Agnico’s steady hand in 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’ CEO Sean Boyd tells 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 capitalizations of some of Canada’s biggest gold producers. Investors are all too familiar with the corporate hubris that nearly felled heavyweights such as Barrick Gold (ABX-T, ABX-N) and Kinross Gold (K-T, KGC-N).

Goldcorp (G-T, GG-N) overtaking Barrick in terms of market cap — despite the latter’s hefty production profile — has been a topic of conversation lately. But the narrowing gap between Agnico’s $5.5-billion market cap and Kinross Gold’s $5.8-billion market cap is also noteworthy. Valuations have tightened despite Kinross’ production being roughly two and a 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 focused on doing what we are capable of doing, and not worrying too much about where we rank in terms of size.”

This aligns well with the current sentiment, but the industry has favoured high-tonnage, low-grade and big-capex projects before, with investors and operators willing to take on almost any amount of sovereign risk to find them.

Now, however, higher-grade, low-capex projects in stable jurisdictions rule the roost, and while the change may be part of an evolution within the industry, Boyd says it was also spurred by gold prices decoupling from gold equity prices, which began after the 2008 financial crisis.

The situation had senior management teams pondering their role in the value-creation process, which is culminating into an industry-wide process.

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

While Agnico pushed the envelope on the manageable execution front — as just a few years ago it was 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 helped was the low level of political risk the company faced.

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

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

Boyd said the company is looking for smaller assets with upside, where it can add value.

Regarding the recent investment in Peru, he points out that it is a modest one 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, 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 towards the future.

The key, Boyd says, is to couple visions with as much corporate flexibility as possible.

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