Agnico keeps steady hand through choppy waters

The downturn in the gold market may be making investors anxious, but the head of one of Canada’s most prominent gold miners, Agnico-Eagle Mines (AEM-T, AEM-N), is staying as cool as a spring breeze in Nunavut.

“Having lived through US$250 per oz. gold and coming out the other side, what you don’t do at a time like this is panic,” Agnico-Eagles chief executive Sean Boyd told The Northern Miner. “You stick to what you are good at; you execute, and you don’t feel pressured into making capital investments unless they make sense.”

The trappings of succumbing to such pressures are written all over the recent downturn in the market caps of some of Canada’s big gold producers. Investors are all too familiar with the corporate hubris that has partially felled such heavyweights as Barrick Gold (ABX-T, ABX-N) and Kinross Gold (K-T, KGC-N).

Goldcorp’s (G-T, GG-N) overtaking of Barrick in terms of market cap — despite the latter’s greater heft in terms of production profile — has been a topic of conversation of late. But equally noteworthy is the narrowing spread between Agnico’s market cap of roughly $5.5 billion, and Kinross Gold’s, which hovers around the $5.8 billion mark. That tightening in valuations has come despite Kinross’ production being roughly two and half times that of Agnico’s.

“What we say around here is that we’ve never felt that we were in a race to be the biggest,” Boyd says. “We’re just focus on doing what we are capable of doing and not worrying too much about where we rank in terms of size.”

That type of thinking happens to align quite well with the current zeitgeist but it seems like only yesterday that the industry was possessed by the drive for high tonnage, low grade and big capex projects. And investors and operators alike were only too willing to take on almost any amount of sovereign risk to find them.

Now, however, high-grade, low capex projects in stable jurisdictions rule the roost, and while that change may be part of a natural evolution within the industry, Boyd says it was also, no doubt, spurred on by the de-coupling of the gold price from gold equity prices that began after the 2008 financial crisis.

The situation led senior management teams in the business to ponder their role in the value creation process, which is culminating into an industry wide process.

“What happened with growth for growth sake is that it created un-manageable companies,” he says. “The industry concluded that the growth for growth sake model just had too much risk associated with it because in order to grow you had to take on larger, more complex projects that were oftentimes more remote as well, and, as result, they were difficult to execute on.”

While it could be argued that Agnico itself pushed the envelope on the manageable execution front — as just a few years ago it was in the midst of developing four mines — its success in getting all of them into production proved that it never bit off more than it could chew.

One factor that aided in that execution was the low level of political risk faced by the company.

Indeed the “riskiest” country that Agnico currently operates in is Mexico, and no one is about to mistake North America’s southern most country for the Democratic Republic of the Congo any time soon.

That’s why a recent $24 million investment in Sulliden Gold (SUE-T) for its Peruvian assets raised some eyebrows.

The move could well be connected to Boyd’s recent assertion that he has advised Agnico’s project evaluation group to broaden the scope of projects to consider.

“We want files on opportunities that may or may not become available, so that we have information in hand,” he said on a conference call connected to Agnico’s latest quarterly earnings. “We’ve seen a lot of valuations depressed and we want to know what is available out there for us.”

In general terms, Boyd said the company looks for smaller assets with upside where we could add value.

Speaking directly to its recent investment in Peru, he points out that it is a relatively modest investment relative to the company’s financial clout, and that it offers the company a vantage point from which to get a better feel for the country.

“We just take a wait and see approach and we take our time and do our homework on the region,” he says. “It’s similar to the tactic we used in the past with Mexico and Finland…and it’s a great time to do it. It’s not a time to sit on your hands. This is the way to build a business.”

So whether it was Paul Penna famously making the call to drive across the depths of LaRonde to discover a new world class deposit, or the company’s foray into Finland in 2004 before gold prices really got rolling, or its steady acquisitions since 2005 that have built up three quarters of its current reserve base, Agnico has consistently made moves with an eye toward the future.

The key, Boyd says, is to couple such future vision with a determination to keep as much corporate flexibility as possible.

“Agnico has the experience to weather volatility in gold market. We have the ability to make our own choices in capex and timing. We have choices in terms of exploration expenditures on grass roots projects,” he said on the same conference call. “Our job is to move forward steadily, achieve measured and executable growth and to protect the dividend.”