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The Gold Stock Strategist analyzes leading junior gold producers and major gold mining companies.

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Thursday, October 29, 2009

Agnico-Eagle Misses Q3 Consensus by 86 Percent

Toronto-based Agnico-Eagle Mines $AEM surprised everyone yesterday by posting a large loss and missing analyst earnings expectations by 86 percent due to special items, missed production targets, and higher operational costs.

Agnico-Eagle posted a third quarter loss of $17.0 million or 11 cents per share, compared to a positive earnings of $14.0 million or 10 cents per share in same quarter last year. Adjusted for special items, the company earned 3 cents per share and missed consensus expectations by 17 cents. The consensus estimate of analysts was 20 cents profit per share, excluding special items.

The company said the current quarter result includes a non-cash foreign currency translation loss of $22.9 million, or 15 cents per share and a stock option expense of $5.1 million or 3 cents per share. Offsetting these losses was a gain on the sale of marketable securities of $5.9 million, or 4 cents per share.

Revenues for the quarter were $158.8 million, compared to $83.3 million in the same quarter last year.

Third-quarter gold production was up 73 percent at 118,763 ounces compared to 68,753 ounces in the third-quarter of 2008. Cash costs for the third quarter were up sharply at $449 an ounce compared to cash costs of $135 in the same quarter last year. Production targets at new gold mines were slower than forecast, negatively impacting quarterly earnings. Agnico dropped its full-year production guidance to 500,000 ounces from its previous range of 550,000 and 575,000 due to operational issues at new mines in Finland and Quebec. Fourth-quarter production is expected to be 170,000 ounces. For 2010, production is now expected to be 1 million to 1.1 million ounces. Agnico had originally forecast 1.2 million ounces of gold production in 2010.

Production at the LaRonde mill was lower than forecast, owing largely to a seven day shutdown related to maintenance and upgrades to the service and production hoist systems.

Production at the Goldex mine in Quebec was below expectations because of a company decision to focus mining on the lower grade deposits. The new Lapa mine in northwestern Quebec and Kittila mine in Finland reported third quarter gold production lower than expected and with higher cash costs than forecast. The company expects cash costs to come down as it ramps up production and development costs decline.

There remains continued cost uncertainty with additional development costs at the Meadowbank mine project in Nunavut as the company begins production sometime during the first quarter of 2010. At full production, Nunavut is forecast to produce 350,000 ounce of gold annually.

Since the beginning of 2009, Agnico-Eagle shares have gained 13 percent, well under the 18 percent gain in the S&P 500 index $SPY. Agnico-Eagles' share price plunged well below the 50-day moving average level on yesterday's earnings announcement and is bouncing along the 200-day moving average at mid-day today just above $58 a share. The relative strength index is signaling an oversold stock (see below).

Like every other analyst, the Gold Stock Strategist was caught off guard by the production slow down and higher cash costs at Agnico-Eagle. The Agnico-Eagle earnings loss this quarter points to the complexity and uncertainty involved in mining for the yellow metal. This hit to 2009 profits might be an early signal for Agnico-Eagle investors that earnings are likely to remain flat over the near term given the operational challenges in bringing new mines into production.

Despite the technical strength, investors should be cautious with Agnico-Eagle for the near term with the operational challenges facing the company. We'll be looking for the company to prove it can manage its growth more efficiently and find a way to reduce negative forex charges.

There are safer plays than Agnico-Eagle in the gold mining industry. Barrick Gold $ABX, the world’s largest gold producer, is projected to grow earnings at a 7 percent clip over the next few years as they bring Pascua-Lama into production. Barrick is an industry leader and a top pick in the Gold Stock Strategist newsletter.

An article written on Tuesday, October 27, "Gold Miners Minting Money" is posted at Self Directed Investor for readers looking for more information on the third quarter gold miners' earnings season.

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