Increasing evidence of an upcoming recession and economic weakness around the world should bode well for gold stocks like Agnico-Eagle Mines Ltd. (TSX:AEM). So how has Agnico Eagle performed over the last few years? Is it in line with the company’s strengths and stock’s true value considering the environment we’re in today?
Gold stocks: A safe haven in weak economic times
Typically, gold stocks are a safe haven. This is because the underlying commodity, gold, is a good store of value. What this means is that it holds its value well, even in difficult geopolitical and economic times, when most asset values fall significantly. Thus, investors have typically flocked to gold and gold stocks in these times.
Today, we are seeing a rapid deterioration in the macro economic health and outlook, both domestically and globally. For example, here in Canada, the economy shrank in the second quarter of 2023. In fact, according to Stats Canada, the economy contracted at an annualized rate of 0.2%. And while the U.S. seems to chug along nicely for now, there are mounting risks as the key target U.S. interest rate has also risen sharply over the last 18 months, to 5.25% to 5.5%. Furthermore, China’s GDP growth rates have fallen to below 3%. As a reminder, before the pandemic, China’s GDP was growing at mid-to-high single digit rates.
As we can see, the global economic outlook is clearly worsening, and really, we should not have expected anything different given the recent rapid rise in interest rates.
Geopolitical turmoil hits the globe
Geopolitical turmoil is nothing new. And these days, it certainly feels like the new norm. For example, the Ukraine war is ongoing, tensions with Russia and China remain, and political risk associated with the United States and the US dollar continues to rise. All of this places a risk premium on asset values as we become acutely aware of the potential downside that exists with an increase in geopolitical tensions.
As a result, gold is an increasingly attractive place to turn for protection against declines in asset values, such as the US dollar. Thus, central banks have recently stepped up their gold purchases in an attempt to protect themselves against these risks.
Yet, the price of gold has only risen 5.7% year to date. On a longer-term basis, however, things make more sense. Compared to 10 years ago, gold is up 45%. And Agnico-Eagle Mines’ stock is up 124%. This is a function of the increase in gold prices, but also of solid operational and financial performance by the company. Interestingly, the stock still trades at depressed multiples, despite high margins and even high growth rates.
Agnico Eagle reports solid results
The company’s Q2 results highlight its strengths, beating expectations for the sixth consecutive quarter. Record gold production was accompanied by costs that came in at the lower end of guidance, and while costs are higher, the company continues to generate strong cash flows. In fact, cash from operations increased 20% to $1.3 billion in the second quarter.
Moving on to the company’s balance sheet, it remains strong, with $433 million in cash, net debt of $1.5 billion, and liquidity of $2.1 billion. In short, Agnico-Eagle is a high quality, safe, and predictable gold company with leading positions in the best mining jurisdictions. The company has paid dividends for 30 consecutive years and, looking ahead, has strong geologic potential in many of its mine. This will drive continued production growth and shareholder value creation.
In closing, all of these company-specific variables, as well as an increase in the gold price as the economic environment worsens, will lead to strong performance for Agnico-Eagle stock.
