Agnico-Eagle Mines (TSX, NYSE: AEM)Agnico-Eagle continues to disappoint. Although the price of gold has risen since I advised buying the stock in June 2010, the shares have lost about one-third of their value since hitting an all-time high last December and are now trading at close to the original recommended price.
Weak financial results have dampened investor enthusiasm for this global producer. For the second quarter, the company reported net income of only $68.8 million ($0.41 per share, figures in U.S. currency), down from $100.4 million ($0.64 per share) in the same period of 2010. The company said that the decline was largely due to "a return to normal levels of tax expense and a foreign currency translation loss versus a large tax recovery and a large foreign currency translation gain in the second quarter of 2010".
Cash from operating activities improved slightly to $162.8 million ($161.7 million before changes in non-cash components of working capital), up from $161.6 million in the second quarter of 2010 ($138.9 million before changes in non-cash components of working capital). The increased cash flow was primarily due to a 25% higher realized gold price and significantly higher byproduct metal prices.
Payable gold production in the second quarter was 239,328 ounces compared to 257,728 ounces in the same period of 2010. The lower level of production was largely due to issues in April relating to the March 2011 fire at the Meadowbank mine and also due to higher than expected levels of dilution in its pit.
While production was down, costs were up - never a good combination. Total cash costs for the second quarter were $565 per ounce compared with $482 per ounce in the same period last year. The higher cost in 2011 was largely attributable to the issues at Meadowbank that more than offset the positive impact of higher byproduct metals prices.
However, company CEO Sean Boyd said the second half will be better with production expected to increase by 20%. "Overall, our corporate strategy, which created significant value over the past five years, remains unchanged," he went on. "Over the next several quarters, we expect to be able to lay out a new plan which will keep Agnico-Eagle at the forefront of growth in the gold industry. To that end, we have made a C$70 million strategic investment in Rubicon Minerals and also plan to enter into a technical services agreement to help advance their high grade Phoenix deposit in Red Lake, Ontario."
Third quarter production did in fact improve although not to the 20% level predicted by Mr. Boyd. In an operating update released on Oct. 11, the company said that third quarter gold production totaled 265,978 ounces, an increase of approximately 11% over the second quarter level. The higher level of production was largely due to improved performance at the Kittila and Meadowbank mines.
So far this year, Agnico-Eagle says it produced a record 757,668 ounces of gold. This compares with the previous nine-month record set in 2010 when gold production was 731,138 ounces. The higher 2011 production is mainly due to higher mill throughput at Meadowbank, Pinos Altos, Kittila, and Lapa. The company will release full third quarter results on Oct. 26.
In other developments, Agnico-Eagle has formalized its friendly takeover bid for Grayd Resource Corporation (TSX-V: GYD, OTC: GYDRF). The acquisition was announced earlier this year. Grayd shareholders now have until Nov. 18 to accept the offer of $2.80 in cash or 0.04039 of an Agnico-Eagle share and $0.05 in cash. Grayd's board of directors has unanimously recommended acceptance.
Grayd is a growth-oriented junior natural resource company focused primarily on exploring and developing a large land position in Mexico. It owns the La India project located in the Mulatos Gold Belt of Sonora, Mexico, which is about 70 kilometres northwest of Agnico-Eagle's Pinos Altos gold mine. The project has an indicated gold resource of 26.8 million tonnes at a grade of 0.88 gram per tonne (g/t) and an inferred gold resource of 19.7 million tonnes at a grade of 0.80 g/t.
Also, Grayd recently discovered the Tarachi gold porphyry prospect located approximately 10 kilometres north of the La India project. Both projects are located in a large package of exploration concessions that total approximately 54,000 hectares.
"This acquisition is consistent with our long-term strategy of building value by bringing our mine development and exploration skills to promising early stage gold deposits and projects," said Mr. Boyd. "The Grayd properties will benefit from the construction and operating experience gained at our Pinos Altos mine. It is expected that La India and, further out potentially Tarachi, will contribute to the ongoing growth in Agnico-Eagle's gold production and cash flows reflecting the high quality of work performed by Grayd."
The total value of the deal is set at C$275 million.
Action now: Hold. This stock should be performing better, given the strength of the company's resources.
Cameco Corp. (TSX: CCO, NYSE: CCJ)
The world's largest uranium producer still hasn't recovered from the international reaction to Japan's nuclear disaster last March. With countries such as Germany halting all further nuclear development, the entire sector has gone into the deep freeze. Cameco stock is trading at less than half its 52-week high of C$44.28, US$43.59 reached last February shortly before the earthquake and tsunami devastated northern Japan.
Second quarter financial results confirmed that Cameco is encountering headwinds. Revenue fell 22% from last year to $426 million. For the first half of fiscal 2011, revenue was off 15% at $880 million. (Third quarter results will be released on Nov. 7.)
