The Q4 and FY2021 Earnings Season for the Gold Miners Index (NYSEARCA:GDX) has finally begun, and Agnico Eagle (NYSE:AEM) is the most recent company to report its results. While the announcement of an annual dividend increase ($1.40 –> $1.60) and a share buyback program ($500 million) were positive surprises, the 3-year guidance was a little underwhelming but it looks much more beat-able than the more aggressive outlook previously. Notably, the cost guidance does not include benefits from synergies, and the long-term growth outlook remains intact. With Agnico offering a ~3.1% dividend yield and an ~8% FY2022 free cash flow yield, I continue to see this pullback as a gift for long-term investors.
Agnico Eagle (“Agnico”) released its Q4 and FY2021 results last week, reporting gold production of ~2.03 million ounces, or ~2.09 million ounces, including production of ~56,200 ounces from Hope Bay. The solid performance was helped by record production years from Meliadine and Kittila, which produced ~392,000, and ~239,000 ounces of gold, respectively. The strong results prompted the company to raise its dividend from $1.40 – $1.60, a 14% increase. This has continued its track record of steady dividend growth relative to peers, with an industry-leading compound annual dividend growth rate of ~23% (FY2003 – FY2022).
Looking at quarterly production statistics above, the most significant contributors in the quarter (Agnico pre-merger portfolio) were Canadian Malartic (~88,900 ounces), LaRonde/LZ5 (~82,400 ounces), Meliadine (~101,800 ounces), Meadowbank (~67,600 ounces), and Kittila at ~63,200 ounces. Notably, this was a record quarter for Kittila and Meliadine, with annual production growing meaningfully on a year-over-year basis at both assets. On a post-merger basis, it was also a massive year at Kirkland Lake’s assets, with Detour Lake and Fosterville combining for production of more than 1.2 million ounces.
However, while production was solid in 2022, the 2022-2024 guidance was a little underwhelming, with estimates of ~3.3 million ounces of gold at all-in sustaining costs of $1,025/oz. These cost estimates do not include benefits from synergies, but the lower production can be attributed to less contribution from Macassa than I initially expected and was previously guided for under Kirkland Lake. In addition, Agnico has chosen to focus on exploration for the next two years at Hope Bay in Nunavut, with a goal of turning this into a 250,000 to 300,0000-ounce per annum operation long-term after optimizing the asset.
If we look ahead to FY2023/FY2024, production estimates were much lighter than I anticipated for Macassa and Fosterville, with Fosterville expected to drop to just ~250,000 ounces in FY2024, or half of its FY2021 production profile. This decline at Fosterville was to be expected due to lower reserve grades and the absence of a new major high-grade discovery. However, I was expecting closer to 275,000 ounces in FY2024.
The bigger surprise was Macassa, which appears to be having equipment availability issues due to its battery-electric trucks. So, while the asset is no longer mine constrained with an extra 4,000 tonnes per day of hoisting capacity, lower equipment availability is not allowing this excess capacity/ventilation to be exploited yet. A possible solution could be a switch to diesel, which may be more practical now that heat/ventilation issues are less meaningful due to the #4 Shaft Project (300,000 cubic feet per minute to 750,000 cubic feet per minute of ventilation in the deep portion of the mine.)
Given this hiccup, Agnico has guided for production of 180,000, 210,000, and 340,000 ounces in FY2022, FY2023, and FY2024, down from 310,000, 412,000, and 400,000+ ounces, respectively. While the dip in production is certainly disappointing at these two assets, I am not surprised that Agnico is erring on the side of caution, with these being new assets in the portfolio. The good news, though, is that there is upside at both assets, given that a new high-grade discovery at Fosterville would change the production profile entirely post-2025. At the same time, there is incremental upside from the AK Property, where Agnico plans to build a 1.3-kilometer exploration ramp from the near-surface area to reach the AK Property.
Finally, at Detour Lake, Agnico has guided for production of just 715,000 ounces per annum, which is essentially flat from FY2021 levels. With Kirkland Lake already working to optimize the asset, I expected the operation to reach the 770,000-ounce – 800,000-ounce mark by 2024 ahead of schedule. However, it appears that Agnico is guiding quite conservatively here as well. The result of this conservative guidance and no production from Hope Bay is that my previous estimate of ~3.6 million ounces of production in 2024 now appears to be closer to ~3.4 million ounces, with slightly higher costs due to inflationary pressures and less contribution from the two lower-cost assets in the portfolio, Macassa (post-expansion) and Fosterville.
Moving over to the financial results, Agnico Eagle reported revenue growth of 2% year-over-year, with revenue of $949.1 million in Q4. This was despite a lower average realized gold price ($1,795 vs. $1,876), which was a headwind for all gold producers in the period. On a combined basis, the new Agnico reported revenue of $1.64 billion in Q4 based on sales of more than 890,000 ounces of gold (Kirkland + Agnico combined).
