IAMGOLD Makes A Major Discovery

Summary

• The Rosebel mine is an extremely important operation for the company, but there are only 3-4 really strong years left.
• Recent exploration at Saramacca, which is only 25 km away from the Rosebel mill, has been wildly successful.
• The impact of Saramacca added to the mine plan will be substantial.
• There are still several catalysts in place that could result in further stock price appreciation for IAG.
• The stock looks like it wants to run to $8-$10.

I have been bullish on IAMGOLD (NYSE:IAG) as they are really starting to see a turnaround. I've certainly been critical in the past of the company and their CEO, Steve Letwin, but I must say that lately they are on a much better path. The stock price has been outperforming other gold miners as positive news continues to pour in. Year-to-date, IAG is up almost 30%, while the rest of the sector continues to languish.

IAG data by YCharts

There are several reasons why IAG is rising in value as other gold stocks have been flat for the year. The main one being the widely successful exploration results coming out of Rosebel. This will continue to be one of the major catalysts that drives the stock price higher.

All figures below are in USD, unless otherwise noted.

Did IAMGOLD Just Solve One Of Their Biggest Problems?

If you are an IAMGOLD long, you want three things to happen:

1. Increase the reserves at Rosebel by finding more soft rock that is higher in grade.
2. Increase the reserves at Essakane.
3. Get Westwood into full production with no further issues.

If the company accomplishes all of those, then shareholders will continue to be greatly rewarded.

IAMGOLD might have just solved #1, and "solved" is an understatement.

I have discussed before the low reserve issue at their Rosebel mine in Suriname. This is an extremely important operation for the company, as it accounts for 35% of total production. But there are only 3-4 really strong years left, and then the mine output starts to decline dramatically. Costs at Rosebel are also high, as IAMGOLD is mining more hard rock than it was just a few years ago. Other cost pressures have also contributed to the elevated AISC.

Below is the mine forecast for Rosebel that IAMGOLD was including in its presentations up until earlier this year. AISC for 2016 actually came in below what was forecast in the graph, and costs this year are also lower than expected. However, it still doesn't change the fact that this operation is going to mine and process more and more hard rock (high cost) over the next few years, and that production will decline precipitously after 2020.

(Source: IAMGOLD)

To get this operation back on track and extend the mine life, IAG started to look for additional higher-grade, soft ore outside of the current property boundary. In August of 2016, they acquired the Saramacca concession from the Government of Suriname. This property falls within the JV agreement between IAMGOLD (70%) and the government (30%). The Rosebel Gold mine is also located only 25 km away from Saramacca - which means ore from this JV concession is easily within trucking distance to the plant at Rosebel.

(Source: IAMGOLD)

There has already been past exploration work done at Saramacca, as Golden Star Resources (GSS) drilled the property in the 1990's and 2000's (they formed a JV with Newmont in 2006 to explore Saramacca further). According to IAMGOLD: "Evaluation of this work suggests an exploration target potential of between 8 and 40 million tonnes grading between 1.0 and 1.8 g/t Au for potentially 0.5 to 1.4 million contained ounces of gold." In other words, past drilling already indicated there was a higher grade gold resource at Saramacca.

When IAMGOLD bought the concession last year, they immediately began exploring the property by conducting an infill drill program. Many of the reported 2016 drill holes that were released earlier this year were being assayed at 4-5 g/t over 20-50 meters. These were already very encouraging results.

Back in late March 2017, IAMGOLD released assay results from the initial 29 diamond drill holes of its 2017 infill drill program at Saramacca. Many of the holes reported showed similar widths and grades to those from 2016. However, there was one intercept in particular that immediately got my attention. I did a double take when I saw the following drill hole:

• SMDD17-077: 60.5 meters grading 40.91 g/t Au Including: 19.5 meters grading 75.91 g/t Au

As I told subscribers of The Gold Edge at the time: I've seen many stellar drill holes over the years out of companies in this sector. Rarely though have I encountered one like this. It's just the combination of grade, width, and depth that make this a true standout. 60 meters at a grade 4-5 g/t is stout, 60 meters at 10 g/t is even more impressive. But 60 meters at 41 g/t? This is highly unusual (and I mean that in a good way). This intercept was also from just 15 meters to 75 meters below surface. This isn't some deep underground deposit, this is a shallow depth ore body that might turn out to be something very special (or at least significantly better than initially thought).

True width of the hole wasn't as strong, as it got cut in half to 30 meters, and capped grade (at 30 g/t) was also about half. However, it still doesn't take away from the overall results. IAG has definitely found something here.

Steve Letwin, IAMGOLD's President and CEO, made the following statement in the March press release:

These drill results exceed what we expected when we acquired the rights to the Saramacca property and lead us to believe that this deposit has the potential to create significant value for all stakeholders with a vested interest in the future of Rosebel, including our shareholders and the Government of Suriname.

