Distressed Investing: Agnico-Eagle Could Be A Great Recovery Play

As the name suggests, distressed investing involves buying companies that are distressed and waiting for them to recover. The key is to select businesses that are only temporarily distressed but remain inherently sound.

One such example was seen back in 2010 with the Deepwater Horizon oil spill in the Gulf of Mexico. The spill was triggered when an explosion aboard the Deepwater Horizon drilling platform caused a pipe on the sea-floor to rupture.

Although owned by Transocean, the Deepwater Horizon platform was leased by BP on a 3 year contract to explore the company’s Macondo Prospect. On 20 April 2010 when the explosion occurred, BP’s share price was around $59.88, but by 25 June it had hit a low of $27.02. The stock still hasn’t fully recovered but today it trades at around $45, a 66.5% gain from the low.

The Agnico Story

Agnico-Eagle Mines is a Canada-based gold producer with mines and exploration properties in Canada, Finland, Mexico and the U.S. In 2011 the company produced 985,460 ounces of gold at a total cash cost of $580 per ounce, giving it nearly $1 billion in gross mine profit.

At the end of 2010 Agnico was trading as high as $86.75, today however it trades at just $33.61, a fall of more than 60%.

A 2 Year Chart Of Agnico-Eagle Mines [AEM]

Chart courtesy of Stockcharts.com

Agnico’s share price was hit hard after it was forced to write-off its investment in its Goldex mine in Quebec, after the mine was shut down due to water inflow and ground stability concerns that made operating there unsafe. The shutdown resulted in a $260 million charge in the third quarter results.

The company was also forced to write down $645 million due to “persistently high operating costs” at its Meadowbank project. A revised mine plan for Meadowbank will result in a shorter mine life and therefore part of its previous book value of $1.7 billion had to be written off. As a result Agnico reported a loss of $601.4 million for the fourth quarter of 2011.

Although Agnico’s gold production will likely be down slightly in 2012, at around 875k to 950k ounces, it is expected to increase each year through 2017.

The company yields 2.4% and has just increased its dividend by 25% to $0.20 per share. It’s worth noting also that Agnico has paid a dividend for each of the past 30 years.

Agnico is a well run company in a sector with tremendous prospects, and this spate of bad luck allows investors to buy it at a significant discount.

Timing these types of investments is notoriously difficult and it’s easy to buy in too early. However I believe the downside for Agnico is limited, and over the next 18 to 24 months the company will likely be an excellent recovery play.

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