Agnico-Eagle Mines reported sturdy fourth-quarter results that concluded an excellent bounce-back year after the firm encountered serious challenges at its Meadowbank and Goldex mine in 2011. Analysts were impressed by the fact that Agnico actually reported a significant gold production increase in 2012 compared with 2011 despite the closure of its Goldex mine in late 2011. The firm’s 2012 achievements testify to the high caliber of Agnico’s management team, which many regard as being one of the best in the gold mining business.
However, Agnico only has small incremental growth projects in its development pipeline, and some of its producing mines are approaching the end of their useful mine lives given current gold reserve figures. Llaying the foundation for stronger production growth going forward should be one of Agnico’s main objectives in 2013.
Agnico produced 1.04 million gold ounces in 2012, up 6% from 2011 and representing an even more impressive 23% year-over-year growth if one excludes 2011 gold production from the shuttered Goldex mine. Agnico was able to achieve this impressive feat largely because of continued optimizations at its newer Meadowbank, Kittila, and Pinos Altos mines. The firm’s unit cash costs in 2012 were $640 per ounce, up roughly 5% from its 2011 adjusted cash cost figure that strips out the effects of Goldex. While a 5% cost inflation in 2012 was better than the industry average, the firm’s cost structure still does not lie below the industry average, which is why we believe Agnico doesn’t enjoy an economic moat.
It’s likely that Agnico’s production will remain stagnant in 2013 before starting to grow again in 2014 and 2015. This is because brownfield expansion projects at Kittila and LaRonde will start to come into play in 2014, and because analysts project the small La India mine to also start ramping up gold production in the back half of 2014. However, Agnico also faces a rapidly expiring mine life at its Lapa mine, where output could start declining as early as 2015.
Gold reserves at the company’s prolific Meadowbank mine also could be depleted as soon as 2018 if brownfield exploratory efforts cannot lengthen the site’s mine life. Agnico has its work cut out in terms of bolstering its project pipeline to offset production declines at existing mines, as well as to compete versus other midtier gold miners that will benefit from a much steeper growth trajectory, such as Yamana Gold and Eldorado Gold. However, Agnico’s rock-solid balance sheet, ample free cash flows, and experienced exploration team should help to make this task a bit easier.
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