The last time I wrote about IAMGOLD (NYSE: IAG) I stated that the company lacked upside catalysts. The update on the company's Westwood mine was crucial for understanding IAMGOLD's future. The company made this update, along with production results for 2015 and 2016 expectations.
In 2015, IAMGOLD produced 806,000 ounces of gold at all-in sustaining costs (AISC) between $1050 - $1150 per ounce. We will know the exact AISC number when the company reports its fourth-quarter and year-end results. It looks like costs will trend down, as the strong dollar and low oil are a major help on the cost side for everyone with mines outside the U.S.
At the same time, there was nothing spectacular in production numbers. Also, the company chose to present a wide range for its costs, although it is evident that AISC won't be $1140 or $1150 per ounce for the whole year.
Previous AISC numbers were $1113 in the first quarter, $1076 in the second quarter and $1027 per ounce in the third quarter. The fact that the low end of guidance is $1050 per ounce shows that there was no major breakout on the cost side in the fourth quarter. Frankly, I think that nobody expected such a breakout.
Let's turn to guidance, as it is much more interesting to investors than past numbers. This year, IAMGOLD expects to produce 770,000 - 800,000 ounces of gold at AISC between $1000 and $1100 per ounce. The lower AISC number reflects the effects from the stronger dollar and lower oil.
In its assumptions, IAMGOLD uses $1150 per ounce of gold, $63 per barrel of oil, $1.10 for EUR/USD and $1.25 for USD/CAD. Assumptions are optimistic regarding the price of gold and especially the price of oil. This leads me to believe that the "real" guidance could have been a little lower, since oil and USD/CAD exchange rate expectations are far away from current numbers.
For investors, there are two problems with this guidance. First, IAMGOLD expects a decline in production compared to the previous year. Second, AISC numbers stay dangerously close to prevailing gold prices.
Recently, gold fluctuated between $1050 and $1150 per ounce. Of course, gold can rather easily reach $1150, but $1000 is also possible and is not that far away. With these costs, IAMGOLD shares will remain very sensitive to gold prices.
The real problem
Anyone who believed that the update on Westwood would be a major breakthrough must be upset. The update was not a positive catalyst at all. This year Westwood is expected to produce 50,000 - 60,000 ounces of gold. Westwood should have been IAMGOLD's growth source, but it so far failed to reach previous expectations.
As I mentioned in my previous article on IAMGOLD, Westwood suffered several accidents last year. Because of this, the company had to reduce production guidance for the mine to 55,000 - 65,000 ounces of gold. In reality, Westwood produced 60,000 ounces in 2015. Current IAMGOLD's production guidance states that the mine will at best replicate this year's result.
Don't forget that Westwood produced just 2,000 ounces in the third quarter of this year, and it started the year with 22,000 ounces of production in the first quarter. In the mid-point of current guidance, Westwood will be producing a little less than 14,000 ounces of gold per quarter, way behind the numbers with which it started the year 2015. The guidance for Westwood is a major disappointment.
Also, IAMGOLD presented its view on what went wrong in Westwood in 2015. In its presentation, IAMGOLD stated that it rejected such failure hypothesis as movement, production blasting/stress redistribution due to ore mining sequence and water management.
It also concluded that the incidents could not have been anticipated. This news is good for company's employees who were found innocent of making miscalculations and mistakes, but makes no difference for investors.
IAMGOLD also stated that appropriate risk management strategies were available. Judging by the production guidance for Westwood, IAMGOLD is not very confident for the mine this year. This is not good news for investors.
IAMGOLD's guidance update and update on Westwood did not provide upside catalysts for the company. The estimated level of costs is dangerously close to existing gold prices. The performance of the Westwood mine remains a big question. Due to IAMGOLD's cost level, the company's shares will remain very sensitive to changes in gold prices.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.