Agnico Eagle: A Core Holding For Gold Investors

Gold, Bars, Wealth, Finance, Gold Bars, Deposit

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Agnico Eagle (AEM) has been in our model portfolio since it was added last August. It’s only up a couple of percentage points, but it does pay a generous 2.7% yield. Meanwhile, the broader stock market is down over 7%, so Agnico has already outperformed stocks by 10% in less than a year. And I think there’s a lot more of that to come. 

Two key people at the helm are Sean Boyd and Ammar Al-Joundi. Boyd was recently named Executive Chair. Since he’s been at Agnico, the company has grown from a small, single mine to a multi-mine international gold miner. Boyd has also served on the Board of the World Gold Council.

Al-Joundi took over reins as president in 2015 after serving as Senior Vice-President and Chief Financial Officer. He was recently also named CEO. He’s also been CFO at Barrick Gold (GOLD), and he has held other top roles for that company.

One important point to consider is that Agnico does not sell forward any of its gold or silver production. In plain language, that means it benefits fully from any appreciation in the gold price. Some miners “hedge” some of their gold production, and so only benefit partially from higher gold prices

Given the company’s maturity, healthy asset base, and diversification by strong jurisdictions, I view Agnico as high-quality, low-risk senior gold producer. Agnico is the world’s third-largest gold producer, with an enviably low cash cost of just $725 - $775/oz. That makes it the largest Canadian producer.

The big news at Agnico in recent months was its merger with Kirkland Lake Gold. That was announced in September, and was finalized in February. That vaulted the market cap to $33 billion. This merger created a top producer. At the time, I said that I thought the merger made good strategic sense, as it would lead to value creation through synergies and business improvement initiatives.

More recently, Agnico said its corporate general and administrative synergies are expected to reach $200 million in the first five years (previous guidance was $145 million), and up to $400 million over 10 years (guidance was $320 million). Operational synergies are estimated at $130 million annually, and $1.1 billion over 10 years.

But there’s more. The company also sees strategic opportunities to reduce current and future expenditures as part of the project pipeline, and that is expected to be up to $240 million over five years and $590 million over 10 years.

Prior to the merger, Agnico had nine operating mines in Quebec, Canada. Then there’s Meliadine, as well as the Meadowbank Complex and Hope Bay, all located in Canada’s northern Nunavut Territory. La India is in northern Mexico, with the Pinos Altos mine located just 70 kilometers to the northwest. Kittila, located in northern Finland, is Europe’s largest primary gold mine.

The merger with Kirkland Lake brought Detour Lake, the second largest gold producing mine in Canada with the largest gold reserves and substantial growth potential, located in northeastern Ontario.

Production is forecast to be 680,000-720,000 ounces from 2021 to 2024, and rising to about 800,000 in 2025, with all-in sustaining costs averaging $775 over the next five years, and $821 over the 22-year production life. This is truly world class. A new technical report and life-of-mine plan are expected in Q2, and should show further exploration success and resource growth.

Overall, I think the new Agnico is better than ever. It’s superbly managed, and has been for decades. It’s now more diversified than ever too, across the top mining jurisdictions globally. Its costs are quite low versus its peers, and has very high quality, high-grade mines with strong resource growth.

On top of all this, the stock currently yields a strong 2.7%. Even after recent interest rate increases, this is well ahead of a bank savings account. Agnico is a great core holding as we progress in this secular precious metals bull market.

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