Preamble
Most of us are familiar with a well-known quip widely attributed to Ernest Hemingway. Seemingly, when asked about how he managed to become broke, his response was; “Slowly at first, and then all at once.” We all experienced this concept during the financial crisis in 2008. At first, a couple of institutions got into a bit of bother, which few people paid attention to, and then, all at once, the stock market tanked.
In October of 2007, all the indices peaked, the S&P 500 on October 9th and the Nasdaq on October 31st. By March 2009, the markets were down around 55% from their peak. Prior to October, several mortgage lenders went bust, New Century Financial for instance. These bankruptcies were harbingers of stress within the subprime mortgage market, which ultimately led to the meltdown.
And now, in my humble opinion, one by one, the canaries in the proverbial coal mine are dropping off their perches for the mining sector in the Global South.
In a blow to confidence, The Colombian Supreme Court has refused to recognise a treaty award of $1.7 billion. This was expected to a certain extent as the actions of the Colombian Supreme Court have been reported by The American Review of International Arbitration in February of this year. To quote; “In accordance with the Arbitration Statute, the Colombian Supreme Court has exclusive jurisdiction for resolving set-aside requests of awards resulting from international arbitrations seated in Colombia and also for recognition and enforcement of foreign arbitral awards.”
Back in 2007, Bolivia began nationalising the assets of Glencore, which the company naturally objected to. In order to gain redress for this injustice, the company approached the courts and successfully won their arbitration case. However, Glencore has yet to receive a single cent from the Bolivian government. I have covered this issue in more detail in a recent article.
Bolivian President Acre, who was the key driver of a program of nationalisation, was invited to describe the country’s experience of these events at the recent Saint Petersburg International Economic Forum. From my research, in the order of around 12,000 delegates from around 100 countries of the Global South attended the gathering.
President Acre was introduced at the plenary session as follows: “He (President Acre) carried out remarkable and most noteworthy reforms, including nationalisation of a significant part of foreign companies’ property, and natural resources. He also successfully introduced import substitution. Certainly, we would love to hear about his experience.”
There are significant events that have taken place in Africa, which have largely been ignored by investors in the mining sector. Since the coup in Niger in July 2023, the status of uranium mines in Niger has become, let us say, uncertain. It has been reported that the military government has revoked the operating license of French nuclear fuel producer Orano at the Imouraren mine, which is believed to contain one of the world’s largest deposits of uranium.
There are other associated events that have taken place in Niger which indicate that Orano can say au revoir to their assets. To begin with, French troops and diplomats have been given their marching orders. Then we have the Russian military replacing the soon-to-depart US troops. And finally, it has been reported that Russia has expressed an interest in taking over the Imouraren mine.
There are numerous other less-than-favourable events that have occurred that ought to concern investors in the mining sector. Chief among them is the growing rift that is appearing between the “collective West” and the “Global South.” Consider the increasing number of countries that wish to join BRICS if evidence is needed.
Familiar rules and circumstances change ever so slowly at the beginning and then, suddenly, there is a whole bunch of change. In my view, we are heading towards the whole bunch of change at breakneck speed, which is being catalysed by the plethora of recent events.
Taken together, these circumstances point to Agnico Eagle Mines Limited (NYSE:AEM) being one of the best options to invest in the precious metals mining sector. Not only are the company’s operations largely located in “safe” jurisdictions, but the company is exceptionally well managed.
Agnico Eagle Overview
Agnico Eagle has reported a 10.5% increase in gold reserves, reaching circa 53.8 million ounces. This growth came from initial reserves at East Gouldie, acquiring the remaining half of Canadian Malartic, and high-grade mines like Fosterville and Macassa exceeding their reserve expectations. Additionally, Agnico’s share of the San Nicolas project holds significant gold and other metals reserves.
Agnico’s gold reserve estimates as of December 2023 at all mines and advanced projects are based on a $1,650/oz gold price and clearly have the potential to increase significantly with the higher gold price trajectory.
Agnico Eagle has consistently grown its reserves over the years, either through acquisitions or exploration success. While some argue that acquisitions dilute share value, Agnico has managed to increase reserves per share, unlike many peers. The company’s reserves are expected to further increase with the inclusion of Wasamac and ongoing exploration at Canadian Malartic, Hope Bay, and Detour Lake.
So, overall, it seems that Agnico Eagle investors are well placed to benefit from any rise in the price of gold for years ahead.
Agnico Eagle Financials
Agnico Eagle’s Q1 2024 results were a list of admirable achievements tempered by some minor challenges:
Highlights:
- Gold production: Output grew thanks to the full ownership of the Canadian Malartic complex and a boost from the Meadowbank mine.
- Cash flow: Agnico raked in a record $395.6 million in free cash flow, showcasing its operational prowess.
- Financial position: The company’s coffers swelled with $524.6 million in cash, and net debt shrank to $1.32 billion from $1.50 billion in the prior quarter.
- Debt upgraded: Moody’s gave Agnico’s credit rating a boost, a testament to its financial stability.
- Shareholder rewards: A consistent $0.40 per share dividend together with share buybacks.
- Confidence in the future: Agnico reaffirmed its 2024 guidance, signalling its belief in meeting its targets.
Challenges on the Horizon:
- Inflation bites: Production costs rose due to inflationary pressures and increased operating expenses.
- Lower net income: While adjusted net income rose, a one-time gain in the prior year made the headline figure look less impressive.
- Detour Lake delay: Some essential capital spending at Detour Lake was postponed, a move that could have future repercussions if not carefully managed.
The company’s strong financial standing and increased gold production are undeniable positives, but rising costs and delayed capital spending warrant attention.
Risks
Virtually no Western nation has escaped the suffocating grip of astronomical debt, which is an impending crisis on the horizon. In the not-too-distant future, countries will have to deal with this thorny issue, a complex challenge that will likely involve raising taxes.
An example of new taxes was given in the Canadian government’s 2024 budget proposal titled; “Fairness for Every Generation.” This budget introduces changes to the capital gains tax, increasing the inclusion rate from 50% to 66.67% for individuals with annual gains over C$250,000 and for all gains by corporations and trusts. This measure particularly impacts the mining industry, where capital gains often play a significant role in investment and financing.
Brian Leni, editor of Junior Stock Review, believes the proposed tax changes could further burden the struggling junior mining sector, potentially driving investment away from Canada.
Clearly, it is not beyond the realms of possibility that other countries will follow Canada and introduce tax hikes in order to raise additional funds to finance their ginormous debts.
Summary
Agnico Eagle is a well-run metal miner, however, investors should remain mindful of the risks. The mounting debt burdens of Western nations pose a significant threat to the future profits of miners.
As governments grapple with their debts, tax hikes, such as those proposed in Canada’s 2024 budget, may become increasingly common, potentially impacting the profitability of mining companies.
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