DBRS Confirms Agnico Eagle Mines Limited at BBB (low) with a Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating of Agnico Eagle Mines Limited (Agnico or the Company) at BBB (low) with a Stable trend. Agnico remains a cost-competitive gold producer operating in low-risk political jurisdictions. The Company has expanded its mines from six in 2010 to nine currently, but several mines have short mine lives based on current reserve and production rates, including its largest producer, the Meadowbank mine.

Agnico enhanced its business profile through the 2014 acquisition of the Canadian Malartic mine, construction of the La India mine and the reactivation of the Goldex mine, idled in 2012 for geotechnical reasons. In addition, the Company has been making various investments in a number of its other operations to increase output or extend operating lives. Nonetheless, 49% of its 2014 production was from mines with less than five years of proven and probable reserves at 2014 gold production rates. The Company also has a number of property development opportunities that could extend reserve lives, some of which, if undertaken, are sufficiently large to represent a potential strain on its financial resources.

Agnico’s net income before non-recurring items has declined sharply from record levels in 2012, even though gold sales volumes have increased by almost 50% (Q1 2015 annualized) as average realized gold prices have fallen 28% from 2012 (and silver prices down 46%), partially offset by a decline in average unit total cash cost of 8.1%. In the last 15 months, realized gold and silver prices have been more stable.

As a result, following the completion of the Meadowbank mine in 2010 and with the exception of peak La India mine build expenditures in 2013, Agnico Eagle has largely remained net free cash positive over the last five years. Net acquisitions have totalled $643 million, closely mirroring the $663 million increase in net debt during the same period. Nonetheless, debt leverage remains modest and key financial metrics remain largely solid for the rating, despite having weakened from strong levels in 2012 mainly due to declining gold prices.

DBRS expects Agnico earnings will decline in 2015, despite about 10% higher gold output than 2014 and the benefits of lower fuel costs and favourable exchange rates, as gold prices remain weak and the full impact of amortization rates of new/ramping-up operations is felt. Despite DBRS’s expectation of lower earnings in 2015, the Company is expected to remain net free cash flow positive during a period of relatively low capex/investment activities, as long as gold prices remain about $1,200 per ounce. This should lead to a reduction in debt and further stabilization of financial metrics.

Over the next few years, an upward creep in gold production will increase output, but the Company’s gold output is expected to decline sharply after 2017, if a Meadowbank replacement/extension cannot be found. Nonetheless, the unpredictable path of gold prices will be the most important earnings determinant.

Over the longer term, 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.

The Company has a relatively modest near-term calendar of active development/expansion projects and its capital expenditures needs are expected to be moderate until its next major mine build is initiated. Gold prices, at about $1,200 per ounce, continue to lack direction (up or down), adding to the uncertainties Agnico Eagle faces. Accordingly, we expect the Company to continue to be prudent in its commitments to major new expansion/mine development or acquisition projects and their financing in order to maintain its credit strength.

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 (September 2014), which can be found on our website under Methodologies.

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