EUR 850.00 For Business Accounts Only

Morningstar | Meliadine Will Deliver Solid Production Growth For Agnico-Eagle; Shares Fairly Valued. See Updated Analyst Note from 17 Feb 2019

Agnico-Eagle delivered strong fourth-quarter results. Full-year production of more than 1.6 million gold ounces at all-in sustaining costs, or AISC, of $877 per ounce beat its guidance to 1.6 million guidance and AISC of $890-940 per ounce. Updated 2019 guidance points to production growth to 1.75 million ounces and AISC of $875-925 per ounce. We think these targets are achievable and have updated our forecasts accordingly.

Agnico-Eagle continued to make progress on its development projects, with the Amaruq deposit and the opening of Meliadine driving production growth over the next two years to roughly 2 million ounces. We expect these new mines to help bring AISC back down toward $800 per ounce.

Management also provided updated guidance through 2021. We’ve updated our forecasts but the change was not significant enough to impact our U.S. dollar-denominated fair value estimate of USD 46 per share. Our Canadian dollar-denominated fair value estimate increases slightly to CAD 61 per share from CAD 60 due to changes in currency exchange rates. Our no-moat rating for Agnico-Eagle is unchanged.

After our third-quarter earnings update, we saw a rare opportunity to invest in one of the most consistent gold miners at a meaningful risk-adjusted discount. In the months since then, that opportunity has closed as shares have risen more than 20%. We see shares as fairly valued at this time.

In December 2018, the Fed again raised the federal-funds target rate by 25 basis points to a range of 2.25% to 2.50%. This was the fourth rate hike of the year. However, the Federal Open Market Committee, or FOMC, appears to be taking a more cautious approach to future rate hikes. The dot plot has reflected a meaningful change in expectations. The December dot plot implied two rate hikes in 2019 versus the three hikes that had been implied back in September. Additionally, language in the FOMC statement now takes a softer tone, indicating a more cautious approach to further rate hikes.

The market has taken a bearish view on the FOMC’s more dovish tone. Current interest rate option prices imply a more-than 90% chance that there will be no rate hikes by the end of 2019. Additionally, they reflect a higher probability for a rate cut than a rate hike by the end of the year.

All else equal, a slower rate hike path reduces the downward pressure on investment demand for gold that we’ve observed over the last few years. However, the FOMC would likely return to rate hikes if inflation were to strengthen due to stronger economic growth. Although pressure on investment demand for gold has softened, we don’t expect a strong resurgence in the near future.

On the back of stabilizing investment demand, gold prices have settled in the high-$1,200 to low-$1,300 per ounce range, falling roughly in line with our forecast for a nominal gold price of $1,300 per ounce by 2020.