June 3, 2023

Agnico Eagle: Overvalued Gold Stock, Set to Tumble

Agnico Eagle Mines (AEM) is a Canadian precious metals explorer, producer, and marketer with operations across Northern America and Europe. I am bearish on the stock.

Fundamental Analysis

A principal component analysis suggests that the stars aren’t exactly aligned for Agnico stock. Mining stocks often correlate with expected GDP growth, company earnings growth, and inflation.

Agnico is heading into 2022 with a downward revision of GDP growth of nearly 10%. The market would have priced the stock in on previous estimates, and recent downward revisions could mean that we’re looking at an overvalued stock here.

Furthermore, Gold prices haven’t lived up to expectations during the latest inflationary environment, and the commodity’s price could be downwardly sticky, meaning that forward prices could overshoot a drawdown to fair value once inflation finds calm; this would in turn severely damage the firm’s topline earnings.

A persisting problem for Agnico is the company’s rising input costs, with total operating expenses increasing by 138.40% year-over-year. This is a bigger problem than what it looks like. As I previously mentioned, I think Gold prices will lag inflation going into 2022, and this could happen while we’re still in a labor crunch, meaning that input costs won’t likely decrease along with the mining houses’ inventory value.

Recent Events

Agnico has dropped some serious cash on acquisitions and existing mines’ expansions of late. The firm recently jointly acquired Osisko in Quebec for C$3.9 billion, providing it with access to easy to mine gold reserves. Agnico also spent nearly half a billion to gain access to 545 thousand ounces of gold per year at Canadian Malartic, and expanded on its Kittila mine in Finland to reach a processing capacity of 2 million ounces of gold per annum.

Although these acquisitions may add value to the stock price in the long run, there’s a risk that they may be dilutive in the short term. It’s often observed that mining stocks lose value when the underlying firm increases its exploration budget, and these prices only really retrace once the acquired assets become cash flow positive.

A second issue here is that these are gold properties. We’ve all got that bit of doubt in our minds regarding the future of gold, with crypto playing its role as a hedging vehicle and the metal itself somewhat losing its appeal as a luxury item in recent years; therefore, I think many investors may be doubting the terminal value of Agnico’s recent acquisitions.

Seriously Overvalued

Certain mining stocks might be set for their final hurrah in early 2022, but Agnico is severely overvalued relative to the sector.

According to Agnico’s P/E ratio, the stock is overvalued by 24.42% relative to its peers, and this doesn’t read well if one considers that Agnico’s earnings per share ratio is growing at 81.12 slower than its stock price.

Agnico is also struggling to match its stock price based on sales; according to the price-sales ratio, the stock is overvalued by 3.37x relative to convention and 1.08x compared to the sector.

Wall Street’s Take

Turning to Wall Street, Agnico has a Moderate Buy consensus rating, based on five Buys and three Holds, assigned in the past eleven months. The average Agnico price target of $65.02 implies 22.4% upside potential.

Concluding Thoughts

Issues are arising with deflating inventory value and continued rising input costs, which could cause trouble for Agnico. The firm’s recent acquisitions aren’t necessarily as accretive as they may appear. From a valuation vantage point, AEM stock is significantly overvalued relative to its peers.

Disclosure: At the time of publication, Steve Gray Booyens did not have a position in any of the securities mentioned in this article.

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