IamGold: It Was Cheap For A Reason

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About: IAMGOLD Corporation (IAG)
by: Taylor Dart
Summary

IamGold is the most recent gold producer to make new 52-week lows.

The company's earnings trend continues to remain flat but may see a change in trend for FY-2020.

Until the stock can begin a new uptrend and start outperforming its peers, I see absolutely no reasons to try and find the bottom in the stock.

Another week has passed, and we've seen yet another round of new 52-week lows among the Gold Miners Index (GDX) constituents. The most recent name to make new 52-week lows is IamGold (IAG), and the drop to new lows came with a spike in volume. While this may have surprised some analysts who suggested the stock was a buy in April, it's of no surprise to those who have been watching the company's earnings trend and technicals. The company has had a flat earnings trend the past five years, and the company has been a laggard technically among its peers for months now. There is absolutely no reason to buy a company that is not growing earnings as earnings are what ultimately attract fund ownership and propel a stock higher. Until the stock can improve its earnings trend and begin a new uptrend, I see absolutely no reasons to try and find a bottom in the stock.

There seems to be a never-ending obsession with cheap in the mining sector and buying companies when they are significantly down from their highs. The thinking I suppose is that the company used to be worth $6 billion and is now only worth $1.2 billion if I buy it, I'll just wait for it to be valued at $4 billion again and then sell it. What investors should really be asking themselves is "What did this company have to do to see its value erode by 80% and is this a company I want to be a shareholder in"? In times of panic and severe meltdowns, a company may trade for 80% off of its regular price, but the difference here is that every single company is selling off due to general sentiment. If a stock instead is falling 35% in a year when its respective index is only dropping 10%, there might be something wrong with that company.

(Source: TC2000.com)

In the case of IamGold, last year's poor share price performance of (-) 37% vs. the GDX's (-) 9% was a sign that something likely wasn't right. To suggest a company that's worth $1.2 billion should return to a valuation of $4 billion or $6 billion, there is going to be a need for a catalyst. In terms of IamGold, there is no catalyst and Q1 was a significant miss vs. analyst estimates. Revenue was down 20% year over year despite the price of gold (GLD) being down less than 10%, and cost of sales also jumped 6%. This translated into a loss for the quarter vs. a significant profit in Q1 2018.

(Source: Company Website)

So, if the stock was cheap at $3.60 per share according to some analysts, it must be a steal here at $2.40? Let's first examine if it ever really was cheap to start with in the first place.

At the share price of $3.60 per share in December, the company was trading at a P/E ratio of 51 based on earnings per share [EPS] of $0.07 expected for FY-2019. Generally, P/E ratios of 50 or higher are reserved for companies with the fastest growth rates in the market, not ones with absolutely zero earnings growth. In summary, to call the stock cheap at $3.60 per share was absurd. Based on FY-2020 projections of $0.10 in EPS, the company is currently trading at a P/E ratio of 24 with the share price at $2.38. I would not call a P/E ratio of 24 cheap for a company that has seen earnings decline 80% since 2012 and has not confirmed any change in its earnings trend. Let's take a look at the earnings trend in a bit more detail below.

As we can see from the below table showing earnings per share since 2013, the stock has seen earnings decline massively from $0.27 to the low single-digits for the past few years. This has coincided with a drop of 60% in the share price which is consistent with the 60% erosion in earnings from $0.27 to $0.10 in projected EPS for next year.

(Source: YCharts.com, Author's Table)

Looking at the chart below, we can see the company's earnings per share fell off a cliff at the depths of the gold bear market, recovered significantly in 2016 but has virtually gone nowhere since. The best-performing companies like Twilio (TWLO) have positive earnings trend with EPS trending higher, and in my opinion, there is no reason to own a company with flat earnings. For comparison, I have shown Twilio's earnings trend below, a company that I do think is worth owning and which I bought in January.

