How The Market Has Excessively Discounted IAMGOLD

| About: IAMGOLD Corporation (IAG)

IAMGOLD (NYSE:IAG) is a mid-tier Canadian gold producer with mining operations in Africa and North and South America. With six mines in total, it also has one of the world's three niobium mines (niobium is primarily used to alloy steel which in very small quantities will increase steel's strength).

IAG's share price has dropped more than 70% this year and has halved since the end of August. This article will briefly review some of the factors which suggest this decline is overdone and that IAG has been left at an excessively discounted price.

IAG Has Declined Much More than the Average Gold Stock

2013 has been a disaster for the gold miners in general. The price of physical gold is down approximately 27% year to date.

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The Market Vectors Gold Miners ETF (NYSEARCA:GDX) is down almost 55% year to date:

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IAG, as previously stated has performed considerably worse, down 70% year to date:

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High Leverage and High Costs Have Been Negative Drivers for Gold Miner Shares

The market has been particularly punishing this year to miners that have higher costs and those that have more than average balance sheet leverage. This is by no means irrational behavior: the drop in gold prices has put many miners in a position where their cash costs to mine their gold are barely enough to generate an operating profit. The higher cost miners have greater sensitivity to changes in the price of gold. Having your cash margins squeezed is never a good thing; and it becomes a very bad thing if you carry a large debt load. The risks of default or share dilution through needing to raise more equity are significant negatives. Hebba Investments has done a terrific job in a series of many articles on various miners' cash costs. They recently reviewed IAG's cash costs in this article. What Hebba found was that IAG has done a good job in reducing cash costs and concluded: "All in all, management's cost cuts produced a very strong quarter from an all-in costs perspective as true all in costs dropped to around $1103 dollars per gold-equivalent ounce which was a significant improvement on previous quarters." Comparisons provided in that article show that IAG is no longer deserving of the high cost moniker it once had: "Compared to IAG's $1103 all-in gold-equivalent costs; the other gold companies we've covered in so far in Q3FY13 have reported the following costs: Newmont Mining (NYSE:NEM) (costs under $1200), Kinross Gold (NYSE:KGC) (costs around $1200), Goldcorp (NYSE:GG) (costs under $1200), Yamana Gold (NYSE:AUY) (costs over $1150), Alamos Gold (NYSE:AGI) (costs above $1250), Barrick Gold (NYSE:ABX) (costs above $1350), Agnico-Eagle (NYSE:AEM) (costs under $1150), and current quarterly cost leader Eldorado Gold (NYSE:EGO) (costs just over $1100). As investors can see, in terms of Q3FY13 costs IAG's true all-in costs ranks it pretty much at the top position of the gold miners we've covered for the quarter - an accomplishment for a company that has struggled in previous quarters to control costs." (Thank you Hebba Investments for allowing me to quote extensively from your excellent article.)

IAG claims they are 77% of the way to completing their annual cost reduction program of $100 million.

I think that the market is correct to discount the IAG valuation somewhat for a balance sheet that carries a $635 million debt load. This amount is unchanged over the course of the year. However that amount of debt needs to be viewed in the context of 9-month operating cash flow before changes in working capital of $250 million and an equity base of $3.7 billion. Liquid assets of cash and gold inventory have dropped from $1 billion to $500 million during that time. While still leaving plenty of liquidity, the optics of that differential is not great.

Dividend Cut and Tax Loss Selling

Last week IAG's board of directors elected to suspend dividend payments in order to preserve its balance sheet and conserve cash for deployment at a future date when the gold market makes its expected comeback. The news sent the stock plummeting 11% on that day alone. But is a cut in the dividend really that momentous an event? This needs to be looked at in context. The dividend was $23.5 million per quarter. Its cancellation erased about $150 million of market value. One must keep in mind that the payment (or cancellation) of a dividend is a capital allocation decision made by the Board of Directors. It does not affect the company's cash generation capabilities; the causal connection is the other way around. It does signal that the directors feel there is presently and perhaps for several quarters to come, insufficient cash being generated to allocate capital back to its shareholders. The decision sent income-oriented investors to the exists. This is likely exacerbated by tax-loss sellers doing the same thing. These income investors are very likely to be replaced by value investors as IAG's share price now represents deep value.


It is my opinion that IAG's current valuation reflects an excess of discounting. IAG can be compared on a valuation basis using forward price to earnings, price to book value and enterprise value to EBITDA to the peer group used by Hebba above:









































IAG trades at the second lowest forward PE, the lowest P/BV and the second lowest EV/EBITDA. IAG's forward PE is two thirds of the group average; its P/BV is one third the group average its EV/EBITDA is half the group average.


IAG has made significant progress in reducing its costs and has a moderate level of debt relative to its equity and good liquidity on its balance sheet. The current low gold prices have significantly impacted IAG's profitability, but it remains operating cash flow positive. Lower ore grades are its line of business, and that is certainly less attractive in a market such as this. IAG remains vulnerable to further declines in the price of gold, but will similarly benefit from any potential rise in that commodity's price.

IAG trades at a substantial discount to its peers based upon the three metrics provided. When averaged, IAG trades at about half the average metric. This discount is not reasonable in my opinion and points to an under-valued investment. IAG's stock price would have to double to be valued similarly to its peers. Cost and leverage, the two items most commonly cited for the discount, are not sufficiently problematic in IAG's case to warrant such a wide disparity. The dividend decision is more of a red herring than fundamental to the value of IAG and has created an opportunity for value investors to buy the income investors shares at an excessive discount. The remainder of the income investors leaving, coupled with yearend tax loss selling, should provide a good entry point for investors seeking an investment in a mid-tier gold miner that has been excessively discounted by the market.

Disclosure: I 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.

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