CA - Agnico Eagle Or Gowest Gold: To Buy A Major Or A Minor - That Is The Question

2023-03-06 03:58:52 ET

Summary

• It is widely believed that the price of gold will rise.
• As gold rises, so it is thought that miners such as Agnico Eagle will benefit.
• Junior miners such as Gowest Gold may offer larger returns than majors.

Preamble

Since I began writing for SA in 2019, I’ve had some notable successes, and, I must confess, a few duds. One of my earliest articles concerned a German company called Aixtron, a company associated with the manufacture of silicon wafers. Since February 2019, the stock has risen 158%, whilst the S&P is up around 48%. To the consternation of many, in my article dated August 2021, I recommended selling Duke Energy (NYSE: DUK ) at $107 and buying Pampa Energia (NYSE: PAM ) with the proceeds at $15.50. I doubt very much if anyone considered the proposal seriously, but if anyone did, they would have more than doubled their money. Perhaps the article which gained the greatest derision is titled; “ Out With The New And In With The Old .” In this, I suggested selling Zscaler ( ZS ) at $331 and buying Check Point Software ( CHKP ) at around $115. This article gained 86 comments, most of which were, let us say, of a different view. More recently, January 13th, 2023 to be precise, I advised readers that I was long Tenet Healthcare (NYSE: THC ). The stock is up around 30% since then.

Now, for the sake of balance, the biggest duds. I recommended buying VanEck Russia ( RSX ), Ginkgo Bioworks ( DNA ) and New Oriental Education & Technology Group Inc. ( EDU ), all of which tanked almost immediately on publication as a result of war, equity offering and government interference respectively.

Like many investors, I have a portfolio consisting of long-, medium-, and short-term horizons. In addition to which, I have a speculative fund that could also be called a gambling fund. As with most gambles, all the principle can be lost but there is the tantalising prospect of a 10x bet. In this article, I explore a long-term investment in the shape of Agnico Eagle ( AEM ) and a gamble, otherwise known as Gowest Gold ( GWSAF ) (CVE: GWA).

Agnico Eagle

Whilst gold may be out of favour with many individuals, purchases are certainly gaining traction with central banks. The Chinese government , for instance, normally tight-lipped on its purchases, has been advertising large acquisitions of late. Although, there are those investors who are concerned about the economy and the geopolitical issues that surround us these days and are not only buying physical gold but also considering gold miners.

One such gold miner on many people’s radars is Agnico Eagle, given that it has mines in safe jurisdictions (Canada, Mexico, Finland, and Australia). Investors will also be aware that the company's primary focus is on the exploration and production of gold, as well as silver, copper, and zinc. Agnico Eagle has been in business for over 60 years and is considered one of the leading gold mining companies in the world.

The company has stated reserves of 48.7 million ounces, and with advanced plans to increase these reserves. Furthermore, Agnico Eagle has a large pipeline of projects in various stages of development. According to the company’s website , there are several advanced exploration projects, including the Meliadine and Amaruq projects in Canada and the Santa Gertrudis project in Mexico. Agnico Eagle is also developing several new mines, including the Odyssey project in Canada and the Sisar Zone project in Mexico.

During the last quarterly report, the company stated that the average AISC for their mining operations was $1,231 per oz. So, a back-of-the-envelope calculation can give us an indication of the value of the company at time of writing.

Current spot price of gold $1,855

Implied cash generation 48.7 million X ($1,855 - $1,231) = $30,388,800,000

Market cap $20,740,000,000

So, market cap represents around 70% of the implied value of the total current reserves of gold. If you are of the opinion that gold is heading north in the long term, a discount of 30% is pretty attractive. On top of that, Agnico Eagle recently reported an annual revenue of $5.74 billion in 2022, with a net income of $670.2 million. The company's revenue has been steadily increasing over the past five years, with a 162% increase from 2018 to 2022. So, we can say that Agnico Eagle has a proven track record of delivering consistent production growth over the years. Agnico Eagle has been delivering strong financial results for many years, with consistently high margins and strong cash flow. The company has also maintained a strong balance sheet and has been able to invest in new projects and acquisitions while still returning value to shareholders through dividends and share buybacks.

When it comes to debt, Agnico Eagle has a very strong balance sheet. The company reported total debt of $1.242 billion in 2022, which the total current assets of $2.180 billion covers with ease. In 2020, the debt-to-equity ratio was 0.5 but now it stands at around 0.1, making it an exceptionally good value.

