Share Price (US)
FD Mkt Cap (4/19/2019
One of my investment objectives is to own mid-tier producers. I am always looking for quality mid-tier producers with a good entry price that provide significant upside potential. IAMGold currently fits that profile.
Of course, the entry price is only one data point that I check. I also look for red flags in several areas. For IAMGold, their only significant flag is exposure to West Africa. This adds both political risk (unforeseen events) and investor risk (where investors stay away). They have about 40% of their resources in West Africa (Burkina Faso, Mali, Senegal), 34% in Canada (Ontario, Quebec), and 23% in South America (Suriname and Brazil).
For mid-tier producers, other data points I look for include their projects (current and future), property locations, resources, costs, grade, recovery rate, management, balance sheet, shares outstanding, and upside potential.
IAMGold Corp is a large mid-tier producer, with production at 850,000 oz. They have 4 operating mines in Suriname (northern South America), Canada (Quebec), Mali, and Burkina Faso. They are currently building a large gold mine in Ontario (Cote with 7 million oz.), and are spending millions on exploration and advancing properties. I consider this a growth stock.
Their cash costs are currently about $800 per oz., with all-in costs (free cash flow) around $1,150 per oz. The gives them around $100 million in free cash flow at $1,300 gold. They also have two additional development stocks in West Africa. Boto (Senegal) is 1.5 million oz. at 1.8 gpt and Sribanye (Mali) is 1 million oz. at 1.7 gpt. Plus, they have a few more exploration plays that could become mines. They are giving guidance to reach 1.2 million oz. of production in 2022, with all-in costs (free cash flow) of about $1,150 per oz.
They have large resources, with 24 million oz. of reserves. In fact, their reserves are what makes them so attractive. They should be able to grow into a very large company.
They have a very good management team with a lot of experience. They have done an excellent job financing (avoiding a lot of debt), building, and operating their mines. I also like the way they have begun to diversify away from West Africa by adding mines in Canada. Plus, I like their strategy of maintaining a lot of cash on their balance sheet.
Their balance sheet is good with $734 million in cash (and short-term investments) and $398 million in debt. With a FD market cap of $1.4 billion, this stock is highly undervalued without a debt problem. Plus, it’s a good income stock that should provide future dividends. This stock has very high upside potential in the long term at higher gold prices. If that happens, the future dividend could be around 5%+ based on today's share price.
My only concern is West African exposure. That could reduce the upside potential, or potentially hurt the stock if there is a political impact of some type. However, I am willing to take that risk to own a high quality gold producer with both growth potential and possible future dividends.
Estimated future annual free cash flow (at $2,500 gold prices): 1,000,000 oz. x $1,300 = $1.3 billion
Estimated future market cap (at 10x free cash flow): $1.3 billion x 10 = $10.3 billion
Comparing the current market cap ($1.4 billion) to the future market cap ($10.3 billion), you get a potential 635% increase.
This valuation assumes that IAMGold will reach 1,000,000 oz. of annual production, with all-in costs at $1,200 per oz., and future gold prices at $2,500. This is a best-case scenario.
I like this stock for several reasons. I like the risk/reward profile for the long term. The number of red flags for this stock are limited. And it appears to have significant upside potential at higher gold prices. Sure, it could drop significantly in value if the price of gold drops, or if one of their properties experiences a shutdown or higher royalties. That is a risk we take with all gold mining stocks.
I want exposure to higher gold prices over the long term. The best way to do that for high returns is to own gold producers. If gold rockets above $2,000 and stays there, it will be companies like IAMGold that reap the rewards, along with their shareholders.
Note: Data included in this analysis was sourced from IAMGold's Website.
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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.