IAMGOLD Analysis of Q2 Results and Bought Deal Financing
IAG data by YCharts
IAMGOLD (NYSE:IAG) recently reported its second-quarter 2016 financial results, and also announced a $200 million bought deal financing. While the company says its net operating cash flow increased by 125% in Q2, I actually thought it was a poor quarter when you look at the numbers closer. I also think diluting shareholders here may not have been the smartest move, as I'll explain below.
In the quarter, IAMGOLD boasts its strong net operating cash flow which increased by 125% from last year. Margins were up 36% from last year, due to higher gold prices and lower cash costs. The company's average realized gold price was $1,269 per ounce.
Really, though, it wasn't that great of a quarter when you look closer. While gross margins were $536 per ounce, this includes total cash costs ($756 per ounce), and not all-in sustaining costs, which includes all sustaining capital expenses, which came in at $1,114 per ounce. This is among the highest in the industry. What's more: each one of IAMGOLD's mines reported AISC higher than $1,000 per ounce.
Net cash from operations was $71.2 million. Sure, this is a big improvement over last year's quarter. However, the company actually wasn't free cash flow positive, as it spent $81 million total on sustaining and development/expansion in Q2, according to the quarterly report. The company ended up reporting a net loss of $12.2 million, or $.03 per share.
As for the balance sheet, IAMGOLD ended the quarter with $625.5 million in cash, cash equivalents and restricted cash, compared to $628.9 million in long-term debt.
As I mentioned in a past article, the company's cash position is declining at an alarming rate - the company had a net cash position of $188 million last year, and this shrunk to $30 million in Q1 and negative at the end of this quarter. This decline in net cash is due to IAMGOLD's poor management of cash costs and heavy investments in development and exploration projects.
When you get down to it, this was a poor performance as IAMGOLD's AISC was higher than its guidance range of $1,000 to $1,100 per ounce, and it looks like IAMGOLD was one of the few gold miners to report a loss in Q2. It is disappointing given gold's recent surge.
IAG data by YCharts
To make matters worse for shareholders, IAMGOLD recently announced a $200 million bought deal financing - the company will issue 38.85 million new common shares at a price of $5.15 per share.
There's also an option to increase this offering by another 5.82 million common shares, which will bring the total proceeds to $230 million. Approximately $150 million of the proceeds will be used to repay the company's 6.75% senior notes due in 2020, and the rest will be used to fund internal growth projects.
Following completion of the equity issuance, IAMGOLD will have approximately 444.75 million shares outstanding or 450.57 million if the over-allotment goes through.
While this equity financing will certainly strengthen IAMGOLD's balance sheet, the dilution will be painful for existing shareholders. The company is sitting on $625 million in cash, and while this is still declining, it could have easily used cash on hand to repay the senior notes. And clearly, if the company was profitable, it wouldn't have to issue equity to repay this debt.
There certainly were some positives to take away from this report. Mainly, exploration success was achieved at TomaGold's (OTC:TOGOF) Monster Lake Project, the Nelligan joint venture project, and, subsequent to quarter end, strong drill results from the Boto project in Senegal. But I still recommend avoiding IAMGOLD shares - any pullback in gold prices will hurt shares given the company's high cash costs, and the equity issuance should also limit upside in the near-term.
Disclosure: I am/we are long TOGOF.
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.