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Morningstar | Steady First-Quarter Results Lead Agnico-Eagle to Maintain Full-Year Guidance; Shares Fairly Valued

While M&A activity has dominated the headlines elsewhere in the industry, Agnico-Eagle reported another quarter of steady performance. In the first quarter of 2019, Agnico-Eagle produced 398,217 ounces at total byproduct cash costs of $623 per ounce. This was a slight improvement over 2018’s production of 389,278 ounces at cash costs of $648 per ounce. All-in sustaining costs showed more improvement, dropping from $889 per ounce in 2018 to $836 per ounce in the first quarter of 2019.

More importantly than the single quarter’s performance, development of the Meliadine mine and the Amaruq deposit at Meadowbank remained on track. Meliadine should achieve commercial production next month, and the Amaruq deposit begins production in the third quarter. These projects will deliver a bulk of the production growth in the next few years.

Steady performance in the first quarter led Agnico-Eagle to maintain its full-year guidance of 1.75 million ounces at cash costs of $620 to $670 per ounce and all-in sustaining costs of $875 to $925 per ounce. We forecast that the company will achieve all three targets this year. We’ve made minimal changes to our model, so we’ve maintained our fair value estimate of $46 per share. Our Canadian dollar-denominated fair value estimate increases slightly to CAD 62 per share from CAD 61 due to a slightly weaker loonie. Agnico-Eagle’s no-moat rating remains unchanged.

The company continues to expect to achieve record gold production in 2019 and steady production of 2 million ounces beginning in 2020. With work progressing as expected, these goals look well within reach. As they reach completion, Agnico-Eagle expects to transition focus to return harvest and away from an investment cycle. However, with shares trading at just 8% below our fair value estimate for this high uncertainty company, risk adjusted upside looks limited at this time.

After last raising the interest rate in December 2018, the Fed has paused its increases, leaving the federal-funds target rate at a range of 2.25% to 2.50%. Amid signs of a slowing economy including slowing consumer spending and business investment, the Federal Open Market Committee, or FOMC, now sees no rate hikes in 2019. The dot plot has reflected a meaningful change in expectations, as the December dot plot implied two rate hikes this year.

The market view is even more bearish. Current interest rate options not only imply no chance of a rate hike but more than 55% chance that there is at least one rate cut by the end of 2019.

All else equal, the turn in the Fed’s sentiment on its rate hike path has reduced 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.