Making smart investments in the gold industry is not an easy task. Firms suffer from different problems, such as high cash costs which leave them exposed to declining gold prices, and difficulties while executing expansion projects. Agnico Eagle Mines (AEM, Financial) and Kinross Gold (KGC, Financial) are two such gold miners, which not only face different challenges, but very different outlooks.
An Overpriced Long-Term Investment
Agnico Eagle is a mid-size gold mining company with operations in Canada, Mexico, and Finland. It is one of the fastest growing firms in the industry, with production reaching 1 million ounces of gold in 2012. Agnico Eagle has not only bought several mines in a very quick manner, such as its most recent project at Goldex, but has maintained low cash costs.
According to third-quarter financial results, the firm has been producing gold at a cash cost of $690, which is quite low compared to the industry average. This has allowed the firm to harness enough free cash flow, and complete projects. Its flagship mine in Quebec, LaRonde, is responsible for much of the revenue generated by Agnico Eagle, as it produces gold at an extremely low cost. Hence, increased gold output seems to be a natural path, especially since the company’s assets are located in stable and mining-friendly countries. One of the firm’s specialties seems to be its ability to invest in operations with significant growth potential. Pinos Altos in Mexico is a great example: several satellite deposits, such as Creston Mascota, were uncovered, leading to greater output projections.
For long-term investors, Agnico Eagle seems like quite a great opportunity. Yet those wishing to enter the firm at this point will have to take share price into consideration. Sure, investment guru Jean-Marie Eveillard increased his stake in the firm by 60% recently, bringing his holdings to 18 million shares. However, with such a huge stake in a company, a long-term investment is probably part of the plan. Since Agnico Eagle is currently trading at 37.5 times its trailing earnings, with a whopping 171% price premium relative to the industry average, investors should wait for bulls to retreat. John Hussman is one such shareholder, who decided to take advantage of the elevated share price to bail, and make a profit. The overbought stock is surely bound to experience a decline in price once the euphoria subsides, making this company a great investment. Hence, as a long-term investment, I feel bullish regarding this stock.
A Project Gone Wrong
Kinross Gold operates eight gold mines, distributed throughout the United States, Latin America, Western Africa, and Russia. Unlike Agnico Eagle, this company has assets in regions that are not as friendly towards mining, and where higher geopolitical risks exist. In addition, increasing operating and capital costs are some of the challenges this firm must face, in order to become profitable once again.
Aggressive expansion has not been very effective for Kinross Gold, as costs weigh heavy on the shoulders of this gold miner. Income has been negative for some time now, and with operational costs mounting, there is no end in sight to the red numbers. Despite being a senior gold miner, with a global production portfolio, the company has not been able to counteract inflation costs, stripping it of its low-cost gold producer status.
Kinross Gold’s high costs are also related to its business strategy. The company’s portfolio was put together by a series of purchases, instead of through organic growth. This has not only brought about high capital costs, such as the $7.1 billion purchase of the Red Back mine demonstrates, but has put a strain on production. By acquiring mines that are not yet production ready, Kinross Gold has had to invest additional funds, in order to derive gains from its investments.
Although the firm has been working on implementing stricter cost controls, it has yet to reduce its cash costs to levels below the $1000 per ounce mark. A large competitor such as Barrick Gold (ABX, Financial), for example, has cash costs of $912 per ounce, and Agnico Eagle’s costs do not even reach the $700 per ounce mark. Hence, it comes as little surprise that revenue has been decreasing steadily, since gold prices are hovering around the $1300 mark at best. As the company is hemorrhaging money, investment gurus the like of John Burbank and Seth Klarman have decided to sell their entire stake in the firm. I agree with this bearish stance, and recommend investors stay away from Kinross Gold.
Any Long Term Investment?
If you were to follow Jean-Marie Eveillard’s purchases, one would be inclined to see good growth prospects for Agnico Eagle, and thus believe in this stock’s potential. And, you wouldn’t be wrong, as the firm has been growing at a steady pace, with no end in sight to its expansion possibilities. However, with a 171% price premium, investors might be better off waiting until a more favorable entry-point is available. Nevertheless, as a long-term investment, I feel highly optimistic and would thus even consider paying the additional cost.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned.
