Less than a week after my last article on Agnico-Eagle Mines Ltd. (AEM), the Canadian gold miner received an important upgrade from Morgan-Stanley. I had already anticipated the firm will continue growing, as long-term prospects look promising, so Morgan-Stanley’s price target increase from $28 to $36 per share came as little surprise. Stock prices naturally spiked following the valuation upgrade, and with expectations running high, a clear upward trend should be achieved going into 2014.
Reinvestment and New Projects
One of the most attractive features of Agnico-Eagle is its focus on reinvestment. Significant cash flow levels have enabled the firm to increase its exploration budget, while expanding production continuously. Reinvestment in important assets, such as the LaRonde and La India mines, should contribute to the company’s plans of increasing output by 20% by the end of 2015.
Agnico-Eagle’s flagship mine, LaRonde, located in Quebec, is particularly interesting for shareholders due to its low cash-costs and longevity. With planned production at the site reaching as far as 2026, and cash costs now below the $700 per ounce mark, at least one important income stream is assured.
This year, the company already exceeded expectations in terms of output and cash costs, and further increments in operational performance have been anticipated by management for 2014. The Goldex underground mine, an exciting project which began production in October, will be one of the key factors going forward. Like La India, which was obtained through the acquisition of the natural resource company Grayd in 2012, Goldex has been subject to large capital expenditures. Both these assets are expected to begin commercial production in the first quarter of 2014.
Additional junior gold explorations made by Agnico-Eagle are also proving to be smart strategic investments for coming years. The firm has a pipeline full of new growth opportunities, along with stable operations in Mexico and Finland. Hence, Agnico-Eagle looks like an attractive long-term value investment.
Gold prices and valuation
One of the largest obstacles during 2013 for the Canadian gold miner has been the sharp reduction in bullion prices. Negative growth rates and declining share prices, however, should not discourage shareholders, as 2014 promises to be more rewarding. Compared to mid-tier rivals such as Eldorado Gold Corp. (EGO), which has an EBITDA growth rate of 19.5%, Agnico Eagle’s EBITDA is at an impressive 55.3%. EPS growth for the stock is also stunning at 48.7%, compared to Eldorado’s 19.2 percent, and Yamana Gold Inc. (AUY)’s 31.4%. Additionally, the 3.4 percent annual dividend yield and 11.5 percent ROIC mean shareholders can expect Agnico-Eagle’s policy of rewarding shareholders will continue. The firm already demonstrates one of the highest dividend growth rates in the industry, far ahead of industry rivals.
Jean-Marie Eveillard, Ray Dalio and Steven Cohen are Agnico-Eagle bulls, and maybe you should consider being one too. Despite trading at 34.8 times its trailing earnings, entailing a price premium of 178% relative to the industry average, the firm is still considered to be undervalued. This is largely due to the overall negative trend the industry is experiencing, which has led to sharp declines in income, and dropping share prices.
Overall, I am inclined to believe gold mining firms will point towards reducing cash costs, in order to deal with current gold market trends. Yet prices are also expected to recover at some point, giving low-cost companies with upcoming projects an edge over the competition. Hence, I believe exciting projects, expansion of production and projected improvements in terms of income and cash flow, will reward Agnico-Eagle bulls such as myself throughout 2014.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned