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Gold Miner Expansion Tactics

Written By Brian Hicks

Posted June 20, 2013

Could it be that gold inflation has hit a peak? Recent movements in the gold mining sector could offer some interesting clues.

Consider the storied Agnico Eagle Mines Ltd. (NYSE: AEM), which is one of Canada’s oldest gold producers. Agnico recently stated it will consider joint ventures and will look to buy mines that are already producing. Moreover—and more significantly—the company will seek to expand into international markets in a more focused way.

As Bloomberg notes, Agnico presently commands the highest price-to-book ratio of all seven Canadian gold producers worth more than $2 billion. Whereas the group trades at an average of 0.95 times book value, Agnico trades at 1.47 times. Clearly, that means the market looks upon Agnico quite favorably.

The company listed sales last year amounting to $1.92 billion, with a market capitalization of $5.19 billion. Despite gold’s steep drop in recent times—it has declined 18 percent thus far in the year—Agnico is pursuing growth even though other majors like Barrick Gold Corp. (NYSE: ABX) are looking to slash costs and reduce forecasts.

However, Agnico does have its issues; the company has faced declines of almost 50 percent so far in 2013 against an average drop of 36 percent amongst the top seven Canadian producers.

Two days back, further rumors regarding a possible Federal Reserve draw-down of its stimulus program caused gold to drop to a three-week low, settling at $1,366.90. However, Agnico CEO Sean Boyd insists that the basics that caused such a fantastic run for gold in the recent past remain true.

Bloomberg quotes:

“It’s going to exceed its all-time high at some point, which is over $1,900,” Boyd said. “I still think it can get to $1,800 in the next 12 months.”

The key differentiator that seems to be working for Agnico is that it is pursuing growth in a steady way rather than acting in overly-ambitious fashion. For example, Agnico has consistently limited the size of all deals to within 15 percent of its market value at the time.

Over 2013, the company expects production volumes of 970,000 to 1 million ounces of gold. That’s set to increase to about 1.5 million ounces by 2015. Despite having historically owned its assets fully, Agnico is now increasingly considering joint efforts, again in a continued effort to rein in risk.

Gold and Gold Equities

This may be a strategy well in line with recent indicators for gold, which—frankly speaking—are not that enthusiastic. As the Financial Post notes, a recent J. P. Morgan survey revealed that just 44 percent of respondents believed in an upward trend for bullion over the next year. The flip side, though, is that almost 60 percent of investors continue to believe in gold—specifically that it will return to high form within the next three years.

A major factor appears to be the position on inflation; some 53 percent of respondents believe operating cost inflation has hit its peak, and 57 percent believe that capital cost inflation has, likewise, peaked.

As a result, the focus seems to be more on gold equities than gold itself over the three-year period mentioned earlier. Gold stocks are expected to remain in line with the fortunes of the metal itself, which aren’t that bright at the moment.


What that means is that miners like Agnico are likely to buy up stakes in assets or simply buy up assets outright, though in a wary fashion. Since it’s a recognized down cycle, these companies are likely to want to preserve their own liquidity so as to reduce exposure to risk.

Let’s return to Agnico to see how this is working out. The company’s Meliadine project in Nunavut is expected to suck up $1 billion or more in capital costs. However, Agnico is taking its time with a feasibility study—to be concluded next year—before moving ahead with definite construction.

And the company is presently developing the La India project in Mexico after it bought the asset through its previous acquisition of Grayd Resource Corp. in a deal worth C$262.9 million. Capital expenses for the La India project were estimated at around $158 million, and it is likely that Agnico will recover it over the future through development of resources.


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