An Overpriced Long-Term Investment
Agnico Eagle is a mid-size gold mining company with operations in Canada, Mexico, and Finland. It is one of the fastest growing firms in the industry, with production reaching 1 million ounces of gold in 2012. Agnico Eagle has not only bought several mines in a very quick manner, such as its most recent project at Goldex, but has maintained low cash costs.
According to third-quarter financial results, the firm has been producing gold at a cash cost of $690, which is quite low compared to the industry average. This has allowed the firm to harness enough free cash flow, and complete projects. Its flagship mine in Quebec, LaRonde, is responsible for much of the revenue generated by Agnico Eagle, as it produces gold at an extremely low cost. Hence, increased gold output seems to be a natural path, especially since the company’s assets are located in stable and mining-friendly countries. One of the firm’s specialties seems to be its ability to invest in operations with significant growth potential. Pinos Altos in Mexico is a great example: several satellite deposits, such as Creston Mascota, were uncovered, leading to greater output projections.
For long-term investors, Agnico Eagle seems like quite a great opportunity. Yet those wishing to enter the firm at this point will have to take share price into consideration. Sure, investment guru Jean-Marie Eveillard increased his stake in the firm by 60% recently, bringing his holdings to 18 million shares. However, with such a huge stake in a company, a long-term investment is probably part of the plan. Since Agnico Eagle is currently trading at 37.5 times its trailing earnings, with a whopping 171% price premium relative to the industry average, investors should wait for bulls to retreat. John Hussman is one such shareholder, who decided to take advantage of the elevated share price to bail, and make a profit. The overbought stock is surely bound to experience a decline in price once the euphoria subsides, making this company a great investment. Hence, as a long-term investment, I feel bullish regarding this stock.
A Project Gone Wrong
Kinross Gold operates eight gold mines, distributed throughout the United States, Latin America, Western Africa, and Russia. Unlike Agnico Eagle, this company has assets in regions that are not as friendly towards mining, and where higher geopolitical risks exist. In addition, increasing operating and capital costs are some of the challenges this firm must face, in order to become profitable once again.
Aggressive expansion has not been very effective for Kinross Gold, as costs weigh heavy on the shoulders of this gold miner. Income has been negative for some time now, and with operational costs mounting, there is no end in sight to the red numbers. Despite being a senior gold miner, with a global production portfolio, the company has not been able to counteract inflation costs, stripping it of its low-cost gold producer status.
Kinross Gold’s high costs are also related to its business strategy. The company’s portfolio was put together by a series of purchases, instead of through organic growth. This has not only brought about high capital costs, such as the $7.1 billion purchase of the Red Back mine demonstrates, but has put a strain on production. By acquiring mines that are not yet production ready, Kinross Gold has had to invest additional funds, in order to derive gains from its investments.
Although the firm has been working on implementing stricter cost controls, it has yet to reduce its cash costs to levels below the $1000 per ounce mark. A large competitor such as Barrick Gold (ABX, Financial), for example, has cash costs of $912 per ounce, and Agnico Eagle’s costs do not even reach the $700 per ounce mark. Hence, it comes as little surprise that revenue has been decreasing steadily, since gold prices are hovering around the $1300 mark at best. As the company is hemorrhaging money, investment gurus the like of John Burbank and Seth Klarman have decided to sell their entire stake in the firm. I agree with this bearish stance, and recommend investors stay away from Kinross Gold.
Any Long Term Investment?
If you were to follow Jean-Marie Eveillard’s purchases, one would be inclined to see good growth prospects for Agnico Eagle, and thus believe in this stock’s potential. And, you wouldn’t be wrong, as the firm has been growing at a steady pace, with no end in sight to its expansion possibilities. However, with a 171% price premium, investors might be better off waiting until a more favorable entry-point is available. Nevertheless, as a long-term investment, I feel highly optimistic and would thus even consider paying the additional cost.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned.
