Gold Co. Shows Once Again Why It Is Best in Class
Contributed Opinion

Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) reported a very strong first-quarter result, with higher production and lower costs. Cash costs are $929 per ounce, and All-In Sustaining Costs ("AAISC") are $1,190, which is below average for major miners. Earnings of 76 cents per share came in well above analysts' consensus of 61 cents, and free cash flow was a record of $393 million, the second consecutive quarter of record free cash flow.

Canadian Malartic reported record production, partially offset by Detour, because of low-grade sequencing; it should recover in coming quarters. The company reiterated its annual guidance. It also reported encouraging exploration results at Detour, where they are aiming to produce 1 million ounces a year; Malartic, where they are transitioning to underground; and Hope Bay, where no production decision has yet been made, but results are positive.

Strong Balance Sheet, Though Some Debt Coming Due

During the quarter, Agnico repurchased 375,000 shares for a total of $19.9 million. It is in a strong financial shape, with almost $525 million in cash, net debt of $1.32 billion (down from $1.5 billion over the quarter), and total liquidity of $2.5 billion. It should be noted that Agnico has about $800 million of debt maturities over the next 15 months, which will "either be repaid or refinanced." 

We would expect the company to use most of its free cash flow over the coming year to build up cash so that it can pay down most of these maturing debts. Agnico, like some other miners, has shown that margins are expanding in the first quarter as the gold price moves up more than costs. Agnico's margins are right at the top among the larger miners as costs seem (for now) under control; it has the largest increase in organic reserves, providing an excellent pipeline; the geopolitical risk profile is low; and the dividend (2.4%) is at the top end. It has solid management and a strong balance sheet.

We said earlier that we thought that Agnico's guidance for the year was somewhat conservative, but the company (as we mentioned) has always provided what it describes as "realistic" guidance. Though Agnico's valuation is higher than its peers — 1.51x NAV (consensus) versus 1.08x, and 11.9 x cash flow versus 7.4x — and the stock has appreciated far more than peers this year — up over 20%, more than double other miners, and considerably outpacing the other largest miners (4% for Newmont Corp. (NEM:NYSE) and negative for Barrick Gold Corp. (ABX:TSX; GOLD:NYSE)) — the quality of the company and its strong performance justifies this. On so many metrics, Agnico is at the top or close of the pack.

We are holding, though for any investor just building a gold equity portfolio, Agnico definitely belongs there.

Orogen Sees Royalty Becoming More Value

Orogen Royalties Inc. (OGN:TSX.V) noted that Altius Minerals Corp. (ALS:TSX.V) had exercised over 7 million warrants, bringing its holdings to 18%. This was fully expected — the warrants were exercisable at 40 cents and expired this month — so no particular significance should be attached to the timing.

Altius acquired the warrants through an investment in Renaissance Gold which Orogen acquired nearly four years ago. More importantly, AngloGold Ashanti Ltd. (AU:NYSE; ANG:JSE; AGG:ASX; AGD:LSE) released a technical report on its Merlin deposit in southern Nevada, over which Orogen holds a 1% royalty. The study, which confirms the 9 million ounces in the deposit, envisions a shorter mine life, packing virtually all of the production into years three to nine.

Previously, a longer mine life at a 500,000 ounce-a-year run rate had been discussed. By bringing production forward, it enhances significantly the economics of the proposed mine. No date was indicated for the start of mining, though earlier Anglo has pointed to 2029. This study is just on the Source: AngloGold Form 20-F Merlin deposit and not the adjacent Silicon, which itself contains over 4 million ounces. In the first two years, there is essentially no gold-bearing ore mined; rather, it is all waste. But years three and four are projected to produce over 1 million ounces each, with an astonishing 1.8 million ounces in year four.

This Is Big, Very Big!

Of course, this production is for one year only, but for context, only one mine in the world — Muruntau in Uzbekistan — produces more on an annual basis. A 1% royalty on that would generate $42 million at today's gold price. As mentioned, this study does not mention a time frame, nor does it indicate recoveries, so some discount for recoveries is warranted, as well as a discount on future revenue to calculate Net Present Value.

However, as we have discussed previously, the Silicon-Merlin deposits — which will perhaps eventually be one pit — have additional potential at depth as well as to the west. Anglo mentioned that the Merlin would be an open pit mine with recoveries from both a mill and a heap leach facility. Work is underway on a preliminary feasibility study. Anglo emphasizes that "the initial assessment is preliminary;" nonetheless, there have been a total of 445 drill holes into Merlin, from both Anglo and its predecessors, for an astonishing total of 146,000 meters of drilling.

The Game's Afoot

We believe that this report will be an incremental catalyst to get the major royalty companies to step up and buy the royalties of both Orogen and Altius. A ruling on the arbitration between Anglo and Altius will be another, and this could come within a month or two.

As discussed previously, we believe that a major royalty company will acquire Orogen and spin off everything except the Silicon-Merlin royalty, including the cash, the cash-flowing Ermitaño royalty, and the rest of the royalties, land, and joint ventures.

We calculate a value of nearly US$50 million for this, meaning that there is an implied value in Orogen's share price for Silicon-Merlin of approximately US$82 million. As I have mentioned before, there is an upside in a takeover, but there is equally little downside from the current price. The stock moved up about 5% in the last few days, after the Anglo report, to the top of its recent range.

Orogen, which we called a "must-own" stock last week, remains a strong buy.

Mine Gets Bigger for Osisko

Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE) received positive news as Metals Acquisition announced a reserve update at its CSA copper-silver mine in Australia. Osisko's stream on this mine is the company's third-largest asset, contributing 6% of its Net Asset value, and a little more of its earnings. Importantly, the 64% boost in copper reserves extends the mine life to 2034.

Separately, Calpers, the large California state pension fund, voted in favor of only two of nine directors standing for election, Jason Attew and David Smith, both new directors. They voted "withhold" on the other seven. On proxies, shareholders can withhold votes for directors but cannot vote against them.

Although Calpers did not provide reasons, we suspect it was a protest vote against the poor board oversight on governance; we have discussed this previously. As indicated last July in our commentary surrounding the dismissal of former CEO Sandeep Singh, we withheld votes against several directors based partly on their low share ownership. We voted in favor of CEO Jason Attew as well as Messrs Macdonald, Murray, Smith, and Joanne Ferstman. The proxies are due May 9. As discussed previously, we are impressed with Mr. Attew and believe he will lead the company forward well. There is a deep pipeline, and whatever the mistakes of the past, Osisko is now well-situated going forward.

We are holding.

TOP BUYS this week, in addition to the above, include Nestlé SA (NESN:VX; NSRGY:OTC) and Midland Exploration Inc. (MD:TSX.V).

WEBINAR WITH TOP ANALYST Co-host Rich Checkan and I welcome guest Peter Cavelti to our next On the Move webinar on Tuesday, May 7. Peter is a well-known manager, analyst, and author whose insights into the impact of geopolitics on investment markets he will share with us. The webinar is complimentary, but you must register here.

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., Orogen Royalties Inc., Altius Minerals Corp., Osisko Gold Royalties Ltd., and Midland Exploration Inc
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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