If we look ahead to Q1, I would expect this to be a softer quarter, with less contribution from Nunavut due to COVID-19 headwinds, offset by a higher gold price. However, revenue should improve in Q2, with a full quarter of production from Meliadine/Meadowbank, and a likely average realized gold price of $1,850/oz or higher. This is a huge tailwind for producers in 2022 vs. a major headwind last year, which should allow gold producers to return to year-over-year growth.
The issue last year for gold miners was that while valuations were attractive, stocks can often remain under pressure when up against insurmountable comps, and producers had to come up against an H2 average realized gold price of nearly $1,900/oz (Q3/Q4 2020). However, in H1 2021, the average realized gold price came in below $1,810/oz sector-wide, while the average Q1 gold price is above $1,840/oz with five weeks to go. So, while operating costs will be up, the gold price will help to offset this somewhat.
Meanwhile, from a margin standpoint, Agnico (pre-merger) had a softer quarter, with all-in sustaining cost margins dipping to $669/oz, down from $891/oz in the year-ago period. This was due to higher all-in sustaining costs in the period ($1,126/oz) and a much lower gold price. While these margins might appear relatively weak, it’s important to note that Agnico should enjoy AISC margins of $840/oz plus in FY2022, based on an estimated average realized gold price of $1,865/oz and estimated all-in sustaining costs of $1,020/oz.
In fact, if we look out over the next few years, I would expect to see margin expansion even without a higher gold price, given that I expect all-in sustaining costs to dip below $1,000/oz in FY2023 and decline to below $950/oz in FY2025. This would represent industry-leading costs compared to my estimated industry average AISC of $1,090/oz in 2023 and $1,120/oz in FY2025.
With the possibility of an autonomous haulage fleet at Detour long-term, which could eliminate the need for breaks for shift changes, improve productivity/safety (reduced fatigue), and allow for the potential for reduced width of haul roads and increase the steepness of ramps, there could be cost improvements here later in the decade. Elsewhere, Agnico plans to extend its automation expertise at LaRonde to Macassa and Fosterville to drive productivity and efficiency, improving costs here as well.
To summarize, I see no reason to get hung up over the weak Q4 results and luke-warm Q1 2022 results (COVID-19 related in Nunavut) since Agnico will be a cash-flow machine, able to invest aggressively in technology, automation, and exploration while benefiting from reduced consulting costs and more buying power and improved worker availability, with Agnico able to retain and attract top talent being Canada’s largest producer by a wide margin. Meanwhile, the company has a robust development pipeline, with what should be industry-leading costs at Santa Gertrudis and Upper Beaver if these projects are green-lighted later this decade. Let’s look at the updated growth profile:
While growth is lower than I initially expected over the next two years, I believe the updated guidance is quite conservative, and I continue to see meaningful growth over the long run. Based on the more conservative estimates, I have lowered my 2029 production estimate to ~4.26 million ounces of gold, down from ~4.5 million ounces previously. The lower estimate has pulled the estimated compound annual production growth rate down from nearly 5.0% to 4.1%, based on ~3.2 million ounces in 2022, increasing to ~4.26 million ounces in 2029.
This updated estimate factors in 2029 annual production of just 210,000 ounces of gold at Upper Beaver (previous: ~240,000 ounces), 250,000 ounces at Hope Bay (previous: ~270,000 ounces), ~350,000 ounces at Macassa (previous: ~400,000 ounces), 270,000 ounces per annum at Fosterville (previous: ~300,000 ounces). It also assumes an annual production profile of 125,000 ounces per annum at Santa Gertrudis in 2029, with the possibility of production beginning in 2027.
It does not include:
- any upside from utilizing excess Holt processing capacity
- any upside at Detour Lake above 850,000 ounces per annum
- any upside at Fosterville, assuming that no new discovery is made
- no contribution from Hammond Reef (~170,000 ounces per annum)
- no upside from Macassa, where estimates were ~400,000 ounces per annum pre-AK integration
- a more conservative production rate at Hope Bay, with the low end of possible production rate (250,000 – 300,000 ounces)
While I would argue that it’s correct to keep Hammond Reef out of the 2029 forecast, given that I see Santa Gertrudis, Upper Beaver, and the AK/Macassa combination being higher priorities, I think the other assumptions are relatively conservative. With significant resources lying south of the Holt Mill, and significant idle capacity, it would not surprise me to see this option explored if Agnico goes ahead with a stand-alone mill at Upper Beaver.
Elsewhere, the company has already discussed utilizing excess capacity at Goldex to process ore from Akasaba West, adding incremental ounces to the Goldex production profile. Finally, Macassa is no longer mine-constrained with the #4 Shaft Project nearing completion, so if the company can get past the short-term issues of reduced equipment availability, I don’t see why this operation can’t operate at closer to 375,000 ounces per annum when including incremental production from AK.
