DBRS Removes Agnico Eagle Mines Limited From Under Review with Developing Implications and Confirms at BBB (low) with a Stable Trend

DBRS has today confirmed the Issuer Rating of Agnico Eagle Mines Limited (Agnico or the Company) at BBB (low) with a Stable trend and removed the rating from Under Review with Developing Implications. Agnico has stabilized its production profile at about 1.1 million ounces per year, but its biggest producer, Meadowbank Mine has less than five years of production remaining. The addition of a 50% interest in the Canadian Malartic Mine through the Company’s joint acquisition of Osisko Mining Corporation (Osisko) completed June 16, 2014, will help offset the increased importance of the short-lived Meadowbank Mine.

Agnico’s business profile had weakened somewhat with the higher costs and decline in relative importance of its once-key LaRonde Mine; and the growing importance of the remote Meadowbank Mine offset partially by the addition of the new La India operation. The addition of a 50% interest in Osisko will add a sizeable, cost-competitive, open pit gold producer in a stable political jurisdiction and with a moderate expected life span. Although the Canadian Malartic operation is not ramped-up to design output and integration risks remain, including dealing with a 50% operating partner, it is expected to enhance Agnico’s current operations.

Agnico’s net income before non-recurring items fell back sharply in 2013 despite record gold sale volumes as average realized gold prices dropped and unit costs continued to increase albeit at a slower rate. A strong first quarter 2014 was a function of still lower gold prices offset by record gold sales volumes and a significant improvement in the Company’s unit cost picture leading to a marked recovery in earnings.

Sharply reduced 2013 earnings and operating cash flow, combined with record dividend payments and high capital expenditures, led to negative net free cash flow, increased year-end debt and weaker coverage metrics for Agnico for the year. A strong rebound of earnings and operating cash flow in Q1 2014, combined with a slashed dividend level and reducing capex, reversed the growth in debt and partially restored metrics leaving the Company with generally strong financial metrics for its rating.

Agnico has maintained a strong financial profile with stable debt levels despite a sharp drop in cash from operations in 2013 as gold prices fell steeply from the $1,600 per ounce level in early 2012 to about $1,300 currently. The Company’s share of Osisko acquisition cost amounts to about CAD 2.0 billion, but will be financed only 26% by cash (debt) with the remainder being funded by equity and other consideration, resulting in an expected small changes to Agnico’s financial metrics and increasing its total assets by about a third.

DBRS expects earnings from Agnico’s existing operations will be weaker in the last three quarters of 2014 due to lower expected production at Meadowbank (and higher unit cash costs) and lower gold prices with the current price below Q1 2014 average. That said, 2014 earnings are expected to be much better than in 2013. In addition, gold output, earnings and gold unit cost performance are all expected to improve with the addition of a 50% interest in Osisko. Over the next few years and with Osisko, an upward creep in gold production will increase output, but the unpredictable path of gold prices will be a more important earnings determinant.

Over the longer term, contribution from short-lived mines will diminish. New mine developments and expansion projects are expected to be undertaken and further property/company acquisitions are likely, potentially adding to debt levels with the expectation of added earnings and cash flow. DBRS expects that Agnico will maintain financial discipline by funding these efforts with an appropriate balance of debt and equity.

The Company has a relatively modest calendar of active expansion projects and its capital expenditures needs are expected to decline until its next major mine build is initiated. With the Osisko integration on its plate and DBRS’s expectation that gold prices will remain volatile (and perhaps go potentially lower), we expect the Company to be cautious in its commitments to major new expansion/mine development projects while Osisko integration is underway.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com .

The applicable methodology is Rating Companies in the Mining Industry (June 2011), which can be found on our website under Methodologies.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.