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Agnico Mines Ltd Case Solution & Answer

Agnico Mines Ltd Case Solution

Executive Summary:

Agnico Mines Ltd, established in Canada operates in gold mining industry. Agnico Mines Ltd is involved in production and exploration of minerals such as gold, silver, zinc and copper. The management of Agnico Mines Ltd is concerned about the recent decrease in its share price. Despite this down fall in share price management believes that Agnico Mines Ltd has the potential to remain profitable through its successful operations and the company will achieve the rise in share price in near future. In this regard management has produced some valuations based of Discounted Cash Flow (DCF) technique. However management is also concerned that share price valuation based on Discounted Cash Flow technique will overstate the share price as this technique uses the cash flows expected to be generated in future, but since the Agnico Mines Ltd is a resource based organization and it has been experienced in past that the asset of company are underutilized hence a valuation based on DCF technique would not be suitable. Instead an extension of Discounted Cash Flow valuation model such as Call Option calculated using Black-Schole model would be more appropriate to value the un-mined gold reserves. For Valuing Call Option using Black-Schole model, two different approaches can be considered. First approach could be to expand the mineral exploration and productions units, this approach will only be considered if there is raising trend in gold prices. Second approach would be to emphasis on exploration of minerals from other mineral sites apart from gold mines. Using this technique Agnico Mines Ltd can influence the adverse movement in future gold prices

Introduction:

Agnico Eagle Mines Ltd is operating in mining industry and is involved mainly in exploration and extraction of gold, running its operation from Canada. Apart from gold extractions company is involved in extraction of other minerals such as silver, zinc and copper. The company started its operation 30 years ago, and was initially involved in exploration of gold. After successfully running of its operations in gold mining it decided to diversify within the mining industry and started its operation to explore other minerals, but still the company is famous and well known in mining industry for its operation in exploration of gold. Cadillac belt was well known for mineral enriched belts in Canada, and Agnico Eagle Mine Ltd has the exclusive ownership of Cadillac belt mine giving it competitive advantage in Canada. Since the company was extracting more than enough amount of gold to fulfill the market demand, and through economies of scale benefit Agnico Eagle Mine Ltd(AEM Ltd) has significantly reduced its production cost giving it competitive advantage over its competitors. As part of the expansion strategy, AEM Ltd established new gold exploration site at LaRonde city during 2001, this addition, of LaRonde site which was 2250 meter deep shaft, into AEM Ltd portfolio increased its gold extraction from 5,000 tons to 7,000 tons per day.

Problem Identification:

Market share price of the company is falling making investor worried about their investment. Company’s expected Return on Investment (ROI) was deteriorating and its other key financial ratios were also showing negative results. Profit and Loss statement was also showing lower gross profits with comparison to preceding year’s gross profit.

Analysis:

Evaluation of Firm’s value through DCF Model:

Discounted Cash Flow (DCF) techniques provides the value of business using future cash flows expected to occur till infinity from the business operations, discounted at the weighted average cost of capital (WACC) adjusted for the risks faced by the business. Since calculation of expected cash flows till infinity can be complex hence terminal values are used to discount the cash flows………………..

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