CA - Agnico Eagle: Leading Gold Miner Is Well-Poised To Ride The Turnaround Robustly

2023-10-06 08:30:00 ET

Summary

• Agnico Eagle Mines is a regional gold mining company focused on high-quality mines with long-term potential.
• The company's ability to deliver shareholder returns is supported by its emphasis on political stability and multiple mine operations.
• Despite volatility in gold prices, Agnico Eagle has outperformed its peers and remains confident in its production guidance.
• I assessed that AEM is well-primed for a bullish rebound as buyers returned to defend against the recent slide.
• I argue why investors looking for a gold mining leader who has executed well with best-in-class profitability metrics shouldn't miss buying the steep pullback.

Agnico Eagle Mines Limited (AEM) is one of the world's leading gold mining companies focusing on high-quality regional mines. As such, management stressed that Agnico Eagle 'is not a global gold mining company; rather, they are a regional gold mining company.'

Accordingly, the leading gold miner focuses on mining assets 'with geologic potential for multiple mines over multiple decades.' In addition, the company is rigorous in ensuring their mines operate in regions that proffer 'political stability to operate multiple mines for an extended period.'

Therefore, I believe such assurances should provide credibility to the company's ability to deliver robust shareholder returns over the long term. Notwithstanding my optimism, Agnico Eagle isn't immune to the volatility in underlying gold prices, affecting its operating leverage.

Economic Moat classification. Data source: Morningstar

As such, I'm not surprised that AEM and its leading peers indicated in the table above are assessed not to possess an economic moat or sustainable competitive advantages. Therefore, investors must be cautious when determining Agnico and its peers' ability to earn excess returns in the long run.

AEM's total return CAGR over the last ten years has significantly underperformed the S&P 500 ( SPX ) ( SPY ), posting a 10Y CAGR of 7.3%. Notwithstanding the underperformance, AEM delivered a total return of 3.19% over the past year, significantly outperforming GOLD's -7.1% total return and NEM's -13.7% total return.

As such, it seems AEM has withstood the hammering among its leading peers better, suggesting more robust buying sentiments.

The company remains confident in meeting its FY23 production guidance. While AISC was noticeably higher in its second-quarter earnings release in July, it was still within expectations.

However, with underlying gold prices hammered to its early February 2023 lows at the $1,815 level recently, I believe it's essential for investors to assess whether buying sentiments could improve.

I assessed that gold prices could bottom out, as the recent price action suggests dip buyers have returned. However, I haven't gleaned a validated bullish reversal signal corroborating my thesis. As such, more conservative investors should consider giving the market time to find its way and establish its directional bias before committing more exposure.

Despite that, I also analyzed that analysts' estimates have likely baked in a more challenging Q3 for Agnico Eagle. Accordingly, analysts expect Agnico to post an adjusted EPS of $0.47 for Q3, down nearly 28% sequentially. It's also likely to be down 9% YoY, but markedly better than last quarter's 14.5% decline. In other words, unless gold prices are expected to fall much further, I believe pessimism has been reflected in AEM.

Despite that, AEM hasn't yet dropped into "deep value" territory. Seeking Alpha Quant assigned AEM a "C+" valuation grade, suggesting things could worsen if underlying gold prices fall further.

However, its best-in-class "A" profitability grade should provide investors confidence that they are investing in a highly profitable gold mining leader that has executed well, as seen with its "B-" earnings revisions grade.

As seen above, AEM recently re-tested its February 2023 critical support level of $44. The downward de-rating from its May 2023 highs ($61 level) likely spooked weak holders into rushing out, as it fell nearly 30% in price-performance terms.

Technical selling likely intensified as sellers "took out" the $44 level this week, although dip buyers seemed ready to defend. As such, it's possible that AEM could consolidate constructively at the current levels before more robust buying momentum returns subsequently.

I'm confident that unless the market intensifies its battering on gold prices moving ahead, the risk/reward for AEM looks attractive here, even though we still lack a validated buy signal.

Investors should prepare their dry powder and be prepared to partake in AEM's expected recovery.

Rating: Initiate Buy.

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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