Iamgold Revisited

About: IAMGOLD Corporation (IAG), Includes: AGI, BTG, KGC
by: Aitezaz Khan

IAG has reported a very weak first quarter.

Increase in gold prices may support IAG in the short term.

Fundamental weakness may inhibit sustained recovery in share price.

Iamgold (IAG) has recently reported Q1 2019 results. The company’s quarterly performance was troubled due to lower output, higher costs, and a decline in the average realized gold prices Y/Y. Apart from witnessing higher production costs, IAG’s cost metrics remained uncompetitive compared with peer gold miners. Moreover, the company’s correlation with gold prices (in both bear and bull gold markets) indicates another red flag for the investors. If gold prices recover from the current level (which is reasonably likely in my opinion) IAG’s share price may also show modest recovery. However, the company lacks fundamental strength which would inhibit any sustained recovery in the long term. Let’s get into the details.

Figure-1 (Source: Mining.com)

During Q1 2019, IAG produced ~185 Koz of gold (Q1 2018: 229 Koz) at an average AISC of $1,086/oz. (Q1 2018: $953/oz.). The declining gold prices added to the woes of the miner and resulted in thinner operating margins. Average realized gold prices stood at ~$1,308/oz., down from $1,331/oz. last year. Together, these three red flags combined with the Y/Y decline in IAG’s revenues (from ~$314.5 MM in Q1 2018 to ~$251 MM in Q1 2019) hammered the company’s EPS which came out at negative $0.09/share compared with positive EPS of $0.09/share last year (total Y/Y decline of $0.18/share). In my view, IAG’s cost performance makes it uncompetitive against other gold miners. For instance, during the period under review, B2Gold (BTG), Kinross Gold (KGC), and Alamos Gold (AGI) respectively reported AISC of $848/oz., $925/oz., and $937/oz. In contrast, IAG’s AISC stood at ~$1,086/oz. The fact that gold prices are beyond the control of any miner, reinforces the importance of controlling production costs. With IAG’s FY 2019 AISC guidance expected to lie within the range of ~$1,030-1,080/oz., I believe that the company’s earnings may continue to suffer going forward.

Another reason for the lackluster performance of IAG (and one that further deteriorates its comparative position among peers) is IAG’s mine profile. In my opinion, other gold miners maintain a balanced mix of mining assets, where some of their mining assets show improved production/cost performance, and such a balanced portfolio helps maintain the overall mining picture of these mining companies. However, in the case of IAG, I can see a declining portfolio. Figure-2 shows that not only were there a Y/Y production decline from all the three mines of IAG, the AISC also saw significant increase Y/Y. But then again, this trend was noted in all of IAG’s mines. It may be well noted that the AISC from all these mines exceeded $1,000/oz and given the average realized gold prices of ~$1,300/oz, largely reduced the average per ounce margins of the company.

Figure-2 (Source)

So, in essence, we are missing that one (or two) star performing assets in IAG’s mining portfolio that could be counted upon to improve the company’s overall mining picture in the long term. If you are wondering how this issue is countered by other gold miners, consider the example of BTG’s Fekola mine, which is a star performer. The Fekola mine has already witnessed improved production and also has the potential to significantly ramp up its production potential by the end of the current fiscal year.

Another important factor at play here is IAG’s correlation with gold prices. As shown in Figure-3, gold prices witnessed a prolonged bearish cycle from the mid of May 2018 till mid of August 2018. Ignoring the intervening period where gold prices showed mixed behavior, a noticeable gold market bull can be seen during the period from the mid of November 2018 to the end of February 2019.

Figure-3 (Source: Infomine)

Now let’s have a look at Table-1 which shows the change in prices of selected gold stocks (including IAG) during the bear and bull gold cycles and correlates them with gold prices.

Table-1 [Prepared by Aitezaz Khan for Seeking Alpha]

The above table clearly shows that in a bearish gold market IAG is the one that takes the greatest impact (of ~3x the decline in gold prices) whereas it also shows the slowest recovery (in terms of correlation with gold prices) when it comes to a bullish gold market.

Based on the correlation factor of 0.3x (in a bullish gold market) and an expectation of recovery in gold prices in the wake of rising US-China trade tensions, I believe that IAG may witness some recovery in share prices in the short-term. This is in line with IAG’s technical picture which reflects that the stock is currently trading at the 52-week lows and at current prices, the likelihood of rebound takes precedence over the likelihood of further price decline (Figure-4). Nevertheless, the fundamental performance does not justify an expectation of continued share price growth because any temporary upside in stock price would only be caused by upward movement in gold prices. This establishes that IAG is not fit for a long investment in the gold mining space.

Figure-4 (Source: Finviz)

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.