining companies with a more conservative approach to leverage, such as Yamana Gold (AUY +0.00%). The company currently has a net debt-to-EBITDA ratio of 1.5, and that may lower to under 1 before 2021. While the company has deleveraged, it has also raised its dividend.
Lastly, skeptics will point to the high price tag as another reason for passing on the stock at this time. Valued at 19 times operating cash flow, the stock is trading at a premium to its five-year average multiple of 14.2, according to Morningstar. Though it seems to be richly valued at the moment, it's worth noting that many gold-oriented stocks are currently trading at premiums to their five-year averages, suggesting that a better option at the moment may be a gold ETF.
Should investors look to Agnico Eagle to build their pots of gold?
With a commitment to growing the dividend and a strong pipeline of growth projects, Agnico Eagle has a lot to offer would-be investors. At this time, though, shares are trading hands at a price a little too high for my tastes -- especially considering the higher risk associated with the company's reliance on leverage. In the coming quarters, though, should the company achieve stronger FCF growth and allocate some of those funds toward deleveraging, it would certainly be worth reexamining the stock.