(Source: YCharts.com, Author's Table)

(Source: YCharts.com, Author's Table)

The silver lining for IamGold shareholders that comes with a big if, is that the company may be seeing a new 5-year high in earnings per share for FY-2020. If the company can deliver on this promise, it's possible the stock could find a floor, but there are much more attractive companies out there delivering and beating estimates consistently today. There is no question that there is lots of money in turnaround stories, but the key is buying when the turnaround is present, not guessing when they will finally materialize. Some companies never turn things around like Eldorado Gold (EGO), and this is why it may be wise for investors to see a positive change in the earnings trend vs. diving in headfirst to try and catch a falling knife.

IamGold has stuck with its prior guidance mid-point of 840,000 ounces of gold production at all-in sustaining cash costs of $1,055/oz despite the Q1 hiccup, but the company continues to be a high-cost producer. High-cost producers in mediocre jurisdictions (80% African production) with low margins do not command high valuations. One can buy TJX Companies (TJX) which is growing earnings at an average of 10% every year and paying a nearly 2% yield, or they can buy IamGold trading at a higher P/E ratio with no earnings growth the past ten years and no yield at the same P/E ratio. Hopefully, this example sheds some light on why it's dangerous to call a company cheap just because it's down significantly from its highs. If the erosion in value is almost entirely linear to the erosion in earnings power, the drop is wholly justified.

(Source: Author's Table)

Finally, from a cost standpoint, all-in sustaining cash costs have mostly gone nowhere in the past four years. The company saw costs drop from an alarmingly high level over $1,100/oz in FY-2015, costs got as low as $1,003/oz for FY-2017, but has since shot right back up to 2016 levels based on 2019 forward guidance. Current all-in sustaining cash costs give the company a meager profit margin of 16% using a conservative $1,250/oz gold price.

To summarize, if not already evident, I do not see IamGold as a deal here even with it trading more than 60% off of its 2017 highs. This does not mean the stock can't bounce or that the stock can't bottom out, but I do not see a reason to start a position in a sector laggard that is significantly under-performing its respective index. The company's cost profile is nothing special, the company has seen a flat range for an earnings trend, and there's no real positive catalyst on the horizon. To justify an investment in gold miners which are inherently higher risk, I want compensation in the form of high reward for this risk. A sector laggard in mediocre locations with low and stagnant profit margins is not typically a high-reward situation. The first thing to watch for will be a sharp decrease in all-in sustaining cash costs and a jump in earnings per share, but this will take at least a few quarters to be proven.

Taking a look at a weekly chart of the stock below, we can see that prior support is broken on the stock. Eager buyers showed up at the $3.30 level from 2016 through 2017, but they were nowhere to be seen the past six months. The stock has now broken down through this level as well as broke down through its lower box, and generally, 3-year lows are not a bullish sign for a stock.

(Source: TC2000.com)

The other issue is that this breakdown came on the back of significant volume. The people that you want to own your stock and be actively accumulating it are the funds as they are what power the large moves in stocks. When you see selling volume and large red bars like we see below, this is funds distributing stock in most cases, not accumulating. During this period, the prevailing sentiment will be "that it's likely manipulation" or it's the "shaking of loose hands", but this is just nonsense. This type of selling is institutional and typically means step aside. Don't believe me? Pan American Silver (PAAS) was showing the same kind of selling at $14.00 and has now slid 20% lower.

(Source: TC2000.com)

(Source: TC2000.com)

Given the fact that IamGold remains in a downtrend and below all of its key moving averages, I see zero reasons to try and catch a bottom in the stock. It is certainly possible that the stock can see a bounce after being pummeled the past month, but I believe that playing for rebounds in bear markets is a losing strategy long term. It is akin to trying to pick up pennies in front of a steamroller.

I do not doubt that we will see more articles labeling IamGold cheap in the future after the recent drop, but it's important to remember that stocks are typically cheap for a reason. It is one thing if an exceptional company goes on sale due to general market malaise, but it is another if a laggard goes on sale and stays on sale while earnings are at multi-year lows with no confirmation of a turnaround. There is no disputing that IamGold is on sale, but I believe it's a sale to pass on. Short term, the stock could see a sharp bounce, but intermediate term, the outlook is bleak until this ship can change course both fundamentally and technically.

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Disclosure: I am/we are long TWLO. 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.