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Thursday, December 13th, 2018 - Buy Gold - Bringing you trusted gold news and gold investing information since 2006

The Better Commodity Investment: Gold vs. Agnico-Eagle Mines

A century-old debate is still raging in the markets (more so today, with the introduction of commodity ETFs like GLD and SLV), and it has to do with whether it is better to invest in a commodity or in the companies that produce the commodity.

The main thrust of this analysis is concentrated in three parts. The first two parts are based on free cash flow (current and historical) and the third is based on historical price action as a gauge of investor sentiment.

The three methods used in this analysis are:

1) Price to Owners Earnings [OE] = Current and future analysis

2) Cumulative Owners Earnings [COE] = Historical analysis of owners earnings

3) Statistical Indicator Analysis [SIA] = Historical price action

For those new to this analysis please link here for an introduction: OE and COE, SIA, CapFlow.

The main goal of my analysis is first to determine a sell price. With that in mind, we attempt to buy the stock at half its sell price and then hold it for 5 years (provided that no macro- economic negative catalysts force us to sell). Due to the fact that we bought it at par, we can potentially achieve an average annualized return of 15% per year. This may enable us to double our money every 5 years. Occasionally we do find a stock that is not selling at par, but is actually selling at a discount. When this happens, gains are usually higher.

Since we will be discussing gold in this article, a further introduction using SIA to analyze gold and silver can be found here.

With the introductions out of the way, let us present our SIA chart for gold:

[Click all to enlarge]]

In analyzing the SIA chart above, one will notice that gold is trading at about 2.56 times its SIA line (red line), which is currently $524.77. So we are nowhere near par and are beyond my Price to SIA (P/SIA) sell result of 2.0.

Analysis of Agnico-Eagle Mines (AEM)

Agnico-Eagle Mines Ltd. is a Toronto-based gold mining company, with current gold production located at the LaRonde and Goldex mines in Quebec and the Kittila mine in Finland. The company has further projects located in Canada and in Pinos Altos, Mexico. It has a policy of remaining unhedged. Before we analyze the company’s fundamentals, let’s see how AEM does using our SIA analysis:

From the chart above you can see that both AEM and gold itself have had a great run in the last decade. Unfortunately AEM’s chart shows that though it is linked to the actual commodity (as it is a gold miner), it is much more volatile as it is not immune in any way as a hedge against the downturns in the general market, like gold showed itself to be during the last bear market. Why is this?

AEM is a company with a balance sheet, income statement and cash flow statement and its stock price goes up and down depending on how capable management is and whether it beats estimates or not. This is not always a bad thing if you follow the stock using our SIA methodology.

AEM achieved its 3,651st day of trading on February 18, 1999 (#1) and on that day was trading at a very deep discount to its SIA. Its stock price on that day was $5.22 and its SIA was $10.20. So AEM was trading at .51 or at a 49% discount to its SIA. The stock then had a tremendous run and peaked at $78.47 (#2359) on July 14, 2008. On that day its SIA was $16.14 so the stock was trading at 4.86.

I am a very conservative investor and like to sell at 2.0 or twice SIA (red line), because the farther you go away from your SIA, the more risk you take on as an investor. SIA is a measure of investor sentiment and at a P/SIA of 4.86 it was definitely ready for a crash, as everyone and their mother was in it. I like to buy stocks at par with or at a discount to their SIA, for the odds of success in most cases are in your favor.

Here is a chart of crude oil when it spiked to about $142 a while back:

At that point it was trading at 4.10 times its SIA and then came crashing down about -70% in a matter of months to the point where it actually traded at a discount to its SIA before shooting up again. So investor sentiment makes up a big part of my Mycroft Research (MR) System and I have hundreds of historical examples of its success. The reason I came up with 2.0 as my sell signal on SIA is because of the back tests I performed on various world indices. I discovered that when they approached a P/SIA of 2.0 they tended to get dangerous (risky). Here are a few charts to show you what I mean:

S&P 500 Index (SPY)

DJIA Index (DIA)

Hang Seng Index (HSXUF)

And for a surprise, here is the chart for my idol Warren Buffett’s company Berkshire Hathaway (BRK.A):

So as you can see selling at 2.0 can be considered conservative, and that’s what I do. So back to AEM vs. gold: We currently have gold trading at 2.56 times its SIA, and AEM is trading at 2.91 times its SIA. Therefore, from a SIA point of view, buying gold vs. AEM means you are taking on less risk. But had you sold AEM in 2008 and then bought it back in 2009, when it was trading almost at its SIA, you would have outperformed the commodity by a wide margin.

So it’s all relative to the type of investor you are. Since all you need to calculate the SIA is Yahoo Finance, everything can be analyzed using it … as long as you have 3.651 trading days (not calendar days) of data.

Since gold has no income statement, balance sheet or cash flow statement, we cannot analyze it using quantitative and qualitative analysis, but we sure can do so with AEM. If you must trade the miners then I would do so using SIA as your guide, as the miners in general are free cash flow disasters.

Here is AEM’s Owners Earnings Analysis from 1973-2010:

From the Totals line at the bottom of the table, you will notice that AEM has generated $19.58 a share in Cash Flow since 1973 and spent $36.53 a share in capital expenditures to do so. That, to a free cash flow analyst, is a very poor record indeed, as the company generated $-16.95 per share in Owners Earnings (OE) during those years. There is no real way to put a positive spin on its record, and even in 2010 it is estimated to lose another $0.25 per share in OE.

The question is how — if your average cash cost is $407 an ounce and gold is selling for more than three times that — are you not generating tremendous numbers in owners’ earnings? The answer is quite simple, as the company has a historical CapFlow average of spending 2.58 times its cash flow over the last four decades. The numbers are so bad that I could not fit the CapFlow numbers into a chart. Here is the Cumulative Owners Earnings (COE) for AEM:

As you can see, from 1973-87 AEM had an excellent management team in place and produced very impressive CapFlow numbers and had amazing OE and COE results. But from 1988 to today, the management has been spending money like crazy in order to buy up reserves of gold. The problem is that the gold is in the ground and until it comes up it cannot be sold, and to get it out of the ground takes a tremendous amount of capital expenditures. AEM had 16 million shares outstanding in 1988 and today has over 170 million, but there have been no stock splits — so management has just been issuing new stock to fund these massive capital expenditures and diluting its shareholders’ ownership stake.

Sales in 1988 were $42 million and today are $1.57 billion, so the company has grown sales tremendously, but in 1987 management delivered $0.81 a share in owners’ earnings, while for 2010 management is expected to deliver -$0.25 cents a share in OE. Value Line has made some predictions that the company will generate $2.05 in OE, but its track record has been rather poor in analyzing AEM. If it does earn $2.05 in 2011, it would still trade at 33 times AEM P/OE, so it would still be ranked a sell.

In conclusion, if you must invest in gold then I think it would be far less risky to invest in the actual commodity than to invest in AEM.

Disclosure: No positions

The original article is published at

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