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We are upgrading our recommendation on Agnico-Eagle Mines Ltd. ( AEM - Analyst Report ) to Neutral following our assessment of its strong first-quarter 2012 results. Its revenues and adjusted earnings for the quarter topped Zacks Consensus Estimates. Sales and profit were boosted by a higher average realized gold price.
Agnico-Eagle has rebounded from a series of underperformances in 2011, which was partly attributable to the closure of its Goldex mine due to safety issues. The company has sufficient cash flow which enables it to maintain a very strong exploration budget for 2012, primarily focused on Kittila, Meliadine and Mexico.
Agnico-Eagleis also reinvesting in its assets to expand its output. It expects production to expand by 24% through the end of 2014. The company also has consistently rewarded its shareholders by way of dividend payments.
With an increase in gold reserves in 2011, Kittila is the company’s largest contributor to proven and probable gold reserves. Agnico-Eagle expects further production growth in 2012. It is currently exploring expansion opportunities in Kittila and is conducting a feasibility study for a potential 25% expansion in throughput.
Agnico-Eagle has developed a revised life of mine plan. The new plan forecasts lower gold production over a shorter mine life but is still expected to yield significant free cash flows over the next six years. The company believes that the new life of mine plan for the Meadowbank mine lowers its operating risk.
However, any potential delay associated with the development projects may jeopardize the company’s future production. Moreover, uncertainties surrounding the Goldex mine could affect the stock’s performance.
Agnico-Eagle suspended operations at the Goldex mine in October 2011. Considering the safety of its employees and the integrity of surface infrastructure, the company decided to cease production and initiated an investigation on the site. Agnico-Eagle is expected to provide an update on the status of the mine in mid-2012.
The company is also faced with persistently high operating costs at its Meadowbank mine in the Canadian Arctic. Moreover, it is exposed to risks associated with currency exchange swings, metal prices and political environment.
Agnico-Eagle, which competes with Barrick Gold Corporation ( ABX - Analyst Report ) , Kinross Gold Corporation ( KGC - Analyst Report ) and Newmont Mining Corp. ( NEM - Analyst Report ) , currently retains a short-term Zacks #3 Rank (Hold).
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