Agnico-Eagle Mines Ltd. Harvard Case Solution & Analysis

Agnico-Eagle Mines Ltd. Case Solution 

1. What are the value drivers (that is, the key success factors) of the gold industry?

 The value drivers or the key success factors of the gold industry comprises of two very important factors that are price of the gold and the ability of the company to produce gold inexpensively. By taking the two success factors one by one, price of the gold like other commodity is mainly dependent on the two economic factors that are demand and supply. Historically it can be seen that the supply of gold has been increasing with a CAGR of 2.3% since 1995. On the other hand, the demand side comprises of the two markets that are consumption market and the investment market.

The other key success factor is the ability of any company to produce gold inexpensively. It can be seen that the cost of production of gold reduced from US$300 per ounce in 1996 to US$ 193 per ounce in 1998, which shows the effectiveness of the company. The major reason behind this difference is the advancement of technology, which the company has adopted in order to cut its cost of production of the gold. The historical change in the gold prices had been approximately 20% which also reflected expectation about volatility of gold prices in the future.

 What is the value of AEM and its equity from operations based on the discounted cash flow method?

 In order to come up with the value of AEM and its equity from operations some necessary assumptions are required to be made. The value of WACC as taken by A-G Financial Consulting Group has been taken for the year 2002 till 2005 as well as for the year 2006 to 2008 the value of WACC would be 10.36%. The value of risk free rate as given in the case is 5.69%. The market risk premium is 6.70%. The beta for the equity is given in the case i.e. 0.6830.

AGNICO-EAGLE MINES LTD Case Solution

With the help of future projection from 2002 to 2008, the value of the enterprise comes to be $ 207,460,200 (USD). The value of the outstanding shares of the company is 61,333,630. So with this number of shares the value of per share of the company comes to be $ 3.382. However, this does not take into account all of the relevant factors pertaining to the company’s value. AEM has additional value, given the option it has to continue or delay the operation of its mine. This flexibility provides additional value that had to be accounted for. The terminal value of the company is calculated using the formula NOPLATPA (1+g)/K.

The growth rate (g) for the terminal value comes to be 4.0%,

The NOPLATPA for the year 2008 is $14,206.

Whereas the WACC for the year 2008 is 10.36%

APPENDIX 1: Valuation of the AEM

 What are the values of the tax loss-related items as well as the impact of the other valuation items shown in Exhibit 11?

 The values of the tax loss-related items are the deferred tax and the development cost adjustments. The first is the deferred tax, which indicates that AEM and its subsidiaries have non-capital income tax losses of approximately $64MM, which may be carried forward to reduce future years’ taxable income. ...........................

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