Agnico Eagle Mines Analysis – January 2022

Agnico Eagle Mines (TSX:AEM, NYSE:AEM) is a senior gold miner with a market cap of $15.85b CAD. They announced a merger of equals with Kirkland Lake Gold (TSX:KL, NYSE:KL) in September 2021. In November, both companies shareholders approved the merger and are awaiting to be granted the final order by the Ontario Superior Court of Justice and approval by the Australian Foreign Investment Review Board. The merger is expected to close in the first quarter of 2022.

Agnico Eagle Mines and Kirkland Lake Gold are both high-quality gold-mining companies. The combined entity will be the largest gold miner in Canada with a relatively low AISC (all-in sustaining cost, a measure of costs incurred in the complete mining life cycle from exploration to closure) of $905 per ounce. The price of gold is currently at $1,826 USD per ounce. Both companies operate in much safer jurisdictions compared with other companies, have low-risk growth and are leaders in ESG (Environmental, Social, and Governance). The company will operate in Canada, Australia, Finland and Mexico. Agnico and Kirkland are the only 2 major gold companies to have grown reserves in last 10 years (by 127% compared to Kinross, another gold company, at -52%). The combined miner will have a strong balance sheet with low leverage and net cash position. Although it trades at a premium, it is undervalued compared to historical data (3-year average of price to Net Asset Value and EBITDA).

Why buy a gold stock? The reason is simple. I’m expecting either higher inflation or a market sell-off in the next 6-12 months. That’s the timeline for now since a hike in the federal funds rate will increase the yield on Treasury Inflation Protected Securities which has a negative correlation with gold prices since TIPS is a measure of real interest rates (interest rates adjusted for inflation vs. nominal interest rates like the basic federal funds rate). We need to ask ourselves how TIPS yields are calculated. It’s the treasure note for that same period (for example 10 years) minus the expected inflation during that time. For example a 5 year-treasury note today has a yield of 1.55% and the 5 year-TIPS has a yield of -1.29% that means they expect inflation during that time to be 2.79% (1.55% + 1.29%). Inflation data from December shows an annual rate of 7%. So as long as inflation stays steady or increases, gold prices will go up, and it could happen even if interest rates go up (though probably not over a sustained period of higher rates). Wage growth in much of the rich world is creeping up and will prove a persistent aspect of inflation reports. Right now the Federal Reserve expects 3 interest rates this year, 3 the following year and 2 in 2024, each one increasing by 0.25%. I believe that because the Fed is going to go slow (going too fast will cause alot of damage), inflation will not be tamed so easily and gold prices will go stay elevated or go higher as a result.

Although the US will probably tighten its monetary policies in the next year, other important economies are (so far) not moving in that direction. The European Central Bank is adamant they will not increase rates this year even though inflation is at 5% and wage growth is at 2.3% (from Q3 2021, this will go up due to labour shortages). The Bank of Japan remains ultra-loose. There is speculation that the People’s Bank Of China will cut one of its key policy rates (cost of medium-term loans) soon.

The Shiller CAPE ratio (price/earnings ratio is based on average inflation-adjusted earnings from the previous 10 years) of the S&P 500 is at 38.34, almost as high as during the dot-com boom. Low growth, higher or sustained inflation, more infectious variants, a third vaccine requirement, a market sell-off, anything bad at this point is going to help gold stocks.

I own and recommend shares of Agnico Eagle Mines.

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