The price of gold has fallen steadily 1.8% through June, and it may very well continue its retreat following the Fed's mid-June announcement that it's raising its benchmark interest rate to a range of 1.0% to 1.25% by the end of the year. With gold mining stocks likely to fall further, now is a good time to see where the opportunities lie. So let's consider two leading gold miners, Yamana Gold (AUY) and Agnico Eagle Mines (AEM 0.29%), to see which one offers the more compelling argument for investment.
A round of introductions
Headquartered in Canada, Yamana maintains a portfolio of assets strictly located in the Americas. Similarly, Agnico also has a strong presence in the Americas; however, it also operates overseas: one gold-producing mine in Finland and several other projects in the exploration phase scattered throughout Scandinavia.
Image source: Getty Images.
The most decisive factors in choosing an investment, though, transcends cursory looks at the companies' mines, so let's compare them on some important metrics to gain better insight.
| Company | Market Cap | FY 2016 Revenue | FY 2016 Earnings per Share | FY 2016 Operating Margin | FY 2016 Return on Equity |
|---|---|---|---|---|---|
| Yamana Gold | $2.5B | $1.79B | ($0.33) | (26.5%) | (6.58%) |
| Agnico Eagle | $11.0B | $2.13B | $0.70 | 11.4% | 3.68% |
Data source: Morningstar.
A brief look suggests Agnico Eagle is the more lustrous opportunity, but we're just beginning. There are plenty of other considerations.
A tale of two miners
Reporting gold production of 1.66 million ounces in fiscal 2016, Agnico Eagle's higher revenue for the year is to be expected as Yamana produced only 1.27 million ounces. The more telling factor is how the companies have fared over the past several years.
AUY Revenue (Annual) data by YCharts
From two different perspectives, Agnico Eagle appears more desirable. Unlike Yamana -- which has seen declining sales -- Agnico Eagle has improved its top line at at steady clip, and it has reported even greater EBITDA growth. Yamana, on the other hand, has reported negative EBITDA in each of the last three years.
The companies' margins provide another reason why Agnico Eagle appears to be more desirable. Although it forecasts all-in sustaining costs (AISC) between $850 to $900 per gold ounce for fiscal 2017 -- higher than the $824 which it reported in fiscal 2017 -- it wouldn't be surprising if the company achieves a similar margin to 2016; the company beat its guidance in each of the past three years. Conversely, Yamana reported AISC (on a co-product basis) of $911 per gold ounce in fiscal 2016 -- far worse than its guidance of $840. In fiscal 2017, it estimates AISC between $890 and $910.
Winner: Agnico Eagle
A delicate balancing act
Though Yamana offers a less-attractive income statement, perhaps its balance sheet will give Agnico Eagle a run for its money.
| Company | Debt-to-Equity | Quick Ratio |
| Yamana | 0.35 | 0.44 |
| Agnico Eagle | 0.24 | 1.71 |
Data source:Morningstar.
Again, Agnico Eagle shimmers more brightly than Yamana. With a quick ratio of 1.71, Agnico Eagle retains $1.71 in assets for every dollar of debt, suggesting that it's clearly better suited than Yamana to withstand a downturn in the price of gold. Agnico Eagle's conservative approach to leverage further illustrates its enviable position to Yamana. Whereas Agnico Eagle reported a net debt-to-EBITDA ratio of 1.05 at the end of fiscal 2016 according to Morningstar, Yamana ended the same year with $1.477 billion in net debt and negative EBITDA.
Yamana has attempted to shore up its balance sheet in 2016 by divesting non-core assets: Ernesto Pau-a-Pique and Mercedes. Attempting to optimize its portfolio through these divestitures, Yamana's management has identified a long-term goal of achieving a net debt-to-EBITDA ratio below 1.5. Unlike its peer, Agnico Eagle hasn't resorted to divesting its assets. In fact, it sought to improve its portfolio by acquiring Osisko Mining in 2014. Yamana, however, doesn't count growth through acquisition as a component of its strategy over the immediate future.
Winner: Agnico Eagle
Digging the gold to generate the green
Lastly, let's compare the companies' in terms of cash flow.
AUY Cash from Operations (Annual) data by YCharts
Our look at Yamana has revealed some sources of concern, but it deserves credit for how it has improved its operational cash flow. This is extremely beneficial for the company's future success. If it succeeds in continuing to grow its operational cash flow, the company may be less reliant on taking on more debt; in fact, it may be able to extend its debt-reduction initiative which has seen a $370 million reduction since the end of 2014.
Although Yamana deserves kudos for its ability to generate operational cash, Agnico Eagle wins in terms of free cash flow. It has reported positive free cash flow in four out of the past five years. By the same measure, Yamana has only reported a positive amount twice. Much of Yamana's capital expenditure relates to the construction of Cerro Moro, which is expected to emerge as a core mine after it commences production in 2018. Like Yamana, Agnico Eagle is also committed to organic growth of its portfolio, illustrated by the development of the Meliadine mine. This, among other projects, will result in negative free cash flow over the next two years according to management; however, it expects to be free cash flow positive again in 2019.
In light of Agnico Eagle's 3.89% return on invested capital at the end of fiscal 2016 compared to Yamana's negative 3.98%, I have more faith in Agnico Eagle's capex spending than that of Yamana.
Winner: Agnico Eagle
And the winner is. . .
Which gold miner offers the more compelling argument for investment? Undoubtedly, it's Agnico Eagle. Although Yamana's price tag seems more attractive -- it trades at 1.4 times trailing sales compared to Agnico Eagle's 5.0 -- it's not enough to compensate for the numerous ways in which Agnico Eagle outshines Yamana.
