Agnico Eagle: It’s OK to Take Some Profits (NYSE:AEM)

What a difference six months can make. I suggested Agnico Eagle Mines Limited (NYSE:AEM) as one of the smartest risk-adjusted precious metal miners in a climbing story on February 10 here. Since then, this at low costs, the jurisdiction’s safest gold producer earned +78% (as a total return) for investors versus the S&P 500’s +12% gain over the equivalent period.

In fact, AEM highlighted the best total return for investors among the major gold miners you could have chosen, or the sector average represented by VanEck Gold Miners ETF (GDX). This list includes Newmont (NEM), Alamos Gold (AGI), Barrick Gold (GOLD) and AngloGold Ashanti plc (AU).

However, things are changing. Agnico suffers from? operating problems? Not. But, the assessment is getting somewhat stretched. My current view is that it could be a lull next, even if gold/silver bullion continues to rise further for the rest of the year. Do I suggest you sell your entire position? Not. My thinking is avoiding this name as a buying idea or covering your position with covered calls or liquidating a small portion of your shares makes sense today. Accordingly, I am withdrawing my formal 12-month assessment from Strong buy TO keep.

Rating-based downgrade logic

My view is that the bargain setup for all gold/silver miners six months ago or even a few years ago is not the same today. Sure, the rising prices of precious metals (gold +28%, silver +17%) over the last 12 months should support better operating results in the second half of 2024 and throughout 2025. However, the outsized gains of 2024 gold miners have greatly reduced this good news.

Looking at a 10-year chart of AEM’s price to trailing sales (5.5x), cash flow (13.6x) and book value (2x), the low (or near) valuation setup from early 2022 to early 2024 is gone. The long-term investor advantage of buying-when-nobody-wants-them the gold miner argument that has been around for years is also gone. Today, I would call the stock valuation zone for Agnico Eagle closer to fair, perhaps moving to full-baked based on additional price gains.

When we include the change in debt and cash levels, enterprise valuation ratios paint a similar picture. With EV to EBITDA (14.9x) and Revenue (5.7x) quite a distance from six months ago and starting to rise above 10-year averages, today might be a good time to get serious about when to sell AEM than buy.

I will say that a forward P/E of 20.4x on 2025 analyst estimates isn’t exactly historically expensive. With the S&P 500 close to the same number and T-bills available at rates in the 4.6% to 5.1% range, AEM’s forward earnings yield of just under 5% (E/P) is far from a sell.

However, Agnico Eagle’s earnings estimate rating is the highest among mega-cap gold miners. Of course, you can argue that better resources (locations and costs) should be priced higher, and I agree. However, the 2025 P/E forecast has risen from 12x in February to 20x today.

The gross margins are also some of the strongest in the peer group, which is a huge advantage if you want to own a miner. But with margins not dramatically better than the other major miners, Newmont and Barrick could catch AEM with additional gold price gains in 2025.

Finally, sector dividend yields (including AEM) are about half of what they were two years ago. One of the most easily argued excuses for owning the big gold miners at the end of 2022 has turned to dividend yields that are superior to the US stock market and those available from Treasury bills. Agnico Eagle’s annual cash distribution of nearly 4% two years ago and the 3.5% rate in February has fallen to less than 2% in late summer 2024.

Final thoughts

I suspect the main negative data point working against Angico Eagle shares in 2025 will be the realization that production growth and operating margin improvement have become quite weak compared to the big mining groups. Why not own a lower valuation setup with above-average growth prospects up front?

At this stage of the gold/silver upswing, I much prefer Newmont’s position for new investments. The benefits of the Newcrest Mining merger should really shine through operating performance in 2025. And, a larger and more diversified gold reserve base is available for purchase at a much lower valuation than Agnico Eagle.

My research still places gold’s long-term underlying at around $3000 an ounce and silver above $40 (using valuation analysis relative to other commodities, money supply, US debt creation since the 1960s). So the bull run in precious metals should continue, albeit at a slower percentage rate of growth over the next 6-12 months than we have experienced since late 2023.

If China does something crazy, or Russia expands its war with Ukraine by attacking neighboring nations, or the situation in the Middle East becomes more volatile with Iran engaging directly with Israel, a breakout of my metal price targets will become increasingly likely . Depending on economic and political circumstances, $4000-5000 gold and $80-100 silver could arrive faster than most investors or world citizens think possible. Given that this is our future, Agnico Eagle should continue to outperform the S&P 500 by a wide margin.

AEM’s eventual targets of $120 to $160 per share are very realistic after a few years. However, the lightest part of the advance in precious metals may be over, especially if global equity markets take a hit soon.

The most reasonable trading scenarios I model with a slower economy and a sizeable decline in the US stock market could mean that Agnico Eagle’s share price will trade between $70 and $90 over the next 12 months. This forecast conclusion forces me to downgrade the stock from Strong buy TO keepusing a 1-year perspective as a criterion.

Holding Agnico Eagle as part of a diversified portfolio of gold/silver assets remains a brilliant idea. I am not as excited about buying stocks at this stage of fluctuations in the various financial markets. I personally no longer hold a stake as I prefer to focus my gold trades/investments on cheaper alternatives such as Newmont. However, for long-term investors who do not day-trade the gold sector, I think holding an AEM position is still appropriate.

Thanks for reading. Please consider this article a first step in your due diligence process. It is recommended to consult an experienced registered investment advisor before making any transaction.