Costs Balance Agnico-Eagle Mines

Agnico-Eagle Mines Limited (AEM) reported first quarter EPS of $0.20, below our estimate of $0.22 and down 13.0% y-o-y, primarily due to higher production and general and administrative costs.

However, gold prices remain high and higher byproduct prices are lowering total cash costs, i.e., production costs net of by-product credits. In addition, the company also has a healthy pipeline of long-term projects to boost gold production. Nonetheless, AEM is incurring heavy exploration costs due to these gold development projects, which will negatively impact the cash position this year. We reiterate our Hold rating on shares of AEM.

For 2008, total cash costs per ounce are expected to be approximately $50 only, with the y-o-y difference in part attributable to higher production costs associated with gold sourced from new mines at the Goldex mine project and the Kittila mine project, which do not contain any by-product metals.

Long-term project funding comes from a healthy cash flow generation. Moreover, the company’s balance sheet remains strong. With four gold projects under construction, AEM remains well-positioned to achieve its goal of a 55% y-o-y increase in gold production to 358,000 ounces in 2008.

We have valued Agnico-Eagle using the P/E valuation metrics. Currently, shares of Agnico-Eagle are trading at 70.1x our 2008 EPS estimate of $0.94, at a significant premium to the industry median and its peer, Kinross Gold Corp’s (KGC - Analyst Report) multiple. Our target price of $66.50 is based on a P/E of about 70.7x our 2008 earnings estimate of $0.94 per share.

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