Initially we were attracted to Saramacca by the prospect of finding soft gold-bearing rock, and are pleased to see soft rock extending to depths of up to 100 metres. What is now becoming Saramacca's most compelling feature is the high grades that we've intercepted to date. We intend to declare a resource this year which would then enable us to develop our plans to bring Saramacca into the mine feed as quickly as possible.

In the Q1 2017 conference call, held in May, Letwin confirmed my opinion of drill hole SMDD17-077 and its impact, as he made the following comment:

We have the fourth best drilling hole in the world of any metal, the fourth best. Sixty meters at over 40 grams a tonne. No one in this room, no one in the marketplace ever expected that Saramacca would turn out the way it's turning out. It is a transformational asset for us, 25 kilometers from the mill. So what does that do for us? Well, with very little capital, we can bring that ore into a mine that paid for itself eight years ago. So it owes us nothing and the economic returns at Saramacca are, again, infinite because we're able to lever off infrastructure.

If Saramacca turns into something much bigger than expected (which certainly looks to be the case), then it really does transform the mid to long-term outlook for Rosebel (and in turn IAG). This discovery means there is now the potential to not only greatly increase the mine life at Rosebel, but also drastically reduce the cash costs given the grade of these assay results.

Additional Drill Results

In May, IAG released additional assays from its infill drill program at Saramacca. While the results weren't as impressive as what was discussed above, they were still very high grade over exceptional widths. Highlights include:

• SMDD17-138: 43.5 meters grading 12.26 g/t Au
• SMDD17-110: 76.6 meters grading 7.74 g/t Au
• SMDD17-130: 46.5 meters grading 3.07 g/t Au
• SMDD17-133: 45.4 meters grading 2.38 g/t Au
• SMDD17-097: 45.0 meters grading 2.70 g/t Au
• SMDD17-125: 31.0 meters grading 3.81 g/t Au

Below is a map of some of this infill drilling that was conducted. IAMGOLD is hitting strong grades over wide widths all along strike. As a side note, the green dots are the historical drill holes. Notice the blue line at the top left, as I'm going to show a map of this cross section so investors can get a better visualization of this discovery.

(Source: IAMGOLD)

Again, SMDD17-077 (the top drill hole shown in the following diagram) hit 60.5 meters grading 40.91 g/t Au. However, as I also said, true width wasn't as strong, as it got cut in half to 30 meters. True width is simply the actual width of the vein itself. You can see that because of the angle of the drill hole, it didn't intersect this area of mineralization perpendicularly (which would have given a true width). Since these veins are running more vertical, you are going to have wider widths in the drill results due to the angle of attack. Still, these are exceptional results. More importantly, this mineralization starts at surface. Hole SMDD17-077 was intersecting gold at just 14.5 meters. A 30 meter wide vein at this grade and located just below surface is a monster find. Also notice holes 084, 138, and 079 at the lower left. These are very good intercepts as well and only 100-150 meters below surface.

(Source: IAMGOLD)

What's Next?

The current phase of the 2017 infill drilling program has concluded - a total of 19,600 meters of drilling has been done YTD. A maiden resource on the Saramacca deposit is expected to be completed this quarter using these results. The question is, "what will be the size of this ore body?" As I mentioned earlier, IAMGOLD stated that past drilling indicated a potential resource of between 8 and 40 million tonnes grading between 1.0 and 1.8 g/t Au for potentially 0.5 to 1.4 million contained ounces of gold.

In the last conference call, the company stated: "we think we're trending towards the high end of that initial range. And if we continue with success, maybe we can surpass that."

I believe IAG is being modest, most likely both grade and ounces will be above that stated target range (possibly well above) - given the drill results that are coming out of this property.

Currently, IAMGOLD is conducting some preliminary engineering and permitting studies on Saramacca. It most likely won't be until 2019 before the company sees any ore delivery from this deposit, given the permitting time-line.

What's The Impact?

The addition of Saramacca will likely transform Rosebel into an entirely new mine. Last year, the head grade at the operation was 0.82 g/t. The company was able to produce gold at $988 per ounce AISC from that mill grade. If the new resource comes in at 1.8 g/t or higher (as I expect), that means that grade from Saramacca will be more than double what is currently being processed at the Rosebel mill. This will result in a step-change in cash cost over the next few years, as the higher-grade ore from Saramacca will be blended with the lower grade feed from Rosebel. The split in grade (meaning how much is sourced from Saramacca), will ultimately determine just how far cash costs will decline.

Rosebel used to be a 400,000+ ounce per year gold mine, but because of the increase in hard rock and reduced processing, the annual output of the operation is now only about 300,000 ounces. With Saramacca introduced to the equation, I believe that Rosebel will once again be over that 400,000 ounce per year mark. AISC at that point should be $800-$900 per ounce max. But we won't be able to accurately determine production and cash cost figures until the National Instrument 43-101 is released. Still, I believe my assumptions are definitely achievable.

