If you must own a gold stock, make it Agnico

Given its record gold production and strong cash flow generation, gold stock Agnico has increased its production guidance and its dividend. Production is now expected to exceed 1.68 million ounces of gold for 2017 compared to previous guidance of 1.62 million. The quarterly dividend, meanwhile, has been increased by 10 per cent to US$0.11 a share.

Gold_Stocks It was not a great year for gold stocks. In fact, the S&P/TSX Global Gold Index is down 0.2 per cent since the beginning of 2017. The one and only gold stock we follow in this publication, by contrast, is up 0.2 per cent year to date.

Though gold stocks have languished, the price of gold did fairly well in 2017, with the price up 11.4 per cent to US$1,284. Yet the underlying fundamentals for the yellow metal have been less spectacular. China and India typically account for most of the world’s gold jewelry, bar and coin purchases. By December, demand for gold in India had risen a modest three per cent, while Chinese demand was up just 1.5 per cent. On the other side of the ledger, mine production for the year reached a record 2,420 tonnes at the end of the third quarter.

Against this backdrop, our recommended gold company, Agnico Eagle Mines Ltd. (TSX—AEM), has delivered strong results. The company is a senior Canadian gold mining company that has produced precious metals since 1957. Its eight mines are located in Canada, Finland and Mexico, with exploration and development activities in each of these countries as well as in the US and Sweden. Agnico Eagle gives you full exposure to gold prices due to its long-standing policy of not hedging gold prices.

The company’s latest results include record quarterly gold production, improved production and cost guidance, and a 10-per-cent increase in its dividend.

For the nine months ended Sept. 30, 2017, Agnico’s cash flow was US$629.9 million, or $2.72 a share, compared with $593.9 million, or $2.64 a share, in the same period of 2016. The increase was mainly due to a combination of higher gold and by-product metal sales volumes partly offset by lower realized gold prices.

Agnico achieved record gold production, as its payable gold production rose 5.2 per cent to 1.3 million ounces. The increase was primarily due to higher grades mined at the LaRonde, Meadowbank and Canadian Malartic mines.

Given its record gold production and strong cash flow generation, Agnico has increased its 2017 production guidance and its dividend. Production is now expected to exceed 1.68 million ounces of gold compared to previous guidance of 1.62 million. The quarterly dividend, meanwhile, has been increased by 10 per cent to US$0.11 a share.

A gold stock to invest in

Gold stocks in general are not timely investments. As we head into the new year, improved global economic growth, modest inflation and tighter monetary policy should act as headwinds against a higher gold price. On the other, hand geopolitical risks — in the Middle East, North Korea and even in the US where the unpredictability of President Trump could come into play — may provide support for the yellow metal.

Under these circumstances, the gold price will likely remain range-bound around its current level. Over time, we don’t see it moving much above $1,300, but it’s unlikely it will drop much below $1,100.

Within this context, we like Agnico’s growth prospects through production growth and higher cash flows. Consequently, we anticipate a higher share price over the next three to five years.

The stock trades at a high 51.4 times the C$1.10 a share that Agnico should earn in 2017. However, it trades at a more reasonable 12.7 times the company’s projected cash flow of $4.45 a share. Agnico Eagle is a buy for growth and some income.

This is an edited version of an article that was originally published for subscribers in the December 15, 2017, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.

Money Reporter, MPL Communications Inc.
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