Based on our assessment of the macroeconomic environment, in our March 2022 blog post we proposed that “It’s Time for Gold”. In response, we recently purchased a position in Agnico Eagle (tkr: AEM), the third largest gold miner by market capitalization. Agnico was founded in 1957, and is headquartered in Canada, with operations in Canada, Australia, Finland and Mexico. In February of this year, Agnico completed its merger with Kirkland Lake Gold (tkr: KL). The combined company will continue under the name “Agnico Eagle Mines Limited.” The companies’ management teams believe that their merger should realize approximately $2B in cost savings over the next 10 years. We purchased Agnico because we believe it has one of the most attractive valuations and operating metrics among the companies in the gold mining industry. In general, Agnico is a profitable company with a trailing twelve-month (TTM) net profit of 12.2%, a strong balance sheet, and one of lowest production costs in the industry. In addition, it currently trades at a reasonable price-to-earnings (PE) ratio.
Aside from the valuation metrics, one of the most important factors to consider when evaluating a mining company is the region where it operates. Companies that operate in regions that are politically and economically stable, and supportive of the mining industry tend to have more consistent output. Operating in these safe (“tier-1”) jurisdictions helps avoid any disruption to operations and provides confidence in future production and profitability. After Agnico’s merger with Kirkland Lake Gold, 93% of its revenue is now produced in tier-1 jurisdictions such as Canada, Australia, and Europe. For comparison, other leading miners such as Newmont (tkr:NEM) and Barrick Gold (tkr:GOLD) have only ~58% and ~50% respectively, of their operations in tier-1 jurisdictions.
Gold is not the only precious metal that we expect to do well in the upcoming macroeconomic environment. Silver should perform just as well as gold, if not better. Silver has similar properties to gold, including its use as an industrial metal. Therefore, in selecting a mining company, we looked for ones that generated the largest total percentage of their revenue from gold and silver. In this regard, Agnico again shines, with 99% of its revenue coming from mining gold and silver, the largest percentage among the top miners.
Agnico currently has a dividend yield of 2.4%, and it has a long history of returning capital to shareholders through frequent share buybacks and dividends — the company has paid dividends consistently for 38 years. Last quarter, Agnico increased its regular quarterly dividend by 14%, and it plans to repurchase approximately 2% of its common shares outstanding. We believe Agnico’s strong cash flow will enable it to continue to pay dividends and buy back shares over the next few years.
Year-to-date, Agnico has performed well relative to both the materials sector and the S&P 500. We believe the performance this year is more representative of performance in a monetary tightening environment.
We do recognize however, that some of the price appreciation that we have seen this year in Agnico can be attributed to the conflict in Russia and Ukraine; we believe this is because gold acts as both an inflation hedge and a safe haven asset. However, going forward, we believe inflation and negative real rates may be the primary catalyst to drive future outperformance.
Individual investment positions detailed in this post should not be construed as a recommendation to purchase or sell the security. Past performance is not necessarily a guide to future performance. There are risks involved in investing, including possible loss of principal. This information is provided for informational purposes only and does not constitute a recommendation for any investment strategy, security or product described herein. Employees and/or owners of Nelson Capital Management, LLC may have a position securities mentioned in this post. Please contact us for a complete list of portfolio holdings. For additional information please contact us at 650-322-4000.
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