Once Again, Agnico Shows Why It Is Top Miner

Source: Adrian Day 11/11/2024

Global Analyst Adrian Day reviews results from two high-quality companies, a gold miner and a global blue chip. He also looks at changes in gold trends.

Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) demonstrated once again why it is best in class, with production and earnings exceeding estimates while costs remain under control. On many metrics, including operating cash flow, financial results were new records for the company for the fourth consecutive quarter. Macassa and Fosterville drove the production, while the mines in Nunavut also saw growth. Production actually was down in the prior quarter due to planned maintenance shutdowns, but it was higher than the year-ago quarter and higher than analyst estimates.

Agnico’s guidance for the full year remains unchanged, at 3.35 million to 3.55 million ounces, with cash costs in the range of $875 to $925 an ounce and All-In Sustaining Costs (AISC) in a low $1,200 to $1,250 range. For the quarter, company-wide cash costs stood at $920, higher than previous quarters due to lower production and higher royalty payments due to higher gold prices.

The company repaid $375 million of debt during the quarter, bringing net debt to $490 million. It could be net debt neutral by the end of the year. President and CEO Ammar Al-Joundi said the highlights for the company are strong financial results, continued optimization, and exciting exploration results. Most of the exploration is at existing assets, enabling the company to leverage existing infrastructure and people.

Agnico Ticks All the Boxes

Agnico continues to be the large miner of choice, with strong and conservative management, a solid balance sheet, world-class mines in top jurisdictions, and a deep pipeline. It has consistently met or exceeded guidance. The stock, as one might expect, trades at a premium on some metrics to many other large miners. But it remains undervalued relative to its own history.

Its price-to-free cash flow stands at under 10 times despite a 30% stock price increase since July. This multiple is close to its 40-year low, astonishing given the high gold price when multiples normally expand. Agnico stock fell after its results, as gold fell over $50, but it fell by less than the index. In the very near term, there could be a further pullback on any additional gold and stock market weakness. However, the stock could hit $100 this year and almost certainly will sometime next.

For us, it’s a core holding, and any weakness would make us buyers again.

Soft Results From Nestlé See Guidance Reduced

Nestle SA (NESN:VX; NSRGY:OTC) reported soft third-quarter results following the replacement of Mark Schneider as CEO with Laurent Feixe. Organic growth for the first nine months was just 2%, while its other key metric of “positive real internal growth” was just 0.5%, blamed on softening consumer demand and reduced inventory.

Emerging markets were the best-performing region, while coffee was the best-performing segment. Higher pricing contributed 1.6% to growth, suggesting very sluggish sales for the third quarter. As a result, the company reduced full-year guidance, which was not unexpected.

Separately, the company introduced a streamlined organization, with some regions (such as North America and South America) merged and led by Switzerland. The aim is to speed up decision-making and encourage collaboration among the leadership team. The risk, of course, is that decisions are made away from developments on the ground. Nestlé stock bounced back on Friday from the 52-week low it hit at the end of October and remains undervalued on its own historical metrics. It no longer trades at a premium to peers, while its yield over 3.6% is essentially its highest-ever yield (at least over the last half-century).

We think the company may struggle with growth over the next year or so, but it is a well-diversified, high-quality company with a strong balance sheet. We would buy on weakness as a long-term holding.

TOP BUYS this week, in addition to the above, Barrick Gold Corp. (ABX:TSX; GOLD:NYSE ),Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE), Metalla Royalty & Streaming Ltd. (MTA:TSX.V; MTA:NYSE American), Orogen Royalties Inc. (OGN:TSX.V), and Lara Exploration Ltd. (LRA:TSX.V). In truth, the resource stocks could have a little further near-term weakness, so these stocks are buys now for those of you underinvested in the sector or who do not yet own these particular stocks.

Western Buyers Pick up the Slack in Gold

D In the third quarter, central bank buying, which drove the gold price for the past two years, and Chinese retail buying, which pushed it higher this year, both declined, according to a report from the World Gold Council. Central bank buying dropped almost 50% from the year-ago quarter, though that was a peak, and central bank buying remains high on a historical basis.

Chinese buying plunged to 36% below its 10-year average. This was replaced by a big jump in Western buying; gold ETFs, which had experienced net outflows for most of the year, saw increasing inflows, particularly in September, and they have continued in October. This quarter saw the first net inflows since the first quarter of 2022.

So, Western investor demand has replaced the slowdown in the central bank and Chinese demand that had been the main drivers of the gold price for the previous two years. The reasons different groups have been buying gold have not gone away. This is true whether we are talking about central banks diversifying their reserves amid the “weaponization of the dollar,” Chinese investors concerned about their domestic economy, or Western investors seeing lower interest rates ahead even as inflation remains stubborn. However, after such strong central bank buying for the past two years and the surge in Chinese buying earlier this year, the slowdown from these sources may continue for a while.

But this buying is not going away and won’t turn negative. Western buying, however, is likely to continue to increase, as most investors, be they retail, funds, or institutions, are meaningfully underweight relative to their historical averages. And none of this will change regardless of who wins the election this coming week: the weaponization of the dollar and the huge fiscal deficits are likely to continue. Astonishingly, most gold mutual funds continued to see net outflows in September, some quite large, though certainly there has been a shift toward inflows. Again, as we have mentioned, as gold moves higher, as the companies report stronger cash flows, and as the broad market, particularly its erstwhile leaders, falter, interest will turn to gold stocks among other groups. The significant underweight in gold assets will lead to sharp moves up in the gold stocks.

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Important Disclosures:

1. As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of Agnico Eagle Mines Ltd., Barrick Gold Corp., Fortuna Mining Corp., Metalla Royalty & Streaming, Orogen Royalties Inc., and Lara Exploration Ltd.
2. Adrian Day: I, or members of my immediate household or family, own securities of: All. My company has a financial relationship with All. I determined which companies would be included in this article based on my research and understanding of the sector.
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Adrian Day Disclosures

Adrian Day’s Global Analyst is distributed for $990 per year by Investment Consultants International, Ltd., P.O. Box 6644, Annapolis, MD 21401. (410) 224-8885. www.AdrianDayGlobalAnalyst.com. Publisher: Adrian Day. Owner: Investment Consultants International, Ltd. Staff may have positions in securities discussed herein. Adrian Day is also President of Global Strategic Management (GSM), a registered investment advisor, and a separate company from this service. In his capacity as GSM president, Adrian Day may be buying or selling for clients securities recommended herein concurrently, before or after recommendations herein, and may be acting for clients in a manner contrary to recommendations herein. This is not a solicitation for GSM. Views herein are the editor’s opinion and not fact. All information is believed to be correct, but its accuracy cannot be guaranteed. The owner and editor are not responsible for errors and omissions. © 2023. Adrian Day’s Global Analyst. Information and advice herein are intended purely for the subscriber’s own account. Under no circumstances may any part of a Global Analyst e-mail be copied or distributed without prior written permission of the editor. Given the nature of this service, we will pursue any violations aggressively.

( Companies Mentioned: AEM:TSX; AEM:NYSE, NESN:VX; NSRGY:OTC, )

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