Image: Westwood mine – Source: IAG

Investment Thesis

The Canada-based IAMGOLD Corp. (IAG) is an interesting mid-tier gold producer which owns, wholly or in part, five operating gold mines spread across three different continents. The biggest producing mine is called Essakane in West Africa which represents 48.65% of the total output of the company in 1Q’19.

The investment thesis has shifted slightly to the negative, because of the obvious technical issues that the company’s producing mines are facing at the moment which create uncertainty for the long-term outlook.

For instance, the Westwood mine owned 100% by the company suffered a severe setback due to earthquakes in 2015, and is again curtailing production this quarter by nearly half sequentially to only 15K Au Oz, due to the same recurring issue.

Despite a good cash position and significant projects pipeline – which could turn the company’s stock into a good proxy for gold – trading IAG short term is now more appropriate.

Thus, I recommend reducing your long-term position gradually whenever possible, while increasing short-term trading until a time when we can be more confident about the future outlook and management ability to deliver a decent AISC below $900 per Oz.

It is not a call to sell your position at a loss though, and it would be a grave mistake to do that.

  1. The Rosebel complex (located in Suriname), including the Saramacca and the Brokolonko fields, 95% owned.
  2. The Essakane mine (located in Burkina Faso) 90% owned.
  3. The Westwood mine (located in Quebec) 100% owned.
  4. And the Sadiola and Yatela mines (Two joint ventures with Gold Ashanti in Mali).

In addition to its producing assets, the company also holds about eight near-term projects. The company also is developing ten significant projects. These projects offer great potential for growth mid-term and can be safely completed through cash flow and cash on hand.

Source: IAG Presentation

One critical financial advantage of the company is that it has excellent liquidity, and has negative net debt, which is paramount especially when the gold price is weakening.

Source: IAG Presentation updated by Fun Trading

Steve Letwin, the CEO, said in the conference call:

Obviously we had one of our tougher quarters here in a long time. I want to reinforce that IAMGOLD is committed to achieving a self-funding model with all of our cash requirements met by our mines.

IAMGOLD – Financial Snapshot 1Q’19 – The Raw Numbers

IAMGOLD 2Q’17 3Q’17 4Q’17 1Q’18 2Q’18 3Q’18 4Q’18 1Q’19
Total Revenues in $ Million 274.5 268.8 291.1 314.5 277.4 244.8 274.3 251.0
Net Income in $ Million 506.5 30.8 -17.7 42.3 -26.2 -9.5 -34.8 -41.3
EBITDA $ Million 638.5 101.0 82.0 122.9 55.5 56.5 52.3 31.2
Profit margin % (0 if loss) 184.5% 11.5% 0 13.4% 0 0 0 0
EPS diluted in $/share 1.08 0.07 -0.04 0.09 -0.06 -0.02 -0.07 -0.09
Operating Cash flow in $ Million 88.7 77.0 65.2 106.0 50.6 11.4 23.1 8.8
Capital Expenditure in $ Million 59.0 44.7 89.8 68.4 86.8 63.1 117.7 70.2
Free Cash Flow in $ Million 29.7 32.3 -24.6 37.6 -36.2 -51.7 -94.6 -61.4
Total Cash $ Million 776.2 810.6 791.3 831.9 775.3 715.9 734.6 673.0
Long-term Debt in $ Million 392.2 388.7 391.6 392.5 393.7 396.2 398.5 394.5
Shares outstanding (diluted) in Million 469.3 469.3 469.9 470.9 466.5 466.6 466.8 467.6

Source: Company filing and Morningstar

Gold Production and Balance Sheet Details

1 – Revenues were $251.0 million in 1Q’19

The quarterly revenue came in at $251.0 million. IAG posted net earnings attributable to equity holders of minus $41.3 million or a loss of $0.09 per share compared to a gain of $42.3 million or $0.09 from the same quarter a year ago. It was a huge disappointment, and the stock plunged to multi-year lows.

Ms. Carol Banducci, the CFO, said in the conference call:

We ended the quarter in a strong financial position with cash, cash equivalents, short-term investments, primarily in money market funds and restricted cash of $696.6 million at March 31, 2019, down $61.4 million from December 31, 2018. The decrease was primarily due to spending on property, plant and equipment totaling $59.7 million partially offset by cash generated from operating activities at $8.8 million.

2 – Free Cash Flow is a loss of $61.4 million.

Free cash flow is not impressive, to say the least, and has been negative in the last four quarters. IAG’s FCF is now minus $243.9 million yearly and minus $61.4 million this quarter alone.

Free cash flow is negative because the company has invested heavily in its mine projects. Such expense is not a subject of concern because what has been spent will generate cash flow down the road. However, with the recent disastrous quarter, this thinking may present some weakness.

However, IAG is not passing the FCF test.

3 – Gold production details. Total production was 185K Au Oz which is a record low.

IAMGOLD produced 185K Au oz during the first quarter of 2019. Production for 1Q’ 2018 was 229K Au oz as you can see in the graph above. The first quarter was a weak production quarter, down 20% sequentially, due to an increase in the frequency of seismic events at Westwood in Canada and lower head grades and throughput at Essakane in Burkina Faso.

All-in sustaining costs, or “AISC,” were $1,086 per Oz in the first quarter of 2019 which is above 2019 guidance. AISC increases when gold production sold decreases. Gord Stothart said in the conference call about Westwood mine:

Looking at Westwood, Q1 gold production was15,000 ounces and all-in sustaining costs per ounce of $1,192 as the mine assessed and adjusted stope sequences to address local seismic issues in packing production. The risk of seismicity varies according to local ethology in alteration combined with the geometry of the openings and the mining sequence. To manage this, we are studying various design approaches to Westwood with a preliminary life of mine expected in the fourth quarter of this year followed by a NI 43-101 compliant plan in the first half of 2020.

4 – Production guidance for 2019 and reserves

For full-year 2019, the company reaffirmed its production guidance of 810k to 870k ounces of attributable gold at an all-in sustaining cost between $1,030 and $1,080 per ounce sold. The cost of sales was reiterated at $790 to $840 per ounce as well as total cash costs of $765 to $815 per ounce produced.

However, guidance is set to be reviewed next quarter. Gord Stothart said in the conference call:

Guidance will be reviewed in the second quarter 2019 and updated as necessary. Gold production at Westwood is expected to improve starting in the second quarter of 2019 compared to the first quarter and is expected to be strongest in the fourth quarter.

As a result of this massive spending, the company’s proven and probable reserves of gold increased by 23% to 17.864 million ounces in 2018 from 14.514 million ounces in 2017.

Source: IAG presentation

The company put on hold some essential projects. Steve Letwin said in the conference call:

For our projects, Côté Gold and Boto Gold, we are progressing within the previously provided capital guidance and outlook. We understand that the time is not right for any large scale projects. We, therefore, are gone to the sidelines on these projects.

5 – IAMGOLD has no net debt and strong liquidity.

IAMGOLD has no net debt and total liquidity of approximately ~$1.2 billion (not including restricted cash) as of the end of March 2019.

Conclusion and Technical Analysis (Short Term)

IAMGOLD has been and remains a real dilemma when it comes to investing.

If we look at the company’s balance sheet, we must admit that it looks impressive and long-term growth potential with Essakane or especially Saramacca starting production in H2 2019. In the conference call:

At Saramacca, we are on the path to production with ore expected to arrive at the mill later in the year. In the first quarter, we announced that we’d receive notice of approval for the Environmental and Social Impact Study from the government of Suriname for the project. All road construction continued during the quarter and deliveries of the haul fleet are expected in the second half of the year.

However, gold production is declining fast, and technical issues are recurring to surprise us quarterly. Management seems unable to fix the situation permanently and has not been able to reduce AISC, which is now well over $1,000 per ounce. The result is a steady deficit in free cash flow quarter after quarter, and it is not acceptable any longer. The result is that the stock is now a fraction of what the stock traded in August 2018.

Technical Analysis

IAG experienced a decisive negative breakout of its symmetrical wedge pattern in mid-April and the recent results created another downside to a multi-year low.

However, the downside has found support around $2.40 (light selling potential depending on the gold price). New resistance is about $2.80-2.90 (I recommend selling about 20% of your position).

The idea is to trade short-term IAG by using support and selling on any rebound providing 15-20% gain.

Author’s note: If you find value in this article and would like to encourage such continued efforts, please click the “Like” button below as a vote of support. Thanks.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in IAG over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: IAG may present a short term opportunity now.

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