Agnico Eagle Stock: Kirkland Lake Merger Makes A Great Buy (NYSE:AEM)

Investment Thesis

Agnico Eagle Mines Limited (NYSE:AEM) recently closed its merger deal with Kirkland Lake Gold (KL) in a cashless transaction. The post-merger company currently trades at $51.80, down 6.5% in the TTM and about the same YTD, with a market cap of $23.6 billion. The merger will likely result in AEM becoming a market leader in the gold mining industry with Kirkland’s top-tier mines in Canada and Australia and a combined mineral reserve base totaling 44.6 million ounces of gold.

The operational leverage created by the merger is expected to realize over $2 billion in value creation over the next 10 years, with approximately $40 to $60 million of merger-related synergies being realized in 2022. The company also intends to utilize its over $2.2 billion in liquid assets to return excess shareholder capital through dividends and share buybacks. A dividend of $0.40 per share has already been declared, and a share buyback plan of $500 million is in place.

The gains to be realized through this merger which put the company on track to becoming a world-leading gold mining company, make me bullish on the stock.

Post-Merger Agnico Eagle

The new Agnico Eagle is banking on achieving operational efficiencies through synergies created by the merger, estimating over $130 million per year ($440 million over five years, $1.1 billion over 10 years). The company stated that its initial efforts would prioritize Canadian operations due to their proximity and focus on savings related to warehousing and logistics, mobile equipment/parts, tires, explosives, mill reagents and consumables, cement, hydrocarbons, and services.

Further, the AISC for 2021 was $1,038, and the total cash costs per ounce in 2021 were $761 compared to an average closing price of $1,798 per ounce of gold, but the company expects to drop its cash costs down to $750 per ounce at the midpoint in 2022, compared to an expected average closing price of $1,836 per ounce. The merger is expected to considerably accelerate the company’s growth rate in comparison to its previous 5-year growth rate of 12%. The production costs are expected to remain stable till 2024 and then decline as the synergies from the merger are realized. In contrast, the production volume and gold prices are expected to rise.

Since Agnico does not hedge its position against gold prices, the company remains exposed to the risks and rewards the move with gold prices. The current bullish sentiment of the gold market remains to benefit the company in 2022.

Source: Trading Economics

These factors continue to pitch into analyst estimates of 60% YoY revenue growth, with 2022 sales expected to be over $6.1 billion. This is a 35% increase compared to the previous revenue estimate of $4.5 billion. If the company maintains its current net margin of 14%, the net income for 2022 will rise to over $866 million. The company’s plan to reduce the outstanding shares by 9 million will result in an aggregate EPS boost of 66%, taking the EPS up to $3.67.

However, the picture remains incomplete without Kirkland’s consolidation into the numbers. With TTM earnings of about $893 million and the new share count of 209,274,263 shares, the company’s EPS stands at $4.27, making the post-merger company’s EPS $3.16 for 2021. With a 5% increase in Kirkland’s income, in line with the company’s current quarter’s production growth rate, Kirkland’s 2022 EPS of $4.48, 2% outstanding share reduction, and Agnico’s EPS of $3.67 result in an aggregate EPS growth of 28% for 2022.

Particulars	2021	2022 (Estimated)	Remarks
Agnico Revenue	3,823,878	6,118,204	As per Analyst Revenue expectations
Agnico TTM Earnings	543,009	866,229	Stable Net margin of 14%
Agnico Outstanding Shares	244,732	235,732	9 million expected shares repurchase
Agnico EPS	2.22	3.67	66% YoY Increase
Kirkland TTM Revenue	2,574,000	2,702,700	5% Growth (In line with Prod. Growth)
Kirkland TTM Earnings	892,913	927,736	Stable Net margin of 35%
Outstanding Shares	209,274	209,274	Assumed Stable
Kirkland EPS	4.27	4.48	In line with revenue growth of 5%
Post-Merger Revenue	6,397,878	8,820,904	Aggregate growth of 38%
Post-Merger Earnings	1,435,922	1,793,965	Aggregate growth of 25%
Post-Merger Shares	454,006	445,006	Aggregate reduction of 2%
Post-Merger EPS	3.16	4.05	Aggregate growth of 28%

Source: Author’s Calculation (figures in thousands except per share data)

Valuation

At the current share price of $51.80, this results in a P/E ratio of 16.37 and a forward P/E ratio of 12.77. For a company with an expected YoY growth of 60%, the P/E signifies a considerably inexpensive stock. At the current P/E ratio and expected EPS value, the stock price is estimated to be $66.39, a potential upside of 28%.

Similarly, the company’s P/S ratio pre-merger at the current price was 3.68 based on consolidated revenue of $3.82 billion by Agnico and $2.57 billion by Kirkland on a TTM basis. The ratio falls to 2.67 post-merger when 2022 numbers are used. Based on a P/S of 3.68 and post-merger revenue per share of $19.43, the target price comes out to be $71.41, in line with analyst estimates, with an upside potential of almost 38%.

Since the company is a dividend-paying company that has already declared a $0.40 dividend per share per quarter at a yield of 3.08%, investors must consider it when calculating total returns. The 14% increase in dividend payouts is in line with the company’s history of steady dividend payouts and increases. Since Kirkland also has a history of steady dividend payouts, synchronicity is apparent in the management structure and philosophy of the merged leadership, making it reasonable to assume that the trend will continue in the future.

Conclusion

Agnico Eagle stock has been volatile in 2022 but postulates solid progress in the upcoming quarters. The company’s 2022 prospects seem very positive, with increasingly good forecasts further out in the years to come. The consequences of the Agnico-Kirkland merger are likely to be far-reaching, affecting the company, and the industry as a new market leader is likely to emerge.

With increasing revenue and operational efficiencies, the company’s margins will likely improve, producing better results than I have used in my calculations (I have used stable margins to avoid being overoptimistic). However, even at the apparent numbers, the prospects look positive, and the number will likely start showing in Q1 2022 results, making the current time and valuations attractive for potential investors. I see the stock price going up by Q2 2022, and the valuation metrics will go up with it.