Agnico Eagle Mines Is Poised for a Strong Rebound

Higher inflationary pressures and concerns about real growth renew investors' interest in gold as a hedging tool

Summary
  • Pushed by investors' fears for their portfolios, gold demand as an investment strategy may drive the price per ounce up.
  • Agnico Eagle Mines' high Ebitda margin appeals to investors, as this catalyst could potentially ignite a strong share price rebound.
  • The Canadian stock doesn't look to be priced in relation to gold or the company's fundamentals
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The sharp rise in demand for goods and services after a rapid economic recovery caused prices to reach unparalleled levels in autumn of this year.

Against higher inflationary pressures, the market is waiting for the Federal Reserve's proper adjustment to its monetary policy. On Tuesday, Fed Chairman Jerome Powell said he is considering a switch in the monetary policy from ultra-accommodative to a balanced policy.

However, to see a policy adjustment by the Fed, high inflation is not the only matter of concern for investors who are afraid that higher prices will wreck the value of their assets. They also wonder whether the gross domestic product is growing because of the increase in prices rather than in the volume of goods and services produced and offered. It seems investors are right to be concerned as the analysts forecast the GDP deflator will grow by 2.3% in the next 12 months to reach 124.45 points in 2022, while the U.S. GDP annual growth rate is expected to stay below 2%.

So investors are increasingly looking for investments that can offer adequate protection against growth uncertainties and inflationary pressures, which, if left untamed for too long, could cause some volatility in the market.

Since gold represents a strong hedge against the above headwinds, its demand should be robust over the coming months, driving up the price per troy ounce. As of the writing of this article, gold futures with expirations in February 2022 were at $1,784.00 per troy ounce.

To benefit from rising gold prices, investors may want to consider U.S.-traded equities in mining companies. Agnico Eagle Mines Ltd. (AEM, Financial) looks like a good candidate as its operating activities stand out thanks to its profitability, which is much higher than the average competitor.

The Canadian stock has an Ebitda margin of 47.6% while the industry median has a margin rate of 27.3%. This provides the shareholders with a strong catalyst as Agnico should be able to capitalize on each uptick in the price of the commodity, growing faster than most gold stocks.

Based in Toronto, Agnico is exploring precious metal properties in Canada, Sweden and Finland. The company is also producing some basic metals such as lead, zinc and copper, but it is mainly a gold company. The LaRonde mine, which is situated in the province of Quebec, is the flagship operation. Here miners are digging up the yellow metal from a deposit accounting for a total of 3.8 million ounces, representing more than 15% of the company's total proven and probable gold reserves.

Other mining and exploration activities are located across Latin America and the United States.

In the third quarter of 2021, the miner recorded steady revenue on a year-over-year basis of $974.07 million as a higher output of payable ounces offset a slightly lower price of gold. The adjusted earnings were 60 cents per share. The company missed expectations on revenue by $7.24 million and adjusted earnings by 1 cent.

For full-year 2021, the company anticipates gold production of 2.05 million ounces.

Agnico also guides for total cash costs of approximately $725 per ounce and all-in sustaining costs of approximately $975 per ounce.

The balance sheet had nearly $250 million in cash on hand and short-term securities at the end of the third quarter. It looks robust based on an interest coverage ratio of 14.22 and a current ratio of 1.6.

The stock closed at $49.21 per share on Monday for a market capitalization of $12 billion. Following a 32.6% downturn over the past year, the stock is trading a few dollars above the lower limit of the 52-week range of $47.07 to $76.69.

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The stock doesn’t seem expensive as the last share price stands significantly below the 50-day moving average value of $53.88 and significantly below the 200-day moving average value of $60. Also, the price-book ratio is 2.06 while the industry median is 2.14 and the enterprise value-Ebitda ratio is 7.59 compared to the industry median of 8.35.

This valuation is also worth considering because the stock holds potential for a significant rebound assuming that the commodity will uptrend.

The 14-day relative strength index of 34 indicates the stock is not far from oversold levels.

Additionally, the company currently pays a quarterly cash dividend of 35 cents per common share. The next distribution is scheduled for payment on Dec. 15. The stock grants a forward dividend of $1.40 per common share, yielding 2.89% as of Dec. 6.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure