BTO:CC - Agnico Eagle Mines: Don't Let The Selloff Fool You

Summary

• Agnico Eagle Mines Limited shares are falling after reporting higher all-in sustaining costs.
• Agnico is far from the only gold miner suffering from higher cash costs due to inflation.
• Despite the higher costs, there are some positives to take away from the report.
• I break down Agnico Eagle Mines' earnings and whether or not the stock is a buy here.

This is my in-depth analysis of Agnico Eagle Mines' ( AEM ) Q4 2022 and full-year 2022 earnings report . We'll be taking a closer look at the company's earnings, balance sheet , and what could be in store in the coming months.

The big takeaway : Despite the strong operational performance, Agnico Eagle Mines Limited's share price fell over 7% following the release of its earnings due to rising all-in-sustaining costs, which rose to $1,231 per ounce. The quarterly unit costs were affected by inflationary pressures and lower production at some of its operations. Agnico forecasts total cash costs per ounce and AISC per ounce to increase in 2023 due to expected inflationary pressures on labor, electricity, fuel, and consumables.

However, this is not an issue specific to Agnico, as other gold producers are reporting higher costs. Take Barrick Gold ( GOLD ), for example, which recently reported AISC that ballooned to $1,222/oz (for the full-year 2022).

Despite the rising costs, Agnico had a good quarter overall , with strong production and exploration results, as well as progress made on its pipeline projects. The company also expects to increase its gold production by at least 7% through 2025.

Here's a breakdown of Agnico's earnings and my thoughts on the stock here.

Summary of Agnico's Q4 2022 Earnings

Agnico Eagle Mines achieved payable gold production of 799,438 ounces in Q4 with an AISC of $1,231/oz. Quarterly unit costs were impacted by inflationary pressures at some of its operations and lower production at LaRonde, Kittila, and Pinos Altos.

Despite this, the company had a strong financial performance, with net income of $0.45 per share and an operating cash flow of $0.84 per share.

For the full year 2022, the company produced 3.13 million ounces of gold at an AISC of $1,109/oz. The total payable gold production, including the legacy Kirkland Lake Gold mines acquired in February 2022, was 3,280,731 ounces at production costs per ounce of $821, total cash costs per ounce of $780, and AISC per ounce of $1,090.

These results were in line with the mid-point of 2022 production guidance and slightly above the top-end of cost guidance announced in February 2022.

Agnico is Returning Cash to Shareholders

Agnico continues to boost shareholder returns by reducing debt, paying dividends, and buying back its shares.

As of December 31, 2022, Agnico's outstanding debt balance was reduced by $225 million, and the company had no outstanding balance on its unsecured revolving bank credit facility. The company had available liquidity of approximately $1.2 billion, not including the uncommitted $600.0 million accordion feature.

Agnico also contributed to shareholder returns through its normal course issuer bid, repurchasing 1,569,620 common shares for $69.9 million in 2022.

Finally, the company declared a quarterly dividend of $0.40 per share, yielding 3.5%, which is among the highest in the gold mining industry, based on the stock price on Friday morning.

What's in Store for Agnico? Breaking Down 2023-25 Guidance

Agnico forecasts strong growth over the next few years, with production expected to rise by at least 7% from 2022 output, reaching up to 3.6 million ounces by 2025.

The company's 2023 gold production forecast assumes 50% ownership of the Canadian Malartic Mine for the first 3 months of 2023, and then 100% ownership for the last nine months of the year following its expected takeover from Yamana Gold ( AUY ).

Agnico then expects production of between 3.35 to 3.55 million ounces of gold in 2024 and 3.40 to 3.60 million ounces of gold in 2025.

Production guidance reflects lower throughput at Kittila and Fosterville due to permitting issues and noise restrictions, respectively. The company says that if these issues are resolved, it expects to add approximately 30,000 ounces of gold to the production forecast at Kittila and 50,000 ounces of gold at Fosterville in each of 2023 and 2024.

The company is also evaluating the potential to process ore from the AK deposit at the LZ5 mill circuit of the LaRonde Complex, which could contribute approximately 20,000 to 40,000 ounces per year to the production forecast in 2024 and 2025. So there appears to be a significant upside to its production forecasts.

Total cash costs per ounce in 2023 are expected to be between $840 and $890, higher than the previous guidance of $725 to $775, primarily due to lower production at LaRonde, Fosterville, Kittila, and Pinos Altos, and expected inflationary pressures on labor, electricity, fuel, and consumables.

However, investors should note that it expects cash costs to decline in 2024 and 2025 due to higher gold production and reduced input costs (productivity improvements and innovation initiatives).

All-in sustaining costs ((AISC)) per ounce in 2023 are expected to be between $1,140 and $1,190, higher than the previous guidance of $1,000 to $1,050, but AISC per ounce is expected to decline in 2024 and 2025.

Agnico's M&A Potential

Agnico has a strong balance sheet, with over $1 billion in available liquidity. It's possible that Agnico could pursue M&A to enhance its growth potential and expand its asset base. The company will still be in a great position for M&A even after it completes the takeover of the Canadian Malartic Mine from Yamana.

It's also worth noting that M&A activity in the gold mining sector has been increasing, so Agnico may have a number of potential targets to consider.

M&A is heating up in the gold mining sector following Newmont Mining's ( NEM ) takeover offer of Newcrest, which was recently rejected by the company. And recently, B2Gold ( BTG ) announced a bid for the Canadian-developer Sabina Gold & Silver ( SGSVF ).

However, any acquisition would need to align with Agnico's strategy and be accretive to shareholder value. I believe Agnico could look to acquire low-cost production to add to its pipeline, perhaps seeking a producing mine or a development asset in a top-tier jurisdiction (Canada and Australia come to mind).

Agnico Eagle Mines: The Final Verdict

Agnico has strong fundamentals here, including rising gold production, profitable operations, and a commitment to reducing debt and returning value to shareholders through dividends and share buybacks. The company's balance sheet is also improving, with no outstanding debt on its revolving bank credit facility, just $683 million in net debt, and available liquidity of approximately $1.2 billion.

While rising cash costs have led to a selloff in the stock, it appears that this may be an overreaction. Agnico's costs are in line with other gold producers, and the company is taking steps to reduce costs through productivity improvements and innovation initiatives. Additionally, Agnico's ownership of gold mines in favorable mining jurisdictions may lower its risk compared to its peers.

Overall, the current Agnico Eagle Mines Limited stock price of $45 may present an attractive buying opportunity for investors looking to invest in a well-run gold producer with strong fundamentals and a commitment to returning value to shareholders. I'm maintaining my Buy rating on Agnico Eagle Mines Limited and may look to buy more shares in the near future.

For further details see: