Agnico's CEO says Mexican copper investment was strategic, not a signal he's losing faith in gold
The CEO of Agnico Eagle Mines Ltd., the largest producer of gold in Canada, said he’s confident that gold prices will break out of a months-long slump, and characterized his investment in a Mexican copper project as opportunistic, not a pivot from precious metals.
Gold appears to be suffering because the U.S. Federal Reserve and other central banks have been raising interest rates so quickly in recent months, making fixed-income assets such as bonds more attractive. As soon as the Fed stops raising interest rates, “gold is going to be unleashed and it’s going to go up,” Agnico CEO Ammar Al-joundi said by phone during the Gold Forum Americas conference in Denver.
The Fed raised its benchmark interest rate by three quarters of a percentage point this week, the third consecutive time policymakers have opted for an outsized increase, reflecting their struggles to contain the burst of inflation that came with the recovery from the COVID recession.
Inflation typically is good for gold investors and miners, as the metal is seen as a haven from volatility. However, the central banks have changed that narrative with their uncharacteristic aggression, at least for now. The price of gold has dropped nearly 20 per cent since the start of the year to US$1,674 per ounce. Shares of Toronto-based Agnico are down more than 30 per cent since April.
Al-joundi noted that gold has fared better as a store of value when measured against the Canadian or Australian dollar than it has against the U.S. dollar, which is considered the benchmark. Although smaller volumes of gold are traded in currencies other than the U.S. dollar, companies such as Agnico, which produces most of its gold from mines in Canada, still face most of their costs in Canadian dollars and thus are highly affected by the price of gold in that currency.
Al-joundi said he expects the rebound in gold prices to commence in either late 2022 or the first half of 2023, but added, “of course, we tend to be more optimistic.”
Agnico, like other gold miners, is seeking to create a hedge by expanding its exposure to copper and other metals. It recently committed at least $580 million to form a joint venture with Vancouver-based Teck Resources Ltd. to develop the San Nicolas copper-zinc project in Zacatecas, Mexico.
Both metals currently constitute a negligible portion of Agnico’s portfolio. Al-joundi described the project as “Goldilocks” — not too big, not too small, but just right.
Al-joundi said Agnico invested in San Nicolas because it has strong economics, with a 2021 prefeasibility study indicating that an open pit mine, producing 63,000 tonnes of copper and 147,000 tonnes of zinc per year, would provide a 33-per-cent internal rate of return.
But perhaps more importantly, Al-joundi said Agnico invested because its strategy is to develop expertise within regions.
“Our philosophy is very conservative,” said Al-joundi. “We don’t see ourselves as a global gold mining company, we see ourselves as a regional gold mining company.”