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, observes Adrian Day, money manager and editor of Global Analyst.
It is ranked as the eighth-largest gold mining company in the world by production. Once a merger with Kirkland Lake Gold (KL) is complete — anticipated during the first quarter now that both sets of shareholders have given their approval — Agnico will be the third-largest in the world, after Newmont (NEM) and Barrick (GOLD).
Agnico said the purpose of the merger was to make a better company, with a focus on making money on a per-share basis. Although there are expected to be synergies, more than $800 million over next five years, these savings are not the driving force of the merger.
Unlike some major mining companies, CEO Ammar Al-Joundi describes Agnico less as a global company than one with a group of specific, focused regions, Ontario, Quebec and Nunavit in Canada, Mexico and Finland. Kirkland will boost Ontario and Quebec and add Australia, another top-tier mining jurisdiction.
It believes in building in regions over time, not looking at one specific mine. 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 of the majors 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 grassroots exploration.
Nunavit and Finland are the two regions getting the bulk of spending this year. Kirkland and Agnico are the only two companies to have increased reserves and production (per-share basis) over last 10 years through investment in exploration.
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, with production little more than half of #1 Newmont, but it is not fanciful to talk of “the big three”. Agnico is certainly less well-known in the U.S. than its larger peers, but this merger provides an opportunity for it to increase awareness.
It will have an appeal 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.
Agnico trades at a premium to the sector, justified because of the company’s overall excellence. The stock is down from highs around $80 a year ago. It is a buy, not in expectations that it will necessarily be the best-performing gold stock in the next few years, but one with the surest upside and with the least downside.
