Agnico Eagle Mines Ltd T.AEM

RBC

[retiredcf]

Current and upside scenario targets are US$65.00 and a whopping US$101.00. GLTA

November 7, 2022
Agnico Eagle Mines Limited Let's stay together

Our view: AEM announced a joint competing proposal with PAAS to acquire AUY. The transaction provides AEM with Yamana's Canadian assets, thereby consolidating its interest in the Malartic mine to 100%. We view the deal providing the company with increased exposure to a core high quality asset, while being neutral to valuation, and our overall takeaways are slightly positive. In our view, GFI is unlikely to revise its existing offer to acquire AUY, and our forecasts incorporate AEM's proposed acquisition proceeding as outlined.

Key points:
• AEM announced the purchase of AUY's Canadian portfolio as part of an AEM-PAAS proposal to acquire AUY. AEM is effectively paying a total $2.5b for Malartic and Wasamac, consisting of 36.1m shares and $1b in cash. At spot prices on announcement, we calculate a valuation of 1.2x NAV, 9.1x EBITDA, and 10.3x CF, excluding AEM's financing costs as well as the $300m GFI termination payment and material closing costs that we interpret as payable by PAAS. Pro-forma, AEM's production increases 8% to ~3.7moz, its costs decline by 1%, Malartic increases to 22% of NAV (from 12%), and Canada exposure increases to 81% (from 78%).

• We calculate the transaction is a neutral to valuation; projected returns are low but consistent with top tier gold assets. At current gold prices, the transaction increases our NAVPS by 1%, and it increases CFPS by 1% over a 3-year period. At spot gold prices, we calculate the transaction will generate a 4% IRR to AEM based on our current forecasts of mining until 2042. With extension +5y to 2047 at spot gold, or assuming gold prices of $1,725/oz, this could improve to 5%.

• Broadly, we see no material strategic concerns or questions with this transaction that emerge. AEM's exposure to an existing core asset increases, where underground development is a key focus today (initial Odyssey production in 1Q23, East Gouldie in 2027, and full production in 2030). Potential development of Wasamac in our view could be evaluated on a different time frame vs. AUY's plan, given AEM's existing project portfolio. Despite significantly increased M&A activity by AEM in 2022, including the AEM-KL merger, San Nicolas acquisition, and now Malartic, we view these circumstances as opportunistic and not indicative of a change in M&A strategy or increased appetite for deals.

• Key risks in our view are the PAAS shareholder vote, and inflationary risks surrounding Malartic development. For the transaction to proceed, PAAS requires a simple majority vote cast in favour of the transaction, where the outcome is not yet clear. In 3Q, AEM previously reported the Malartic underground project was on schedule and budget, but that it was re-evaluating the potential impact of sustained cost inflation. Our existing forecasts continue to incorporate ~30% higher initial capital costs to reflect this and general industry inflationary pressures.