Once a company achieves upper-mid-tier status, as Agnico-Eagle Mines (AEM-T) has, it is faced with a different set of problems.
Speaking on a conference call Agnico’s chief executive Sean Boyd said the company is grappling with how best to distribute its bounty of cash flows. Some problem.
Boyd said the trick is striking the right balance between paying out cash as dividends, putting it in the ground for exploration or re-investing it into its existing core assets for expansion and optimization.
Thus far, it is doing a decent job as its 20¢ per share dividend is one of the highest in the industry, its exploration budget is aggressive and has yielded enviable results and three of its five core assets are continuing to reach ever loftier levels of production.
Not that it has been all smooth sailing. Last year was notable in the company’s recent history for the operational hurdles it had to navigate. Hurdles that winded up hobbling the company’s share price last year.
The chief culprit on the operational side was its Goldex mine in the Abitibi region of Quebec. Agnico had to suspend operations and then advised analysts to assign the asset a zero value when constructing financial models on the company. The moves were necessary due to unexpected unstable rock formations and excessive flooding at the mine.
Boyd says studies on what went wrong at Goldex are ongoing and investors can expect a thorough update on its status in the middle of the year. He did say that Agnico continues to spend money on exploration at the site, however, and while no work can be done on the main deposit, other satellite deposits are seeing the drill.
But when examining first quarter results it is evident that Goldex has become periphery to the Agnico story as the company has more than ample assets to pick up the slack that the suspension of the mine brought about.
Indeed Agnico managed to increase its total gold production over the same period last years — a period in which Goldex had been contributing.
“We increased output from all five of our mines and that more than made up for loss of gold from suspension at Goldex,” Boyd explained.
More specifically the company managed to reach record gold production at its Kittila mine in Finland and its Pinos Altos mine in Mexico. It also achieved a record throughput rate of over 9,700 tonnes per day at its Meadowbank mine in Nunavut.
With those assets being pushed harder gold production for the quarter came in at 254,955 oz. compared to 252,362 oz in the first quarter last year.
Cash costs on those ounces did rise slightly, however, as they were up to US$594 per oz from US$531 per oz. for the same period last year.
The key contributor to the higher costs was a decline in the base metal byproduct credits from its flagship La Ronde mine in Quebec.
Despite those credits winding down, the mine maintained its juggernaut status in gold production as cash costs remained below the US$300 mark and gold output was up 17% to roughly 43,000 oz. for the quarter.
With La Ronde humming along and Kittila and Pinos Altos hitting record levels, the company managed a first-quarter profit of US$78.5 million or 46¢ per share — a significant uptick from the 26¢ earnings per share from the same period last year.
And while Boyd says the company is confident that it will meet its 2012 guidance of production of 875,000 to 950,000 oz. of gold, he did caution that production at Kittila will fall off in the second quarter. That is because the mine will be shutdown for a scheduled 40-day maintenance shutdown in May.
As for the project pipeline, the development of the Meliadine project continues as Agnico is investing $82 million into the project this year on exploration and infrastructure.
The project has probable reserves of 12.4 million tonnes grading 7.2 grams for 2.9 million oz. of gold, indicated resources of 12.6 million tonnes grading 4.1 grams gold for 1.7 million oz. and inferred resource of 12.7 million tonnes grading 6 grams gold for 2.4 million oz.
Company wide Agnico has proven and probable reserves of 157 million tonnes grading 3.71 grams gold for 18.75 million oz.
In Toronto on April 27 the company’s shares were up 10% or $3.40 to $38.66 on 1.6 million shares traded.
I decided last week that Agnico Eagle would be at NEM’s price or above by early next year. I like them both and think they will outperform the rest for the near future. NEM’s price projection was $77 recently and that seems about right to me based on current and projected events.