Agnico Eagle Mines Ltd. Blasts Higher – A Sign of the Future for Gold Stocks?

by JDH on October 26, 2013

As I sat at my computer screen on Thursday, watching my portfolio, I was shocked to see that AEM.TO – Agnico-Eagle Mines Ltd. was up 18%.

Agnico Eagle Blasts Off

As reported by Bloomberg, Agnico Eagle Soars as Profit Tops Estimates on Gold Costs:

Agnico Eagle Mines Ltd. (AEM), the fifth-biggest Canadian gold producer, surged the most in almost five years after the company reported earnings that beat analysts’ estimates and said 2013 production and costs will be better than it previously forecast.

Agnico rose 19 percent to C$31.82 at the close in Toronto, the biggest gain since Nov. 21, 2008.

Third-quarter profit, excluding a non-cash foreign-currency loss of 4 cents and other one-time items, was 35 cents a share, the Toronto-based company said in a statement released yesterday after the close of regular trading. That was almost four times the 9-cent average of 15 estimates compiled by Bloomberg. Sales fell 17 percent to $444.3 million, beating the $373.7 million average estimate.

Agnico is among gold producers seeking to curb costs and cut spending after gold slumped into a bear market in April.

The story goes on to report that ore grades were higher than expected, and they have raised future production estimates.  This leads to two obvious questions:

  1. Is this simply company-specific news, with no impact on the overall gold market?
  2. What is the impact on the gold market?

Obviously if production increases, that is company specific news, which has no impact on the overall market.  A 10 year chart is instructive (click to enlarge):

AEM-10Years-Oct26-2013

As you can see, Agnico Eagle has a very solid base price around $25 (Canadian; I’m using the TSX quotes here; the prices on the U.S. markets are similar).  AEM blasted through $25 for the first time in early 2006, then dropped to that level in the crash of 2008, and then bounced off that level on October 16, 2013 when it traded at $24.85

In the period from October 16 to October 25, 9 days, Agnico Eagle has increased from $24.85 to a high of $32.80, before closing on Friday at $32.24, a gain of almost 30%.

Wow.

This is not some junior speculative exploration stock we are talking about.  This is the “fifth-biggest Canadian gold producer”, a company that will produce over 1 million ounces of gold this year.  The implications are staggering: if a blue chip stock can swing 30% in 9 days, a turnaround in low share prices for both blue chip and junior stocks can occur very quickly.

That’s why I continue to hold the quality stocks in my portfolio.  The last two years have not been great in this sector, but a turn-around can happen at any time.

Of course we should not get carried away.  As the ten year chart shows, Agnico Eagle remains in a down trend that started at the peak in 2010.  On November 29, 2010 Agnico Eagle peaked at $85.24, so even with the 30% uptick in the last nine days, this stock is still down 62% from the peak.  Does that matter?  If you bought in November 2010 it certainly matters.

The point is that these stocks are volatile.  They go up and down, and that’s why the correct strategy is to load up when they are down, and take profits when they are up.  Easy to say, hard to do.

So did I sell this week?  No, but I did sell the November 32 calls against the stocks I own.  I don’t foresee 30% every two weeks going forward, so I assume the stock will pull back slightly in the coming weeks.  I’m holding, but if the stock fades below $32 over the next three weeks I pocket the premium, and keep my stocks.

For more analysis, there’s a good article over at Seeking Alpha on An Early Christmas Gift From Agnico Eagle.  Revenue was 17% lower than last year, but with the gold price down 21% (more on that below) that’s actually a good result.

Back to my second question: what does this imply for the gold market in general?

Gold-10years-Oct25-2013

Probably nothing.

Gold’s gently sloping uptrend from the lows in 2004 remains intact anywhere above around $950 an ounce.  The steeper slope drawn from the lows in late 2005 and the crash in 2008 was broken earlier this year, although at current levels we are creeping above that line.

At Friday’s closing price of $1,352.50 gold is slightly above it’s 50 day moving average of $1,343.15, but well below the 200 day moving average of $1,434.34.  Gold may be bouncing off the bottoms, but it is much too early to predict new highs in the short term.

So what’s the take away message?

Gold had a good week, and since the $1,200 low in July gold has recovered over 12%, so that’s a good start.  However, it’s only a start, so keep some powder dry in the event that those lows are retested.  More importantly, if you get a nice pop like we witnessed with Agnico Eagle this week, don’t be afraid to take some money off the table, either by selling or doing as I did with a covered write.

There will be more ups and downs, so let’s stay in the game long enough to profit from those swings.

Thanks for reading; see you next week.