Danielle Bochove
RTGAM



Agnico Eagle Mines Ltd. is emerging as the winner in the race to shield profit from slumping gold prices.

Since gold began a more than 40-per-cent plunge from a 2011 peak, the miner's gross margins have narrowed by just 1.9 per cent thanks to expansions and a strengthening U.S. dollar. For every dollar of gold Agnico Eagle sold last quarter, 49 cents was gross profit, little changed from four years ago when gold touched $1,900. That's the best performance among 15 major producers tracked by Bloomberg, whose margins compressed by an average 64 percent.

"We've generated net free cash flow this year because of those margins, and it's not at the expense of squeezing our key development projects or our exploration budgets," Chief Executive Officer Sean Boyd said in an interview in Toronto. "And we still managed to reduce our net debt by almost $200-million."

It hasn't always been that way. The Toronto-based company struggled to bring five mines on stream between 2008 and 2010, missing production and cost guidance. In 2011, it suspended mining at Goldex in Quebec because of flooding and rock instability.

But in 2012, the company turned a corner. Since then, operational and exploration success coupled with acquisitions have helped turn things around, according to Josh Wolfson, an analyst with Dundee Capital Markets, who has a buy recommendation on the stock and a share price target of $44. In 2014, it joined with Yamana Gold Inc. to buy Osisko Mining Corp., giving it the Canadian Malartic gold mine in Northern Quebec.

Production Surges

The stock has gained 21 per cent this year in Toronto compared with the BI Global Senior Gold Valuation Peers Index's 32-per-cent loss. That outperformance has also made it the index's most expensive member at about 63 times estimated earnings. Agnico Eagle closed up 5.2 per cent to $35.10 on Wednesday for a market value of $7.6-billion ($5.7-billion).

"This was not a pretty story a couple of years ago," Mr. Wolfson said. "They've been not only coping with the current environment, they've also been improving the business."

A surge in production has supported margins through the gold downturn. On October 28, the company raised its 2015 gold production guidance to 1.65 million ounces from 1. 6 million.

Currency Supports

It's also benefited from currency weakness in all three countries in which it operates: Canada, Finland and Mexico. In the third quarter, the Canadian dollar, euro and Mexican peso were eight, four and 23 per cent lower, respectively, than the company's 2015 assumptions, it said in its third-quarter earnings statement.

The combination of higher production and currency gains lowered third-quarter total cash costs per ounce on a by-product basis to $536 from $716 a year earlier. Reduced costs, combined with lower capital expenditure and general and administrative costs, knocked Agnico Eagle's all-in-sustaining costs down to $759 from $1,059, the company said. Weaker currencies were responsible for $39 an ounce of the latter reduction, the company said in an e-mail.

Agnico Eagle also managed to keep its investment grade rating, even through last year's purchase of Osisko, and benefits from a high average reserve grade, Boyd said. The average reserve grade of its portfolio is 2.4 grams per tonne compared to an industry average of 1.2 grams. In 2014, the company ran a test on their reserve numbers assuming $1,000 gold and found they dropped only six percent, he said.

Portfolio Strength

Potential risks for the company are "quite negligible," with the only real worry being some sort of black swan event at an existing mine, according to Michael Siperco, an analyst with Macquarie Capital Markets Canada Ltd. He cited the 2011 Goldex shutdown as an example, but added that Agnico Eagle's portfolio is much stronger now.

"There isn't one big development project that they're trying to get done, there isn't a massive need for new capital," he said by telephone.

Of the 25 analysts covering the stock, 20 have the equivalent of a buy rating, three recommend holding and two say sell, according to data compiled by Bloomberg.

The company had total net debt of $1.2 billion at the end of the third quarter, consisting of $850 million of fixed rate debt and $350 million drawn on its variable rate revolving line of credit.

Cost Cuts

Given low gold prices, the company's debt is still a concern, although "they're in a much better position then their peers," Mr. Wolfson said.

CEO Boyd sees more room to cut costs while still boosting production. The company's focus now is on containing debt and developing existing assets.

"Five years from now we could be producing 30 per cent more gold," he said. "We have the projects. The question will be, in this environment, the pace at which we move towards that expanded output level."