When it comes to Fosterville, it is clear that the reserve grade is decreasing, but I would not rule out a new discovery at this operation. This is because the best place to make a new high-grade discovery is next to one of the world’s highest-grade gold mines. However, even if no further high-grade discoveries are made, and if Agnico just manages to replace tonnes and grades remain at ~9.0 grams per tonne gold, this is still a ~240,000-ounce per annum operation at below-average costs.
Finally, at Hope Bay, Agnico has noted that it sees the potential for 250,000 to 300,000 ounces per annum of production long-term. The new plan is to drill aggressively over the next two years and then better assess the opportunity here. This estimate (250,000 to 300,000 ounces per annum) is based on solely Doris and Madrid, with no upside from the Boston deposit. As shown above, this is a massive project that was acquired for less than $60/oz in reserves, and while Boston at the south end of the gold belt offers upside, there is significant upside from a regional standpoint as well, given the sheer size of this land package.
To summarize, I would argue that my 2029 estimates are more than reasonable, and there is considerable upside to these projections. The key to unlocking this upside is aggressive exploration spending to make new discoveries and convert existing resources to reserves. With a $324 million exploration budget for 2022, Agnico is certainly not skimping in this department, spending much more than larger peers like Newmont (NYSE:NEM) and Barrick on a dollar spent per ounce produced basis.
Based on ~455 million shares outstanding and a share price of $51.00, Agnico Eagle trades at an ~8% free cash flow yield, and this assumes no upside in the gold price from current levels. It’s also worth noting that the company is not getting any credit for its attractive development pipeline (Upper Beaver, Santa Gertrudis, Hammond Reef), nor the upside at existing mines from their near-term production guidance (Macassa, Detour Lake, Canadian Malartic, Hope Bay).
This high free cash flow yield is even more attractive when compared to other multi-million ounce producers. In fact, Agnico now trades at a discount to Barrick Gold (NYSE:GOLD), which, while very diversified, operates out of some less attractive jurisdictions (~45% Tier-1 jurisdictions) and has a less impressive growth profile than Agnico. The above point is not to state that Barrick isn’t a great investment but to point out that Agnico offers better growth in less volatile jurisdictions for a slightly higher free cash flow yield.
The other differentiation is Agnico and Kirkland’s strong track record of reserve growth. While this reserve growth did not show up in the 2022 results, I would expect meaningful reserve growth in 2023, with the incorporation of the updated Detour Lake Life of Mine Plan expected later this year. Based on expectations of ~12 million ounces of added M&I resources, I would not be surprised to see the reserve base climb north of 20 million ounces at DL in the next two years (15.0 million ounces currently), translating to nearly 10% growth on a consolidated basis (~44.6 million ounces).
Looking at the chart below, we can see that Agnico has historically traded at ~12.5x cash flow. This makes sense given that it’s a producer that has steadily paid dividends, operates out of the best jurisdictions, and has a track record of steady production growth per share and disciplined capital allocation. However, despite joining forces with another high-margin producer with an incredible track record that has led to further diversification, better costs, and clear synergies, Agnico Eagle trades at just ~8.5x cash flow based on estimates of ~$6.00 in FY2022 cash flow per share.
I would argue that the new Agnico can easily command a cash flow multiple of 12 given its peer-leading growth profile, industry-leading margins, industry-leading GHG emissions per ounce produced, and attractive jurisdictional profile. Based on this, I see a fair value for the stock of $72.00 per share. While this represents just over 40% upside from current levels, it’s worth noting that total returns are higher given the company’s attractive dividend yield, which comes in at ~3.1% at $51.00 per share.
Of course, this FY2022 cash flow estimate does not bake in any upside from higher gold prices nor the steadily growing production profile (post-2024), which is why I believe this target understates the stock’s true potential. However, I have chosen to be more conservative following the change in guidance from my previous estimates. To summarize, it’s hard to find a more attractive bet in the gold space than Agnico Eagle, with a ~3.1% dividend yield and an ~8% FY2022 free cash flow yield.
It’s easy to be negative on Agnico Eagle following the recent results, with production coming in a bit shy of estimates, guidance being pared back from previous estimates, and a higher-cost quarter. However, I don’t find much value in rear-view mirror analysis, especially when a stock is already more than 30% from its prior highs. In fact, I would argue that this setup is similar to the Boddington guidance cut from Newmont in October when I added to my position at $53.60 while some writers were busy downgrading the stock.
There’s nothing wrong with downgrading after negative news, but it really doesn’t provide much value when a stock is already trading at a deep discount to fair value. With Agnico Eagle reporting underwhelming 3-year guidance and a more conservative outlook for some of its mines in 2022-2025, I would argue that we could see upside surprises, both on cost beats and production beats. Meanwhile, minimal value is being ascribed for new discoveries/reserve growth, which certainly looks likely with an exploration budget north of $300 million. In summary, I continue to see Agnico Eagle Mines as a top-3 gold producer, and I plan to add to my position on further weakness.