Agnico Eagle Mines Ltd. (AEM) has long been regarded as one of the better quality of the major miners, with consistently solid management, strong balance sheet, and low political risk profile, explains resources sector specialist Adrian Day, editor of Global Analyst.
It is ranked as the eighth-largest gold mining company in the world by production. Now it has announced plans to combine in a so-called “merger of equals” with Kirkland Lake (KL), a newer and rapidly growing company. The combined company would be third-largest in the world, after Newmont (NEM) and Barrick (GOLD).
What will the new company look like? Kirkland and Agnico are not dissimilar companies, each with a solid balance sheet, strong management, and good political risk profile.
They are the only two companies to have increased reserves and production (per-share basis) over last 10 years through investment in exploration. Agnico said the purpose of the merger was to make a better company, with a focus on making money on a per-share basis.
There are expected to be synergies, more than $800 million over next five years — and the company's President Ammar Al-Joundi took me through a very detailed analysis of where the expected savings would come from.
Al-Joundi took over as president in 2015 after a stint as CFO at Barrick, sharing the executive duties with long-time chief Sean Boyd who became CEO in 1998, making him the longest serving of any major miner CEO.
With the merger, Boyd will become executive chairman, while Kirkland’s Tony Makuch will become CEO and Mr. Al-Joundi will remain president. The company will retain the name of Agnico, the larger company (approximately $15 billion market cap to Kirkland’s $10 billion).
Al-Joundi describes Agnico as a global company with a group of specific, focused regions — Ontario, Quebec and Nunavit in Canada, Mexico and Finland. It believes in building in regions over time, not looking at one specific mine.
In fact, Al-Joundi made the point that a company usually makes money on the second or third mine, or a major expansion in a region where it has already build infrastructure, an office, contacts with local communities and governments and so forth.
Combining with Kirkland will boost the Ontario and Quebec regions and add Western Australia, another friendly mining jurisdiction. The combined company will see 75% of its production from Canada and most of the rest from Australia and Finland, giving it the best political risk profile by a long way.
Agnico, of all the majors, has long had a focus on exploration, including joint ventures with, and investments, in juniors. This year it is spending $160 million, more than any other year in its 60-year history, which includes on its pipeline, on brownfield projects, and also on grassroot exploration. Nunavit and Finland are the two regions getting the bulk of spending this year.
In its latest quarter, Agnico reported broadly in line with expectations (with its top-line earnings missing by 1 cent and costs up in line with other large producers), and it reiterated guidance for the full year. Kirkland reported production above, and costs below, expectations, mostly from good performance at Fosterville, in Australia.
The merger will require the approval of both sets of shareholders, with the transaction expected to be complete in the first quarter of 2022. Some Kirkland shareholders are upset with the price of the merger, but I expect it to go through and do not see a competing bid at present. At best, Agnico could sweeten the bid just a little.
The merger will catapult Agnico up the ranks of leading producers. Its market cap and production will still be a long way from the top two — market cap of $25 billion compared with $43 billion for Newmont and $34 billion for Barrick; production of 3.4 million ounces, compared with 6.5 million and 4.6 million for the larger companies — but it is not fanciful to talk of “the big three”.
It will have an appear to generalist investors because of its quality: cash flow, balance sheet, political risk profile, and track record. It will have the lowest “all-in sustaining costs” of the big three, and of other larger miners, except only for Russia’s Polyus which is unlikely to appeal to U.S. generalist investors. Its main competition for generalist “gold” money will be Franco-Nevada.
Agnico continues to trade at a premium to the sector. This is justified in my mind because of the company’s overall excellence. Even without the Kirkland merger, it has a strong growth profile, particularly from the Malartic underground and new Hope Bay projects.
The stock is down from highs around $80 during the third-quarter of last year. We are buying, not in expectations that this will necessarily be the best-performing gold stock in the next few years, but one with the surest upside and least downside.
We are putting this in the conservative category on our investment pyramid, recognizing that all gold companies by their nature have some risk and the stocks can be volatile, but of all the major miners, this is the most conservative. Buy Agnico Eagle now up to $53.60.