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Stock Analysis & Ideas

Why Agnico Eagle Mines Stock Could Outperform

Agnico Eagle Mines (AEM) is a leading Canadian gold mining company producing gold and silver from mines in Canada, Australia, Finland, and Mexico.

The company is currently exploring and developing existing mineral deposits in the United States and Colombia to improve the gold and silver production profile. However, the company is primarily a gold producer.

I am bullish on Agnico Eagle Mines, as I believe this stock will continue to rise due to the existence of factors favoring higher gold prices, and it will likely rise faster than most of its peers as it tends to outperform mining the Industry Benchmark Index.

As the chart below shows, shares of Agnico Eagle Mines Limited are down 3.1% year-to-date, outperforming the VanEck Gold Miners ETF (GDX) – the benchmark index for the mining industry – by about 1%. Meanwhile, gold futures expiring in June 2022 are up 1.27%.

Why Investors Choose Precious Metals Stocks

It is not just oil and gas stocks that benefit from price increases in the commodities they produce, fueled by market fears over their regular supplies from Russia, that continue to attack Ukraine.

Gold and silver stocks can also benefit.

However, unlike energy stocks, gold and silver miners are growing because the assets they produce are currently in high demand as hedging tools against market uncertainty.

More and more investors are turning to precious metals to hedge against the risk of higher volatility as current macroeconomic and market conditions threaten the value of their portfolios.

The investor benefits from gold and silver because, unlike many other assets, these safe-haven assets are not suffering as much from the current bear market.

Q1-2022 Results

Higher hedging needs in the first three months of 2022 allowed Agnico Eagle Mines to operate in a supportive gold price environment while gold production and overall costs were better than expected despite the challenges from COVID-19.

The gold prospector posted a more than 40% year-over-year increase in total revenue to $1.33 billion, beating the analysts’ median projection by $71.35 million.

Earnings were $0.28 per share, but these missed analysts’ average estimate by $0.04.

Additionally, strong cash flow generation from operations (up 38.4% year-over-year to $507.4 million) enabled Agnico Eagle Mines to fund its quarterly dividend ($0.40 per share to be paid on June 15) while reducing its debt ($1.71 billion as of March 30).

Agnico Eagle has also made good progress in advancing operations and pipeline projects, which is critical to ensure that costs for several quarters are in line with expectations.

The company appears well-positioned to weather the headwinds of ongoing issues with higher energy costs and supply chain setbacks.

It will seek to capitalize on potential increases in gold prices by meeting 2022 production expectations.

Production Guidance and Gold Price Outlook

The company expects payable gold production in 2022 to be between 3.2 million and 3.4 million ounces at total costs per ounce of between $1,000 and $1,050. Total investments should also be around $1.4 billion.

The Federal Reserve’s maneuver to raise interest rates in response to higher inflation increases the risk of stagflation.

Hence, investors are flocking to gold as it offers a good hedge against headwinds from the risk of increased inflation and a slowdown in consumption and investment due to higher borrowing costs.

The risk of stagflation stems from the fact that raising interest rates may prove an inappropriate measure to combat rapid inflation, as inflation appears to be much more driven by elevated oil and gas prices than demand-driven.

Analysts estimate that gold is likely to trade higher going forward, moving from the current level of $1,823 an ounce (as of this writing) to $1,965.59 an ounce in about a year.

The Balance Sheet

The financial position of the company is good.

As of March 30, 2022, total debt exceeded total cash by $650 million, but the company can shoulder the burden, as suggested by its interest coverage ratio of 11.55, well above the minimum acceptable level of 1.5.

In addition, its debt-to-EBITDA ratio of 0.93 means that it takes less than one year to fully repay the debt through EBITDA, while most competitors take additional time.

Wall Street’s Take

In the past three months, 12 Wall Street analysts have issued a 12-month price target for AEM. The company has a Strong Buy consensus rating based on 10 Buys, two Holds, and one Sell rating.

The average Agnico Eagle Mines price target is $70.98, implying 40.5% upside potential.

Valuation

Shares are changing hands at $50.53 as of the writing of this article, for a market cap of about $23.05 billion, a P/E ratio of 27.7, and a 52-week range of $45.42 to $74.50.

The stock has a price/book ratio of 1.4, a price/sales ratio of 5.5, a price-to-cash-flow ratio of 15.7, and a price-to-free-cash-flow ratio of 46.9. The dividend yield is 3.2% as of this writing.

The share price is below the 50-day moving average of $60.18 and trades slightly below the 200-day moving average of $54.79. 

Conclusion

Agnico Eagle is well-positioned to continue to benefit from higher projected gold prices. The share price could rise more than many of its competitors in this scenario.

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