This satellite deposit could also be brought into production for just a small sum - IAG is estimating the capex costs will be around $40 million and that includes constructing a road or railway (depending on how large the resource is). That's a pittance considering the impact it will have.

I'm not sure investors fully grasp what is occurring at Rosebel/Saramacca, and how transformative this could be. The stock price is certainly moving higher, but I believe there are still many catalysts that could drive further appreciation in the shares.

Catalysts

1. If the resource estimate comes in much higher than expected at Saramacca (both in terms of grade and contained ounces), then that will most likely result in a further surge for IAG.

There are also still many areas left to explore in and around Saramacca.

IAMGOLD has only been infill drilling the main deposit area - which is a 2 km long x 600 meter wide corridor that was defined in the 1990's. The drilling conducted back then was very wide spaced, and it's unlikely that the entire zone of mineralization was delineated at that time.

The 2017 infill drilling program has already found multiple, mineralized structures within this corridor. But IAMGOLD hasn't conducted any step-out drilling yet, and this mineralization remains open along strike and at depth. The company plans to test these areas in future drilling programs later this year. There is also a poorly tested IP trend that runs parallel to the Saramacca deposit. Shareholders should be on the lookout for any future drill results from these targets, as there could be additional major discoveries made.

(Source: IAMGOLD)

2. IAMGOLD recently announced the sale of 30% of their Côté gold project in Canada. According to my calculations, this now puts net cash at $461.7 million (including the $95 million receivable in the next 18 months from this sale). Total liquidity is now over $1.1 billion, giving IAMGOLD plenty of flexibility to speed up the development of its project pipeline or possibly make a major acquisition.

3. Westwood is ramping up ahead of schedule and AISC are coming in much lower than expected. Production in the first quarter of 2017 was double what it was last year. Regulators in Quebec have also approved the resumption of mining in the area impacted by the rock burst/fall of ground back in 2015.

Full production at the operation was expected be reached in 2019, with next year's total output expected to be similar to 2017. However, IAG is looking at ways to accelerate production in 2018, as major development that has already been completed (along with the development planned for this year), will result in IAG being able to produce at a commercial level from three of the upper four mining blocks by year-end.

A fully ramped up Westwood mine would be producing over 200,000 ounces of gold annually at an AISC of around $800 per ounce. This type of steady state operation would result in a further re-rating of the shares.

Having said that, I still see Westwood as the major risk to the IAG story. Given the depth of the mine, there is a heightened chance for future rock bursts and fall of ground events.

Valuation And Stock Chart

IAMGOLD has a market cap of $2.26 billion. For that price, investors are getting 800,000-900,000 ounces of gold production annually at an AISC of just over $1,000 per ounce. The recent sale of part of Cote also boosted the balance sheet further. After backing out the net cash position, the EV is just $1.8 billion. However, the game is changing.

A fully ramped up Westwood and Saramacca will most likely increase production to over 1 million ounces annually on a companywide basis, and at a significantly lower AISC ($800-$900 per ounce or less). IAG also has a very large portfolio of projects which includes Côté, Boto, the Sadiola sulfide project, and Monster Lake (just to name a few).

By contrast, a company like Alamos Gold has a market cap $1.9 billion, and an EV of $1.7 billion. Alamos is producing about 415,000 ounces of gold per year at an AISC of $940 per ounce.

At $1,250 gold, IAG will generate almost 50% more in pre-tax operating cash flow compared to AGI, and that gap will increase further over the coming years. Yet IAG is trading at just a slightly higher EV.

In other words, despite the run-up, IAG is still cheap by comparison to other companies in the sector.

As I told subscribers of The Gold Edge back in early June, IAG is a stock that looks like it wants to run:

Even though IAMGOLD was being reduced in weight by GDXJ, its days to trade volume was only around 3. Combined with the news regarding the wildly successful exploration drilling around their Rosebel mine, I thought there was a good chance that this stock would show strength despite the rebalancing. This is why IAG was one of the few GDXJ reductions that I was willing to hold (and buy more on the dips). The chart has a bullish setup in place and has been holding up much better than the other stocks that GDXJ was cutting in size. This isn't a stock that looks like it wants to roll over, quite the opposite in fact. It's building out a long, sideways consolidation pattern, and there is a clear series of higher lows. IAG seems as though it wants to run to $8-$10.

The stock was at $4.50 at the time, and I posted the following chart.

(Source: StockCharts.com)

Two weeks later, it had run to $5.70 a share, but has since backed off from that price. The overhead resistance from last August is providing some push back.

(Source: StockCharts.com)

The long-term chart shows a clear uptrend in place since the January 2016 lows were hit. I will reiterate, this continues to be a stock that looks like it wants to run to $8-$10. It will need a little help from the gold price to reach that objective in the near-term (6-12 months), but the catalysts are certainly in place for further price appreciation. I booked some profits recently, but I still own shares. I'm using any large pullbacks to increase my position again.

(Source: StockCharts.com)

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Analyst’s Disclosure: I am/we are long IAG. 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.