Iamgold: What Lies In Store For This Emerging Gold Producer?

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About: IAMGOLD Corporation (IAG)
by: Aitezaz Khan
Summary

Technical analysis indicates less downside since the stock is near support levels.

IAG's Q3 financial and operational performance has been unimpressive.

IAG seems to shift its geographical preference from the African region to the American region.

Thesis

Iamgold (IAG) is a Canadian mid-tier gold miner with gold properties (including operating mines, development and exploration projects, and joint ventures) in Africa and America.

Description: https://static.seekingalpha.com/uploads/2018/11/28/48748470-15434250781217105.jpg Figure-1 (Source: 24hgold.com)

Through geographical dispersion of mining properties (Figure-2), IAG effectively reduces the geographical risks associated with mining operations. These risks become rather significant for a mining company when its operations are based solely in the underdeveloped African countries.

Description: https://static.seekingalpha.com/uploads/2018/11/28/48748470-15434252533340533.png Figure-2 (Source: Previous article on Seeking Alpha)

In this article, I have discussed the technical outlook, and the Q3 operational and financial performance of this gold miner. Moreover, I have also discussed the factors that led to the recent positive momentum in IAG's share price. I will analyze the impact of these factors on IAG's future performance. Nevertheless, I will also identify a few red flags that could limit the growth potential of the company.

Technical analysis

By looking at the technical price chart in Figure-3, we can figure out that IAG is trading near the support levels. Based on the trend line, a safe entry/accumulation point should be somewhere between $2.9 and $3.0.

Description: https://static.seekingalpha.com/uploads/2018/11/28/48748470-1543427146470336.png Figure-3 (Source: Finviz)

Moreover, IAG's 52-week range lies between $2.75 and $6.52 and we can see that the current prices are on the lower end of the 52-week spread.

IAG's correlation with gold prices: In another article on B2Gold Corporation (BTG), I analyzed the correlation between gold prices and the prices of respective gold stocks (including IAG). My analysis revealed that IAG had witnessed ~1x and ~1.6x correlation with gold prices (Figure-4), in times of bullish and bearish gold markets respectively. This implies that a positive momentum in gold prices will result in an equivalent increase in IAG's price. But the correlation between gold and IAG’s price looks more like a downside to me, because (based on the numbers) a 1% decline in gold price would result in a ~1.6% decline in IAG's price.

Description: https://static.seekingalpha.com/uploads/2018/11/28/48748470-15434279116723192.png Figure-4 [Prepared by Aitezaz Khan for Seeking Alpha]

IAG's Q3 performance at a glance:

Operational performance review: During Q3 2018, IAG produced ~208,000 oz of gold and that production was ~9,000 oz lower on a Y/Y basis. The company's AISC (read: All-in-Sustaining-Cost) and CC (read: Cash Costs) stood at $1,086/oz and $830/oz of gold, respectively. The cost metrics also became adverse when compared on a Y/Y basis. Moreover, a ~4% Y/Y decline in gold ounces sold also explains the recent drop in share prices (refer Figure-3). Consequently, IAG's EPS dropped from $0.07 in Q3 2017 to a loss of $0.02/share in Q3 2018.

Financial performance review: On a Y/Y basis, IAG witnessed a ~10% decline in revenues in Q3 2018, and that translated into a significant ~82% decline in gross profits. The rapidly declining operating margins and the negative FCFs (Figure-5) are another red flag for the investors.

Description: https://static.seekingalpha.com/uploads/2018/11/28/48748470-15434314974921665.png Figure-5 (Source: YCharts)

Moreover, the company's Q3 2018 cash from operations stood at ~$40 MM, compared with ~$73.5 MM in Q3 2017 (nearly halved when compared on a Y/Y basis). The overall financial and operational performance remained below expectations but there's some room for improvement.

Updates on IAG's gold projects:

An update on the Côté Gold Project: As shown in Figure-2, the previous estimate of proven and probable reserves at the Côté Gold Project in Canada amounted to ~3.84 Moz based on a 65% ownership interest. On 1st November 2018, IAG announced the result of a feasibility study that enhanced the reserve estimate on this project. Based on a 100% basis, the proven and probable reserves' estimate was increased to ~7.3 Moz. For IAG, the 65% ownership interest would mean that reserve estimate has been enhanced to ~4.745 Moz of gold. Moreover, IAG has revised the project's LoM (read: Life of Mine) from ~16 years to ~18+ years.

This project offers an NPV (after-tax) of ~$800 MM based on a discount rate of 5%. The decision to commence construction of the Côté Gold Project is expected in H1 2019. A positive decision would support IAG's share price. Moreover, we can expect to see continued share price appreciation when IAG commences production from this project. It should be noted that IAG expects to achieve this milestone sometime in 2021. In my view, there is an additional premium attached to the Côté Gold Project because its location is less prone to political risks compared with IAG’s African mining properties. A few general risks associated with African mining operations are highlighted in Figure-6.

Figure-6 (Source: Deloitte)

An update on the Boto Gold Project: This project is based in Senegal (Africa) and has a greater political risk associated with it; compared with the Canadian project mentioned above. IAG owns a 65% interest in this project and has favourably revised the proven and probable reserves' estimate from ~1.42 Moz (Figure-2) to ~1.9 Moz. Based on its 65% ownership, IAG's enhanced share is ~1.2 Moz.

The Boto Gold Project offers an after-tax NPV of ~$261 MM based on a 6% discount rate. IAG expects to obtain mining permit from the Government of Senegal in H1 2019. This permit is important as it would determine the path for an investment decision in the project.

Key developments in IAG's operating mines:

The numbers in Figure-2 establish that IAG's Essakane mine in Burkina Faso is one of the most significant mining assets owned by the company. It has notable reserves and healthy ore grades at ~1.23 g/t. During the Q4, 2018 IAG expects to commission an oxygen plant for this mine and that should help the recovery rates of metal mined from this gold mine.

On another note, IAG's Westwood mine in Canada has the potential to be a flagship asset for the company. As shown in Figure-2, it has ~3.25 Moz in measured and indicated resources and ~1.25 Moz in proven and probable reserves. Furthermore, IAG owns 100% of this project and the attraction is enhanced by the fact that Westwood has the highest expected gold grades at ~6.82 g/t, and these operations are conducted in a jurisdiction (Canada) that is considered free from political risks and unwarranted government interventions.

In my opinion, the above factors present a positive outlook of IAG's future. It should also be noted that Westwood's LoM extends beyond 2033, whereas the Essakane mine is expected to produce until 2025. This implies that IAG is shifting its mining focus from Africa to America. This is another positive in my opinion because the African mining operations are prone to higher geopolitical risks; as mining companies are often faced with pressing demands from mineworkers' unions.

Conclusion:

IAG's Q3 2018 was a disappointment, in terms of operational and financial results. However, the technical chart indicates that the share price is trading at support levels and reduces the chances of significant downside from the current levels. Moreover, an analysis of IAG's operational outlook suggests that significant developments are expected during FY 2019. If these developments are achieved as per target, we may expect share prices to improve. Nevertheless, in the long term, we can see a transformation in IAG's geographical preference as it’s committed to enhance its presence in the American continent and reduce its dependency on the African mining operations.

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.