Several of our top gold companies have great potential ahead, despite some lackluster recent results in some cases, observes Adrian Day, editor of Global Analyst.
Agnico Eagle Mines (AEM) reported a modest miss on higher costs while providing lower guidance than some expected. However, Agnico is known as a conservative company, and it is no surprise that it would be cautious in forecasting production and costs following their merger with Kirkland.
The miss was largely because of a covid outbreak in Canada's Nunavut region, where Agnico has operations, causing production to come in around 12% below expectations.
As for the guidance, it is lower than prior estimates for Agnico and Kirkland separately. It is likely an achievable target, however, with room for outperformance. Agnico is projecting a reduction in output at Kirkland’s flagship Fosterville, due to declining grades.
The company also announced it would not resume mining at Hope Bay for the time being while it focuses on exploration to build the reserves. At the same time as the fourth-quarter results were released, CEO Tony Makuch, who had built Kirkland into a solid intermediate, in a surprise move stepped down as both CEO and director, just 16 days into the merger.
Reports indicate a culture clash, with the hard-charging Australian bumping up against Agnico’s famously conservative and consensus style of management. Ammar Al-Joundi, who has been president at Agnico since 2015, was named CEO in addition to president.
The move confirms the transaction as an acquisition by Agnico rather than “a merger of equals”, with Agnico personnel now likely to fill most head office slots going forward. The change is on balance positive, since it avoids the potential for ongoing clashes between the former Kirkland and Agnico officers and makes the company’s strategic direction clearer.
Agnico said at the time of the merger that though cost savings were not a driver of the merger, nonetheless there were various synergies, beyond combining head-offices.
Agnico now thinks it can achieve cost savings well above the original estimate of $2 billion, saying that $3 billion of savings over 10 years had been identified, though adding that not all of them would come to fruition.
These sound like nice big round numbers, but in a discussion with Mr. Al-Joundi, the granular details of specific savings made it clear that these were real. Part of the savings come from leveraging existing infrastructure at Kirkland’s Macassa Mine for development of Agnico’s AK and Upper Beaver deposits.
Like other gold miners, Agnico raised its dividend, up 14% to 40 cents a quarter for a 3% yield. Agnico has paid a dividend continuously for 38 years without any reduction, and it never wants to have to cut the dividend.
I am nervous that many of the new dividend plans introduced may not be sustainable in poor markets, or companies needing capital for a project may raise new equity at a higher cost than the cash being distributed. A $500 million share buyback program was also introduced with the potential to buy back around 2% of the shares.
Agnico has a focus on safe jurisdictions, low costs, and exploration upside. Canada represents about 85% of near-term production for the combined company. Given the slippage in Agnico’s stock price since it announced the acquisition of Kirkland — not unusual in such mergers — its valuation metrics are now in line with other senior miners. Despite a $10 rally in the last month, Agnico is still a buy.
