The price of gold has fallen 1.8% through June, and it may very well continue its retreat following the Federal Reserve's mid-June announcement that it's raising its benchmark interest rate to a range of 1% to 1.25% by the end of the year. With gold mining stocks likely to also fall, now is a good time to see where the opportunities lie. So let's consider two leading gold miners, Yamana Gold (NYSE: AUY) and Agnico Eagle Mines (NYSE: AEM), to see which one offers the more compelling argument for investment.
A round of introductions
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Headquartered in Canada, Yamana maintains a portfolio of assets strictly located in the Americas. Similarly, Agnico also has a strong presence in the Americas, but it also operates overseas: one gold-producing mine in Finland and several projects in the exploration phase scattered throughout Scandinavia.
The most decisive factors, though, transcend cursory looks at the companies' assets, so let's compare them on some important metrics to gain better insight.
A brief look suggests Agnico Eagle is more lustrous, but let's see what we find when we dig in further.
A tale of two miners
Reporting gold production of 1.66 million ounces in fiscal 2016, Agnico Eagle's higher revenue for the year is unsurprising, since Yamana produced only 1.27 million ounces. More importantly, though, is how the companies have fared over the past several years.
From two different perspectives, Agnico Eagle appears more desirable. Unlike Yamana -- which has reported declining sales -- Agnico Eagle has improved its top line at at a steady clip, and it has reported even greater EBITDA growth. Yamana, however, has reported negative EBITDA in each of the past three years.
The companies' margins provide another reason Agnico Eagle is more attractive. Although it forecasts all-in sustaining costs (AISC) between $850 and $900 per gold ounce for fiscal 2017 -- higher than the $824 it reported in fiscal 2017 -- it wouldn't be surprising if the company performs better, as it has beaten its guidance in each of the past three years. Conversely, Yamana reported AISC (on a co-product basis) of $911 per gold ounce in fiscal 2016 -- far worse than its guidance of $840. In fiscal 2017, it estimates AISC between $890 and $910.
Winner: Agnico Eagle.
A delicate balancing act
Though Yamana offers a less attractive income statement, perhaps its balance sheet will give Agnico Eagle a run for its money.
Again, Agnico Eagle shimmers more brightly than Yamana, this time in terms of liquidity. According to its quick ratio, Agnico Eagle retains 1.71 times the amount of liquid assets -- cash, cash equivalents, marketable securities and short-term investments -- as it does immediate liabilities, suggesting that it's better suited than Yamana to withstand a fast downturn in the price of gold. Agnico Eagle's conservative approach to leverage further illustrates its enviable position relative to Yamana. Whereas Agnico Eagle reported a net debt-to-EBITDA ratio of 1.05 at the end of fiscal 2016, according to Morningstar, Yamana ended the same year with $1.477 billion in net debt and negative EBITDA.
Yamana sought to strengthen its balance sheet in 2016 by divesting non-core assets Ernesto Pau-a-Pique and Mercedes. Attempting to optimize its portfolio, Yamana's management has identified a long-term goal of achieving a net debt-to-EBITDA ratio below 1.5. Unlike its peer, Agnico Eagle hasn't resorted to divesting its assets. In fact, it sought to improve its portfolio by acquiring Osisko Mining in 2014. Yamana, however, doesn't intend to seek acquisitions in the immediate future, relying instead on organic growth.
Winner: Agnico Eagle.
Mining the gold to generate the green
Finally, let's compare the companies in terms of cash flow.
Our look at Yamana has revealed some sources of concern, but the company deserves credit for its improved operational cash flow -- something extremely helpful for the company's future success. If it continues growth in its operational cash flow, it may be less reliant on assuming more debt; in fact, it may be able to extend its debt-reduction initiative beyond the $370 million reduction it has reported since the end of 2014.
Although Yamana deserves kudos for its operational cash-flow growth, Agnico Eagle wins in terms of free cash flow, reporting positive free cash flow in four out of the past five years. By the same measure, Yamana has only reported a positive amount twice. Much of Yamana's capital expenditure relates to the construction of Cerro Moro, which is expected to emerge as a core mine after it commences production in 2018. Like Yamana, Agnico Eagle is also committed to organic growth of its portfolio, illustrated by the development of the Meliadine mine. This, among other projects, will result in negative free cash flow over the next two years, according to management; however, it expects to be free cash flow positive again in 2019.
In light of Agnico Eagle's 3.89% return on invested capital at the end of fiscal 2016 compared with Yamana's negative-3.98%, I have more faith in Agnico Eagle's capex spending than that of Yamana.
Winner: Agnico Eagle.
And the winner is...
Which gold miner offers the more compelling argument for investment? Undoubtedly, it's Agnico Eagle. Although Yamana's price tag seems more attractive -- it trades at 1.4 times trailing sales, compared with Agnico Eagle's 5.0 -- it's not enough to compensate for the numerous ways in which Agnico Eagle outshines Yamana.
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