Agnico Weighs Deals as Gold Miners Sell Assets

Agnico Eagle Mines Ltd., one of Canada’s oldest gold producers, will consider entering joint ventures for the first time and buying mines already in operation.

Agnico may also expand into new countries as it loosens the acquisition criteria it’s stuck to for decades, Chief Executive Officer Sean Boyd said in an interview at Bloomberg’s Toronto office. What Boyd won’t change is his vow not to “bet the company” on any single deal, he said.

“We’re not changing the general strategy, we’re changing the tactics,” the CEO said. “We’re broadening our horizon.”

Agnico, based in Toronto, has the highest price-to-book ratio of seven Canadian gold producers bigger than $2 billion, according to data compiled by Bloomberg. The company trades at 1.50 times book value, compared with an average of 0.94 times for the group, indicating the market values the company’s net assets, including its LaRonde mine in Quebec, higher than any other miner in Canada. Agnico has a market capitalization of C$5.13 billion ($5 billion) and had 2012 sales of $1.92 billion.

The company continues to seek growth even after gold fell 19 percent this year and as companies including Barrick Gold Corp., the biggest producer, cut spending plans and pursue asset sales. Agnico Eagle, which also operates in Finland and Mexico, isn’t facing some of the same difficulties as other producers because it didn’t get caught up in a “race to be the biggest,” Boyd said.

Smart Deals

“In the race to grow, the industry has created businesses that are unmanageable, whether they are too big or too complex or the assets in them are just not that good,” he said. “The companies that have successfully navigated the last two or three years realize the importance of doing smart, measured deals.”

Agnico got its start when five silver mining companies merged in 1953 to become Cobalt Consolidated Mining Co., according to the company’s website. Cobalt, which changed its name to Agnico Mines Ltd., merged with Eagle Mines Ltd. in 1972 and the new company started trading on the Toronto Stock Exchange the same year.

Agnico Eagle fell 1.5 percent to close at C$29.70 in Toronto while gold futures dropped 1.2 percent to $1,350.50 an ounce at 4:57 p.m. on the Comex in New York. Agnico has declined 43 percent this year, compared with an average of 36 percent among the seven biggest Canadian producers.

Bull Market

Gold fell to a four-week low today after the Federal Reserve Chairman Ben S. Bernanke said the central bank may “moderate” the pace of U.S. bond purchases later this year, which may reduce inflation pressures.

While there may be some more short-term weakness, the longer-term gold bull market hasn’t ended and the fundamentals that pushed prices higher for 12 straight years are still in place, Boyd said.

“It’s going to exceed its all-time high at some point, which is over $1,900,” Boyd said. “I still think it can get to $1,800 in the next 12 months.” Gold reached a record $1,923.70 an ounce in New York in September 2011.

Agnico had $232 million of cash and an undrawn $1.2 billion line of credit as of March 31. The company had net debt of $516.6 million on March 31 and the ratio of its net debt to trailing 12-month earnings before taxes, depreciation and amortization was 0.7, compared with an average of 0.67 among the biggest Canadian producers, according to data compiled by Bloomberg.

Comfort Zone

Agnico’s strategy of pursuing measured growth makes sense, said David Christensen, CEO of ASA Gold and Precious Metals Ltd. in San Mateo, California, which manages about $300 million and invests in precious-metals companies including Agnico.

“They’ve never gone out and done a transaction which could cost them the company,” he said in a phone interview yesterday. “Knowing this company they will stay within their comfort zone and I wouldn’t expect them to do anything outlandish.”

While Agnico has consistently grown through acquisitions, the company limited the size of deals to within 15 percent of its market value, Boyd said. At yesterday’s close that would be about C$782 million. It may be prepared to go beyond that threshold for the right deal, as long as it doesn’t increase financial risk for the company, he said.

“It has to be measured, we’re not talking about massive deals relative to our market cap,” he said.

Minority Positions

Agnico spent $1.67 billion on 14 acquisitions in the past 10 years, according to data compiled by Bloomberg. The company’s biggest transaction was its $577.6 million purchase of Complex Minerals Corp. in 2010 to add a project in Nunavut.

The company plans to produce about 970,000 to 1 million ounces of gold this year, increasing to about 1.2 million ounces in 2015. The firm’s Goldex mine in Quebec and La India in Mexico will both start operations this year ahead of schedule, Agnico said in April.

Agnico has been active already this year, acquiring minority positions in smaller companies including Kootenay Silver Inc., Sulliden Gold Corp. and Probe Mines Ltd.

The company’s current operations are divided between its northern business, which has longer mine lives and greater operational complexity, and a southern business in Mexico, which offers higher returns, better growth prospects and shorter payback times on investments, and which it’s hoping to grow, Boyd said.

Meliadine Approval?

Agnico has yet to decide whether it will approve construction of its Meliadine project in Nunavut, which Boyd said in April would have a $1 billion-plus capital cost. The company will complete a final feasibility study on the mine next year.

It’s “not the end of the world” if Meliadine doesn’t start production in 2018, which is when the company’s current Nunavut mine, Meadowbank, may end operations, he said.

While Agnico has focused on buying development projects in the past and always owned 100 percent of its assets, the company is being more “open-minded” as it assesses potential deals, Boyd said.

Agnico is building the La India project in Mexico after acquiring the asset through the C$262.9 million acquisition of Grayd Resource Corp.

The company will probably seek similar deals in the future, David West, a Vancouver-based analyst at Salman Partners Inc., said in a phone interview yesterday.

Capital expenditures, or capex, for La India were estimated at $158 million, Agnico said when it approved the project in September last year.

“It’s not extremely high capex to develop the project and it’s also got some exploration upside,” West said. “There’s not a lot of risk when you buy something like that and a company like Agnico can actually add value down the road through the drill bit.”

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