Gold producer Agnico-Eagle Mines (NYSE: AEM) could not have picked a better day -- Wednesday -- to release its results for 2007, with gold going above $950 for the first time ever, amid renewed inflation concerns. While the results were varied enough to raise questions for the uninitiated, the fundamental picture remains fully intact: Agnico is a gold mine.
The numbers were all over the place. Agnico-Eagle's net income rose more than 50% to $65.2 million for the fourth quarter vs. Q4 2006 because of a favorable tax-rate adjustment. Revenue from mining operations, however, was actually down 21% for the quarter, and nearly 7% for the year, in large part because of weakness in copper and zinc prices. Agnico-Eagle's shares were diluted by 13% in 2007, but the dividend grew by 50%. Gold production was down 6% in 2007, narrowly missing targets. These numbers may have Fools wondering if Agnico-Eagle has hit its stride.
Digging deeper, we see that Agnico-Eagle was just pausing to build itself up.
The company purchased Cumberland Resources in 2007, adding another 3.5 million ounces of gold to reserves. It's projecting a 55% increase in 2008 to 358,000 ounces, and a five-fold increase to more than 1.3 million ounces by just 2010. That's a whole lot of shiny yellow stuff.
At today's gold prices, and with large-scale miners like Newmont Mining (NYSE: NEM) signaling expectations for still higher prices by removing price hedges, the timing of Agnico-Eagle's production ramp-up appears to lock in considerable value for shareholders. The company projects it will spend an unprecedented $550 million in 2008 on bringing its five active gold projects to development, and two new mines will begin production this year. With no debt, nearly $400 million in cash on hand, available bank lines, and strong projected cash flow, Agnico-Eagle is well-positioned to absorb this investment. This production growth will create one of the largest intermediate producers, though still well below the scale of a Newmont or a Goldcorp (NYSE: GG) (both of which announced earnings yesterday).
In this Fool's opinion, the intermediate and junior gold and silver producers will outperform the industry giants over the coming months and years. Many Fools have done well in recent years with the Goldcorps and Newmonts of the world, but while they will be pressured to sustain growth by purchasing new assets and gobbling up smaller companies at a premium, companies like Agnico-Eagle, Yamana Gold (NYSE: AUY), and Kinross Gold (NYSE: KGC) will be growing into their shoes. If gold continues to run, and the recent inflationary practices of the Federal Reserve and the U.S. government suggest that it will, then Agnico-Eagle could reach new heights.
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