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Buy Agnico Eagle Mines Ltd. for Gold Exposure in a Well-Diversified Portfolio

Gold stocks have been a terrible investment over the last few years, with two of the bigger names seeing their stocks decline considerably. In the last five years, Agnico Eagle Mines Ltd. (TSX: AEM)(NYSE: AEM) declined 52% and Barrick Gold Corp.  (TSX: ABX)(NYSE: ABX) fell 58.5%.

When the carnage will stop is highly uncertain and difficult to call, but for investors who want to keep some exposure to gold stocks for the purposes of diversification, the following SWOT analysis can be helpful.

Strengths

Agnico Eagle has the lowest political risk profile of its peer group, with gold mines in politically safe areas such as northwestern Quebec, northern Mexico, Finland, and Nunavut, as well as exploration activities in Canada, Europe, Latin America, and the United States.

Good operational performance, with management expecting total cash costs to be between $650 and $675 per ounce in 2014, compared to $734 per ounce in 2012. This represents a decline of 11% at the mid-point of guidance. Lower costs are attributed to higher grades at Meadowbank and contributions from commercial production at Goldex and La India. The all-in cost per ounce, which includes exploration expense, head office costs, and sustaining capital, is expected to be approximately $950 in 2014 and 2015. While this is still higher than Barrick’s expected all-in cost per ounce of $900 to $940, it is better than most gold companies.

The near-term production growth profile is strong, with an approximately 30% growth rate in production expected in 2014. Furthermore, production has beaten expectations in the last two quarters. The balance sheet is healthy with manageable debt levels. The company’s debt-to-capitalization ratio is 23% compared to Barrick’s at 45%. The Osisko acquisition enhances Agnico Eagle’s production and cost profiles and increases its reserves and resources.

Weaknesses

Although the company has experience in Nunavut, the area is remote and lacks infrastructure. Therefore, the cost to explore and produce in this area is on the high end. Also, declining grades at Meadowbank (34% of production) are a weakness, but are expected to be offset by improvement in other areas.

The Canadian Malarctic (9% of production) has high cash costs of $799 per ounce. The company is reviewing operations there in order to achieve improvements to productivity and the cost structure.

Opportunities

Building on the company’s success with Meadowbank in Nunavut, its Meliadine project represents a key opportunity for production growth. Management has pointed out that Meliadine has better infrastructure than Meadowbank and with management’s expertise and experience in the area, the company is well positioned to drive shareholder value with this new high-grade resource base. Drilling at Meliadine will continue throughout the year with the expectation that the resource base will be expanded further.

Closer to Meadowbank, the company recently had exploration success at IVR, which gives the company more exploration upside.

Recently, the company acquired Cayden Resources, a Canadian exploration company with assets in politically stable jurisdictions in Mexico. The deal is expected to close at the end of the year and offers further exploration upside for the company.

I like that Agnico Eagle is picking up assets and making acquisitions now in a weak gold environment where equity values are under pressure. The fact that the company has been financially strong to do this despite falling gold prices is a testament to the quality of the management team.

Threats

The price of gold is a big threat and a big uncertainty. Analysts forecast a decline in gold prices — estimates are in the range of $1,350 per ounce in 2014 and $1,300 per ounce in 2015, and heading even lower longer term. This compares to a $1,669 gold price in 2012 and $1,900 in 2011.

Bottom line

In the past, gold has acted as a safe haven. In recent years, investors have been more optimistic as monetary policy resulted in a big injection of liquidity, but a well-diversified portfolio still has a place for gold stocks, and as increasing uncertainty hits the market, this diversification will be a welcome addition to investors’ portfolios.

If gold isn't your thing, then this stock might be

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Fool contributor Karen Thomas has no position in any stocks mentioned.

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