Second quarter earnings came in at $54 million ($0.14 per share, fully diluted), down 22% from $70 million ($0.18 a share) last year. For the first half, earning were off 32% year-over-year to $145 million ($0.37 a share).
Despite the weak second quarter results, the company stuck to its forecast of a revenue increase of 5% to 10% over 2010 for the full fiscal year.
CEO Tim Gitzel tried to keep up a brave front, saying that the production is on track to meet 2011 projections and reiterating the commitment to double annual uranium output by 2018.
"As we anticipated, this quarter's financial results were lower due to variability in the timing of uranium deliveries," he said. "We expect our sales will be heavily weighted to the second half of the year and anticipate stronger results in the third and fourth quarters.
"With our extensive portfolio of long-term sales contracts, we are in the enviable position of being heavily committed until 2016, which provides us with financial stability as we pursue our corporate growth strategy.
"Over the longer term, we remain confident in the strong fundamentals of the uranium market. World demand for safe, clean, reliable, affordable energy continues to grow and the need for nuclear as part of the world's energy mix remains as compelling as ever."
Meanwhile, the battle of words goes on as Hathor Exploration (TSX: HAT) tries to fight off a hostile takeover bid from Cameco valued at $526 million, or $3.75 a share. Hathor says the offer significantly undervalues the company's Roughrider uranium deposit which is located near Cameco's Rabbit Lake mill in the Athabasca Basin of Saskatchewan.
Cameco claims that Hathor has underestimated the costs involved in bringing the deposit into production and says its offer is "full and fair".
"Hathor estimates the cost of an underground mine, a mill and tailings management facilities at $567 million," Cameco said in a statement last month. "A relevant independent benchmark is Denison Mines Corp.'s January 2011 estimate of the capital expenditure to construct a comparable mine to access the Phoenix deposit, also located in the Athabasca Basin. Denison's estimate, which did not include the cost of constructing a mill and tailings management facilities, was $690 million."
The offer is open until Oct. 31, unless Cameco decides to extend it.
Action now: Hold/Sell. This one will take time to recover. If you don't have the patience to wait and could use the capital loss for tax purposes, get out. Otherwise, wait it out; the stock will eventually come back. I will continue to monitor the company.
Trinidad Drilling (TSX: TDG, OTC: TDGCF)
Trinidad's shares are down more than 30% from their recommended price last April despite respectable second quarter results. The Calgary-based drilling company said year-over-year revenue was up 11.1% to $143.1 million compared to $128.8 million in the same period of 2010. For the first half of fiscal 2011, revenue was $359.2 million compared to $298.9 million in 2010, an improvement of 20.2%.
That was the good news. On the negative side, profit was down more than 50% in the second quarter after a terrific start to the year. Earnings came in at just over $5 million compared to almost $10 million in the 2010 second quarter and about $16 million in the first quarter of this year. The company said that earnings were hurt by higher depreciation charges, due to an increased activity level, a lower gain on foreign exchange and the impairment of capital assets recorded in the quarter. These factors were partly offset by lower finance costs reflecting the company's reduced debt levels (down 11.1% for the year as of June 30).
Looking ahead, the company said that despite concerns about the global economy, Trinidad continues to see strong demand for its equipment and is able to charge higher dayrates as a result.
"Current indications for future dayrates and activity levels are positive and Trinidad continues to gain momentum as it moves into the second half of the year," a statement said. "The company believes that its track record of high performance, the adaptability of its fleet and its growing financial flexibility position it well for the remainder of 2011 and into 2012."
We'll get a better idea as to how well Trinidad is faring when the third quarter results come out in early November.
The stock pays a quarterly dividend of $0.05 per share with the latest payment having been sent on Oct. 14 to shareholders of record on Sept. 30.
Action now: Hold.
Brookfield Asset Management (TSX: BAM.A, NYSE: BAM)
The shares have dropped about $5 since my last update in June when I changed my guidance to Hold in anticipation of weak stock markets over the summer. We certainly experienced the poor market conditions I was expecting but I was surprised to see Brookfield shares drop as much as they did after an outstanding second quarter financial report.
The company announced that net income attributable to shareholders for the three months to June 30 came in at $838 million ($1.26 per share), a huge increase from $89 million ($0.12 per share) in the same period of 2010. Note that Brookfield reports in U.S. currency. Total profit for the period was $1.4 billion compared to $373 million last year.
The intrinsic value of Brookfield's common equity was $39.31 per share as of June 30. This includes net tangible asset value of $33.26 per share and $6.05 per share related to the company's asset management franchise. This means the stock is trading at more than $12 less than its intrinsic value.
Normally, that would be a clear signal to buy, however in the light of the on-going economic uncertainty I am maintaining my Hold rating for now. We'll see how the third quarter numbers look, which are due on Nov. 11.
Action now: Hold. - G.P.