Agnico-Eagle Mines Limited (USA) (AEM), Goldcorp Inc. (USA) (GG): Are Gold Stocks Still Attractive?

Gold price crashed from above $1,700/oz to as low as $1,330/oz when the government of Cyprus said that a sale of gold reserves worth 400 million euros was among the options for its contribution toward an international bailout. This obviously had an impact on gold stocks.

In the ongoing season, many believed that gold-mining companies would cut their guidance for the year given a weak outlook on gold. Let’s have a look at the investment thesis for some of these stocks.

Investment thesis

For IAMGOLD Corp (USA) (NYSE:IAG) , the Street has recently turned bullish on the stock. There are reasons to believe that positive signs are starting to emerge at this company. These positive developments include a strong operating quarter highlighted by cash costs that were well below annual guidance, the potential for guidance reflecting a cost reduction in Q2, the start-up of commercial production in Quebec and a Quebec tax proposal that ended up being much better than feared.

In the near term, the implementation of the company’s $100 million cost-savings program along with mine re-sequencing at Rosebel to access higher-grade ore could lead to a reduction in annual cost guidance when the company reports its Q2 results. (For those who don’t know, Rosebel is a mine that the company owns in Suriname, South America. The government of Suriname recently subsidized 50% of the power rates to the company)

Agnico-Eagle Mines Limited (USA) (NYSE:AEM)

Mixed outlook for this stock

Agnico-Eagle Mines Limited (USA) (NYSE:AEM)

reported its quarterly results on April 26. The developments coming from its Q1 2013 update are perceived as a mixed bag. On the positive side, the company posted a decent operating quarter and showed good progress on its development projects with La India and Goldex; both were approximately one quarter ahead of schedule.

Goldex is a part of the operations that Agnico-Eagle Mines Limited (USA) (NYSE:AEM) owns in the Abitibi region of Quebec. The mine is expected to start its operations in the second quarter of 2014. Similarly, La India is located in Mexico and is expected to start its production in the second half of 2014.

However, these positives were offset by additional down time expected at Kittila mine (an underground mine in Finland) in Q2/13 (~1 additional month of downtime), lower commercial production expectations and an increase in cash cost guidance (~5% increase) in 2013, associated with the downtime and a revision in commodity and forex assumptions.

Overall, the lower commercial production and higher costs in 2013 are expected to negatively impact earnings and cash flow in 2013. Hence, some pressure on the stock is expected in the short term; however, assuming the additional downtime at Kittila is contained to the guidance offered, any prolonged pressure on the stock price would be seen as an opportunity to enter the stock.