Gold mining stock poised for strong cash flow

The coronavirus hurt gold mining stock Agnico Eagle's production and drove up its costs. But cash flow is healthy and it should earn significant free cash flow in the second half.

Agnico Eagle expects its quarterly gold production to return to Q4 2019 levels.

Given the COVID-19 pandemic, Agnico's first quarter was challenging. Gold production and unit costs were negatively impacted in March as the company's operations were reduced to minimum activities at all five of its Canadian mines.

Payable gold production, which management had anticipated back in February to be about 435,000 ounces for the first quarter, came in at 411,366 ounces for the quarter. Units costs, meanwhile, were higher than anticipated. All-in sustaining costs per ounce were $1,099 (all figures in US dollars unless otherwise noted), compared with previous guidance of $975 to $1,025.

Agnico Eagle Mines Ltd. (TSX-AEM; NYSE-AEM) is a senior Canadian gold mining company that has produced precious metals since 1957. Its operating mines are located in Canada, Finland and Mexico, with exploration and development activities in each of these countries as well as in the US and Sweden. The company has full exposure to gold prices, so it should benefit strongly from rising gold prices. It has also declared a cash dividend every year since 1983.

Q1 earnings, cash flow, dividends up in 2020

For the three months ended March 31, 2020, Agnico made $56.0 million (adjusted), or $0.23 a share, compared with $37.0 million, or $0.16 a share, in the same period of 2019. The consensus estimate of analysts had called for the company to earn $0.18 a share in the latest period.

Cash flow was $204.8 million, up 19.9 per cent from a year ago, thanks mainly to higher gold sales volumes and higher realized gold prices. Higher sales volumes were largely caused by increased production due to the commencement of commercial production at the Meliadine mine in Nunavut during May 2019.

Earlier this year, Agnico raised its quarterly dividend 14.3 per cent to $0.20 a share. With the release of its first-quarter results, this dividend remained unchanged. Absent a sharp drop in the price of gold, we think the dividend is sustainable. The company is expected to earn $325 million in free cash flow this year. By contrast dividends are estimated to be $150 million.

AEM expecting a strong second half in 2020

Despite the temporary shutdowns required to manage COVID-19, Agnico made progress in the first quarter at its LaRonde mine in Quebec, where it has upgraded infrastructure, and its Meliadine and Amaruq operations in Nunavut. Consequently, the company expects to have a strong second half this year with quarterly gold production expected to return to levels similar to the fourth quarter of 2019, when payable production was 494,678 ounces.

What's more, given the strong gold price, which is up more than 15 per cent from a year ago, and the weak Canadian dollar, management anticipates Agnico will earn significant free cash flow in the second half of the year.

The stock trades at a high multiple of its cash flow but it's in line with where the stock has traded in the past.

This is an edited version of an article that was originally published for subscribers in the May 29, 2020, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

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