Agnico Does It Again, With Record Cash Flow
Contributed Opinion

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Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE), with its second-quarter financials, demonstrated once again why it is "the gold standard of mining companies," as I described it in introducing President and CEO Ammar Al-Joundi at Rick Rule's Boca Resource Symposium last month. With production above expectations and low costs (though up on the first quarter) — and aided by record gold prices — the company reported record EBIDTA of $1.92 billion, up 20% on the prior quarter and up 60% on the year-ago quarter.

First half cash costs came in at $918/oz, and All-In Sustaining Costs (AISC) of $1,235, the first at the lower-end of its guidance, and the second below. This combination saw the company generate over $1.3 billion in free cash flow, a record, allowing the company to pay down debt, returning to a net cash positive position of almost $1 billion.

The company also repurchased $100 million in shares during the quarter, at an average cost of $119.47, a clear signal that, though the share price has increased, they remain undervalued.

On Track for Annual Guidance, Despite 2H Headwinds

With production above and costs below guidance at the mid-point, it is tracking well, and full-year guidance was reiterated, though the company noted that its tax bill will increase significantly in the second half.

Its capital spend may also increase as it is considering bringing forward some of its major capital spending programs, including going underground at Detour, its (and Canada's) largest gold mine. There was no single standout operation, with improved production and costs at most of its mines, both in Canada and Australia, though Detour is expected to finish the year at the low end of its guidance.

Agnico Has a Large Investment Portfolio

Agnico has traditionally been one of the most active in investing exploration companies and their projects. It has shifted in recent years from option earn-ins and joint ventures on specific projects to taking stakes in companies with interesting projects. Its portfolio of such companies now stands at over $1 billion, aided, of course, by appreciate in the stock prices. Al-Joundi said that small investments early on give Agnico knowledge on projects from which it can decide whether to invest more.

In most cases, the company decides the project is not a fit. The portfolio should be seen as providing an entrée into projects rather than as an investment portfolio, he said. Trading at a price-to-book of 2.8 times, and 12 times cash flow, with a solid balance sheet and high margins, Agnico stock remains undervalued on an historical basis. It is trading very close to its lowest price-to-free cash flow in 20 years. It remains a core holding in the gold space and we would not want to enter a gold bull market without this stock in our portfolio.

However, with the stock price up over 60% year-to-date, and high tax and capital expenditures coming up, we are holding.

Ares Shows Its Resilience, Despite Lower Income

Ares Capital Corp. (ARCC:NASDAQ) also demonstrated why it is best-in-class in its sector. At $16 bill market cap, it is the largest and among the most conservative of the Business Development Companies. In its second-quarter results, it reported an increase in its Net Asset Value per share, a strengthening of the balance sheet (with a renegotiated credit facility), and earnings once again in excess of its dividend (with an increase in spillover income to the equivalent of $1.29 per share).

Net income was stable over last year, though other metrics, including net investment income, were down. But net asset per share ticked up, while the debt-to-equity ratio fell (to 1.01x).

The black mark on the quarter was that nonaccruals ticked up, though at just 1.2% at cost, they remain well below the company's historical average as well as the BDC average. CEO Kurt Schnabel indicated that new companies on nonaccrual were all idiosyncratic, with no trends visible, and the weighted average grade of the portfolio remained static (at a strong 3.1% out of four).

Ares Continues To Be Active, Despite Industry Slowdown

Schnable said that Ares continues to be active looking at new opportunities, although industry wide, activity slowed due to the uncertainty caused by tariffs. He added that there are recent signs of a pick-up in market activity, with Ares positioned to benefit due to its liquidity, scale, and deep relationships. Its backlog continues to be strong.

It also had some exits this past quarter, at an average return of three times investment capital. A closer look at its portfolio led Ares to increase confidence that its portfolio companies had a low exposure to tariffs than earlier thought (see Bulletin #960). It broad-based portfolio, in 25 different industry sectors, is heavily focused on domestic service industries, which are more immune to tariffs than other sectors.

The portfolio is broadly diversified, with each company representing an average of just 0.2% of the total portfolio, and the largest company less than 2%. Over half of its investments (at fair value) are first-lien, senior secured loans.

Stable Dividend Yields Over 8%

With lower leverage than its peers and a strong balance sheet, the company "moderated" its use of the At-the-Market stock issuance facility. It held its dividend the same at 48 cents per quarter, its 16th consecutive year of stable or increasing dividends; analysts expect an increase by year end.

With a well-covered dividend yield of 8.6%, low leverage and a low-risk portfolio, Ares remains a solid long-term holding for income investors. However, trading at 1.13x book, its high since before the Great Financial Crisis, means it is not particularly inexpensive.

We are holding, though long-term investors looking for income can buy here.

TOP BUYS this week, in addition to above, include Nestle SA (NESN:VX; NSRGY:OTC), Royal Gold Inc. (RGLD:NASDAQ), Fortuna Mining Corp. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE), and Metalla Royalty & Streaming Ltd. (MTA:TSX.V; MTA:NYSE American).