A Study of Agnico Eagle Mines' 1st-Quarter Earnings Announcement

2nd-quarter announcement should produce another significant impact on the market value

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Agnico Eagle Mines Ltd. (AEM, Financial) (TSX:AEM, Financial) closed the first quarter reporting strong performances at operations that led the Canadian gold producer to generate an EPS, adjusted to one-time charges, of 28 cents.

The actual EPS surpassed the forecasted EPS by 17 cents producing a positive surprise of 154.50% since analysts forecasted that the Canadian miner would close the quarter with the income statement showing an adjusted bottom line of 11 cents per share.

What follows is an analysis of Agnico Eagle Mines' first-quarter earnings through an event study, a useful tool of econometrics of financial markets that investors should know and use when investing in the stock market.

Analysis of the impact of the first-quarter announcement on Agnico Eagle Mines' market value

  • Event of interest: Agnico Eagle Mines' earnings announcement on April 27.
  • Event window: March 31 to May 23.
  • Estimation window: from April 4, 2016 to March 30, 2017.

I have assessed the exposure of Agnico Eagle Mines’ returns to the variations in the stock market price and in the price of gold over the estimation window (250 trading days prior to the event window), according to the following two-factor model:

Daily Returns on Agnico Eagle Mines = alfa + Beta1 x daily changes in MKT + Beta2 x daily changes in the Comex

Standard & Poor's 500 and COMEX are used as proxies for variations in the stock market (MKT) and in the price of gold.

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As you can see from the table above, over the 250 trading days prior to the event window, Agnico Eagle Mines' daily return was more volatile than the S&P 500's daily return and more volatile than COMEX's daily return. Both coefficients are statistically significant; they have a t-Stat that is higher than 1.96 for a confidence level of 95%.

The table below represents the expected return, E(r), the abnormal returns (AR), the abnormal cumulative return (CAR) and the abnormal return t-test (AR t-test) over the event window period – March 31 to May 23:

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For this "good news," there was an impact on Agnico Eagle Mines’ share price the day after the news was published. On April 28, there was a positive abnormal return (AR) of 9.9%. The standard error was 0.02469, and it led to an AR t-test value of +4.018 (more than +1.96). Therefore, the impact of the earnings announcement on Agnico Eagle Mines' market value was statistically significant.

For the second quarter, analysts forecast that Agnico Eagle Mines will generate an EPS of 14 cents.

I expect the announcement of the earnings for the second quarter will produce another significant impact on the market value of Agnico Eagle Mines for the following reasons:

  1. Because year to date the average price of the underlying commodity that the Canadian miner produces and sells is up $33.88 per troy ounce or plus 2.8% on the London Bullion Market from the average price per troy ounce of gold calculated over the first quarter when Agnico Eagle Mines produced a 154.50% positive surprise beating analysts’ expectations on earnings. The average price of gold per troy ounce was $1,219.36 in the first quarter versus an average price of $1,253.24 per troy ounce calculated from April 1 to date.
  2. Agnico Eagle Mines increased expectations on future gold production. The miner guides that gold production will exceed 1.57 million ounces thanks to the extension of the life of the Lapa mine until June 30. This means that the gold mining company will have more ounces of gold to sell taking – therefore more advantage from rising gold prices.

Agnico Eagle Mines is trading at $47.90 per share with a price-sales (P/S) ratio of 4.98 and a price-book (P/B) value ratio of 2.31. The stock is uptrending and has gained nearly 14% year to date.

The analysts’ average target price per share is $54.16. The recommendation rating is 2.5 out of 5.

Disclosure: I have no positions in Agnico Eagle Mines.

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