IAMGOLD: Q1 Report Brings More Disappointment And I'm No Longer Bullish

Summary

• IAMGOLD reports Q1 2020 results, missing estimates on both earnings and revenue.
• The company cuts its 2020 production guidance and increases its cost guidance.
• Too many things have gone wrong in IAMGOLD, and I abandon my previous bullish stance as even the high gold price fails to cure the company's problems.

Back in March, I was bullish on IAMGOLD (NYSE:IAG) as I believed that the sell-off in the gold mining space was unjustified and that the company would benefit from higher gold prices which will lead to a re-pricing of its shares. After some adventures which included an excursion into the sub-$2.00 zone, IAMGOLD is trading at higher levels and is even close to the key $4.00 level. The company has just provided its first-quarter report, and it's high time to check the previous bullish thesis.

The company reported revenues of $274.5 million and a net loss of $0.07 per share, missing analyst estimates on both earnings and revenue. IAMGOLD produced 170,000 ounces at all-in sustaining costs (AISC) of $1,230 per ounce. The company blamed COVID-19 for high costs, but I’d note that only the Westwood mine was placed on care and maintenance due to the global pandemic, and this happened at the very end of the quarter on March 25. Operations at the Westwood mine were restarted on April 15.

Due to the negative impact of virus containment measures, the company has decreased its production guidance from 700,000–760,000 ounces to 685,000–740,000 ounces. The previous guidance was rather conservative, and I believed that it left some room for emergencies. However, the guidance was lowered, and that’s another negative catalyst for the company’s shares.

At the same time, IAMGOLD has increased the AISC guidance from $1,100-$1,150 per ounce to $1,195-$1,245 per ounce. Put simply, the company will produce less gold at higher costs in 2020, and the current quarterly results show that even a high gold price is unable to cure the company’s problems.

I am sure that many traders and investors wonder how it is possible to lose money in the current gold price environment. The problem is that IAMGOLD had just $31.9 million of gross profit after the cost of sales was subtracted from revenues. A loss on non-hedge derivatives and warrants totaled $30 million, while the usual stuff like G&A, exploration and interest expenses pushed the earnings into the negative territory. Even without the loss on derivatives and the foreign exchange loss that totaled $4.9 million, IAMGOLD’s results would have looked bleak.

The cash flow statement is telling the same sad story again: IAMGOLD generated $44 million of operating cash flow but spent $67.5 million on capex. Not surprisingly, the company’s cash position declined from $830.6 million at the end of 2019 to $795 million at the end of the first quarter.

IAMGOLD continues to carry a huge cash position while it has $414.6 million of long-term debt, and I wonder why the company would not just pay the debt and get rid of interest payments if it is unable to invest money.

IAMGOLD stated that strategic review of Cote Gold and Boto Gold projects was continued. Cote Gold looks too big for the company that has a history of poor execution, but Boto Gold has lower capex requirements and has recently received permits in Senegal. While I’m sure that the management will say that COVID-19 disrupted life and postponed decisions on Boto Gold or Cote Gold, I’d note that the company had more than enough time to come up with a plan on what to do with its huge cash pile and has so far opted to do nothing.

While the leading gold mining stocks like Barrick Gold (GOLD) or Newmont Corp. (NEM) may be getting expensive, I do not expect that traders and investors will turn to IAMGOLD as a catch-up play in the current gold price environment. In this light, the $4.00 level may be a true wall for IAMGOLD shares.

I’m abandoning my previous bullish stance due to continuous problems with execution and failure to reap the benefits of the high gold price environment. I’m bullish on gold, so I’m not outright bearish on IAMGOLD, but the magnitude of the miner’s problems is too significant to ignore even when gold is above $1,700 per ounce.

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