Gold Poised for Record as Yields Sag, Most Profitable Miner Says

The most profitable producer of one of this year’s best-performing commodities says things are about to get a whole lot better.

For investors who missed gold’s climb to a two-year high in early July, it’s not too late to jump in, according to Agnico Eagle Mines Ltd. Chief Executive Officer Sean Boyd. The Toronto-based company’s gross margin of 52 percent last quarter is the biggest among major producers, according to data compiled by Bloomberg. It’s also the only big gold miner to expand the margin over the past five years, the data show.

“I think in this cycle, they will ultimately set an all-time high,” Boyd said in a telephone interview Thursday. Spot gold prices touched a record $1,921.17 an ounce in September 2011. Agnico is laying the groundwork for expanded output through exploration, and Boyd said it’s “one of the very few companies that can see its output 30-40 percent higher in five years from now from stuff we already own.”

Gold has climbed 26 percent this year, with demand for the metal as a store of value rising on global economic-growth concerns and speculation that the Federal Reserve will be slow to raise rates. Purchases of gold as a haven asset have also increased as more than $9 trillion in government debt in developed markets offers yields below zero. Low rates are a boon to non-interest-bearing precious metals.

Negative Yield

“There’s still a tremendous amount of debt in the system,” Boyd said. “There’s an inability to create conditions for growth. You’ve got a negative-interest-rate environment, which is a great environment for gold from an opportunity-cost standpoint. And you’ve still got very strong demand coming out of China and India. So all the factors are there that can steadily move gold up.”

The miner raised its quarterly dividend to 10 cents a share, from 8 cents, after earnings beat analysts’ estimates. Agnico’s compound five-year growth rate in gross margin was 0.6 percent, while the rest of its peers in the BI Global Senior Gold Valuation Peers index shrank.

“Wouldn’t it be interesting if the high-quality gold companies out there can actually work their business model so they can actually pay a bigger dividend so they can actually give investors leverage to gold in very uncertain times and also keep bumping the dividend up?” Boyd said. “That’s what we’d like to do."

Price Boon

The index of 14 major gold producers tracked by Bloomberg Intelligence has advanced 144 percent this year, a sharp turnaround from five straight annual losses that wiped 76 percent of its value. Investors poured in money as miners cut costs and lowered debt, allowing the companies to boost earnings just as gold prices surged. Agnico shares have doubled this year.

Agnico isn’t the only producer benefiting from bullion’s rally. On Wednesday, Barrick Gold Corp., the biggest miner of the metal, reported the highest quarterly profit in three years. Less than a week earlier, Newmont Mining Corp. beat second-quarter earnings estimates by more than 50 percent.

Others, including Goldcorp Inc. and Kinross Gold Corp., missed estimates. Goldcorp’s gross margin narrowed to 2.9 percent in the second quarter, according to data compiled by Bloomberg.

“People still don’t really have full weighting in their portfolios in the gold space,” Boyd said. “There’s still a large collection of generalist investors that don’t own many gold stocks, and I think their general view is that they may have missed this run and our view is that we’re just getting started."