Whilst Agnico investors are more than likely familiar with the company’s tier 1 mines, for this article, I will review one of their smaller mines; Glodex, situated in Quebec, Canada. As I will describe later in the article, it shares some similarities to Gowest's deposit. According to Agnico Eagle’s website , the mine has around 7 years of life left with around a million ounces of reserves. Producing gold from this mine is quite expensive; Production costs at $717 and total cash costs at $684.

In addition to the reserves advertised, there is the possibility that further exploration near this mine will reveal further deposits that can be exploited. Also, the company has acquired a gold-copper deposit 30 kilometres away called Akasaka West. This mine is expected to have a 5-year life and produce approximately 115,000 ounces of gold and 21,000 tonnes of copper.

Gowest Gold

In contrast, Gowest Gold has a much smaller market capitalization of around $29.5 million. Without wishing to state the obvious, I must point out that market capitalization reflects the market's perception of a company's value, and it would appear that Mr. Market does not rate Gowest too highly. And this is the crux of my thesis, Mr. Market does not always value companies correctly. Gowest Gold has been in the exploration and development stage since 2008 and has planned to commence commercial gold production in Q2 of this year. The company's primary asset is the Bradshaw Gold Deposit, located in the Timmins Gold Camp in Ontario, Canada. Reviewing this deposit, we can see that there are some similarities to Agnico Eagle’s Glodex mine. Gowest’s underground mine has an estimated Production target of 26,000 oz in year 1, 58,000 oz in year 2, and 100,000 oz in year 3 together with a mine life of 8.5 years . Assuming that the company does indeed begin production in Q2, revenue should be announced at some point this year. However, to be fair, the company's production output is still uncertain, as it has not, at the time of writing, started commercial production.

The Bradshaw Deposit (The Gowest Gold Timmin's Project)

From the company presentation of the North Timmins Gold Project, we are advised that the mine currently contains approximately 1.5 million ounces of gold:

• 945,600 ounces of indicated gold at 4.9 gpt.
• 536,800 ounces of inferred gold at 4.2 gpt.

In addition, recent drill results show that the Tully North Property (Russian Gold Zone) holds significant deposits of gold.

For comparison, below is a similar calculation to the one given for Agnico to estimate the implied value of Gowest. I have used a figure of $1,400 for AISC, which is the figure given by the company. In addition, I have used the figure for indicated gold reserves, so anything above this number is a bonus.

Current spot price of gold $1,855

Implied cash generation 945,600 X ($1,855 - $1,400) = $430,248,000

Market Cap $29,500,000 (CAD 40,410,000 X 0.73)

In the case of Gowest, the market cap represents only around 7% of the recorded value of the reserves, meaning a 93% discount based on the inferred value.

Financials

One of the biggest concerns for investors when considering a stock purchase of such a small miner is the balance sheet. The worry is; does the company have enough cash to keep going until revenue and profits begin to come through the door? This particular In December 2022 the company raised $5 million through a share offer and in January this year Gowest secured a $25 Million Investment for the Planned Restart of Operations at Bradshaw. This latter investment is clearly substantial and would have required extensive due diligence on the part of the investors and therefore ought to give added confidence to those mulling over a share purchase.

If you review the last available balance sheet you may see that the company has total liabilities of around $20 million, to which, the $25 million must be added, giving a total of around $45 million in debt.

To sum up

Investors interested in gold mining companies may find Agnico Eagle to be a more stable and diversified investment, while those looking for a potentially high-growth opportunity may be more interested in Gowest Gold's development-stage project.

I would also add another key difference between the two companies is their level of experience and expertise in the gold mining industry. Agnico Eagle is an established company with a long track record of successful mining operations. The company has a deep understanding of the technical, operational, and regulatory aspects of the industry, as well as a large team of experienced professionals. Gowest Gold, on the other hand, is a relatively new company that is still in the process of developing its first mine. While the company has a team of experienced mining professionals, it may not have the same level of expertise or institutional knowledge as a more established company like Agnico Eagle.

Caution

As with all investments, investors should conduct their own research and due diligence before making any investment decisions. Also, note that I am personally invested in Gowest Gold with an extremely small long position. Even though my position is tiny, I will consider exiting if there are any further rounds of capital raises.

For further details see: