A gold growth stock with safe political risks

Many a gold stock's headquarters are situated in a safe, stable country, but its mines may be located abroad and exposed to the downside of some less developed jurisdictions around the world. But Agnico Eagle Mines, headquartered in Toronto, offers strong production growth in stable political jurisdictions, a solid balance sheet and quality management.

Gold stocks have outperformed the overall market so far this year. The S&P/TSX Global Gold Index is up 3.9 per cent year to date, beating the S&P/TSX Composite, which has added only 1.9 per cent. Of note is Agnico Eagle Mines Ltd. (TSX-AEM; NYSE-AEM), which is up 12.9 per cent in 2017.

The recent outperformance of the sector appears to reflect the rise in the price of gold, which has increased 7.5 per cent, to US$1,238, since the beginning of the year. This strength is in marked contrast to the final quarter of 2016, when rising interest rates and a climbing U.S. dollar caused a sell-off in bullion. Since then, investors have used the sell-off as a buying opportunity.

Agnico Eagle's share-price strength partly reflects this buying activity. But the shares have also been buoyed by the company's better-than-expected financial results and strong operating performance in the first quarter.

Agnico is a senior Canadian gold mining company that has been producing precious metals since 1957. Its eight mines are located in Canada, Finland and Mexico, with exploration and development activities in each of those countries, as well as in the U.S. and Sweden.

For the three months ended March 31, 2017, Agnico's cash flow was US$224.7 million, or $0.98 a share, compared with $167.5 million, or $0.75 a share in the same period of 2016. The analysts' consensus estimate had called for $0.79 a share in the 2017 period.

The increase was mainly due to a combination of higher gold sales volumes and realized prices (about seven and three per cent, respectively).

Payable gold production was 418,216 ounces, up 1.7 per cent. The higher level of production was mainly due to higher grades at the LaRonde mine in Quebec and the Meadowbank open pit gold mine in Nunavut.

All-in sustaining costs (AISC) per ounce were $741, down seven per cent. The lower AISC were mainly due to lower total cash costs per ounce and lower sustaining capital expenditures. Total cash costs were positively affected by a combination of higher production of gold and by-product metals at LaRonde, and higher production levels at Meadowbank.

Production estimates increased

Agnico has increased its full-year production guidance. Production is now expected to exceed 1.57 million ounces, compared to previous guidance of 1.55 million ounces. The increase reflects the extension of the underground mine life at Lapa, in Quebec, to the end of the second quarter of this year. And management now projects production of 2.0 million ounces in 2020.

AISC in 2017 are forecast to be between $800 and $900 an ounce.

Agnico's mission is to increase gold production in lower-risk jurisdictions. This, of course, will help the company grow its cash flow and free cash flow. In fact, the company's free cash flow in the first quarter was $76.6 million. Free cash flow lets a company do several things to reward shareholders, including increase its dividend and make acquisitions.

Agnico's shares trade at 12.4 times this year's forecast cash flow of C$5.14 a share. This is a reasonable valuation in view of the company's strong production growth in stable political jurisdictions, solid balance sheet and quality management. The dividend yields 0.6 per cent. Agnico Eagle is a buy, mostly for growth.

This is an edited version of an article that was originally published for subscribers in the May 2017/Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

The MoneyLetter, MPL Communications Inc.133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846