IAMGOLD: A Slow Start To The Year

Summary

• IAMGOLD released its Q1 results this week, reporting quarterly gold production of ~156,000 ounces, down 8% from the year-ago period.
• The softer performance was driven by heavy rainfall at Rosebel and no underground production from Westwood, which weighed on consolidated production.
• While Essakane carried operations in Q1, grades will decrease for the  remainder of FY2021, so we'll need to see much stronger performance at Rosebel in H2 to meet consolidated guidance.
• I continue to see much better opportunities elsewhere in the sector among companies under-promising and over-delivering, but I would view any pullbacks below $2.90 as low-risk buying opportunities.

Photo by robas/E+ via Getty Images

The Q1 Earnings Season for the Gold Miners Index (GDX) has finally begun, and one of the first names to report its results is IAMGOLD (NYSE:IAG). Unfortunately, while most companies have posted solid results in Q1, IAMGOLD did not have a great quarter, reporting an 8% decrease in production vs. Q1 2020, with weaker output at Rosebel offsetting a decent quarter from Essakane. Given that grades will be lower than Q1 at Essakane, Rosebel and Westwood will need to pick up the slack to meet the company's FY2021 guidance mid-point. I continue to see better opportunities elsewhere in the sector among higher-margin producers with Tier-1 jurisdictions.

(Source: Company Presentation)

IAMGOLD released its Q1 results on Monday and reported quarterly gold production of 156,000 ounces, an 8% decline from the 170,000 ounces produced in Q1 2020. The softer performance was not surprising, given that we were not expecting any underground production from Westwood, and the operation was relying on lower grades from Grand Duc. However, elevated volumes of rain contributed to a slow start to the year at Rosebel, with these two operations dragging down what was a decent quarter from Essakane. Let's take a closer look at the results below:

(Source: Company Filings, Author's Chart)

As shown above, IAMGOLD's production has trailed considerably since Q4 2018, with lower production at Westwood dragging on consolidated production. This trend has continued in FY2021 with guidance for the operation at just ~55,000 ounces after the company reported another seismic event at its Westwood Mine in Q4 of last year. This led to a temporary reduction in the remaining workforce, with the company hoping to start mining underground later this year. However, with the company relying solely on material from its lower-grade Grand Duc Pit in Q1, Westwood produced just ~7,000 ounces of gold, down from ~22,000 ounces in the year-ago period, which obviously weighed on consolidated output.

(Source: Company Filings, Author's Chart)

If we look at consolidated production from all of the company's operations, this trend lower in Westwood is clear, which has been offsetting stable production from Essakane on a consolidated basis. During the quarter, Essakane had a satisfactory quarter, reporting a 21% increase in production to ~102,000 ounces at slightly higher costs. The increased production was driven by increased throughput at much higher grades of 1.34 grams per tonne gold. The operation would have had a better quarter but the higher-grade ore mined unfortunately had graphitic content, which translated to much lower recovery rates. During Q1, gold recovery rates dipped by 800 basis points to 82%, with elevated reagent consumption weighing on costs.

(Source: Company Presentation)

Despite higher gold production and sales in the period, all-in sustaining costs rose slightly to $1,061/oz vs. $1,054/oz in the year-ago period. Given that this is IAMGOLD's lowest-cost operation, the higher costs didn't help, with all-in sustaining costs for the quarter coming in at $1,238/oz on a consolidated basis. While Essakane might look like it's on track to trounce FY2021 guidance of ~377,000 ounces with ~102,000 ounces produced in Q1, it's important to note that grades will decrease as the year progresses, so this will likely be the best quarter of the year for the mine.

Moving over to Rosebel, the operation had a much softer quarter, with production down 26% to ~47,000 ounces. The weaker results were attributed to lower throughput and significantly lower recovery rates on a year-over-year basis (88% vs. 94%). Unfortunately, elevated volumes of rain resulted in softer road and ground conditions and water accumulation on mining benches following rain events. This led to the company having to process more low-grade stockpiles than planned to supplement mill feed, translating to a relatively low grade of 0.77 grams per tonne gold in the period.

If mill throughput had been higher, the quarter could have been salvaged, but unplanned maintenance led to lower throughput as well, with throughput down more than 10% to ~2.55 million tonnes. The company expects similar production in Q2 due to the rainy season and restricted manpower. IAMGOLD hopes to mitigate the latter issue by constructing additional beds to offset the effects of the temporary suspension of daily commuting due to increases in COVID-19 cases in Suriname. IAMGOLD reiterated its production guidance of ~232,000 ounces at the midpoint. Given the lower sales and production in the period, all-in sustaining costs rose sharply to $1,450/oz, up from $1,248/oz in the year-ago period. Let's take a look at the financial results:

(Source: Company Filings, Author's Chart)

Fortunately, the higher gold prices(GLD) more than offset lower gold sales in the period, allowing IAMGOLD to report an 8% increase in revenue to $297.4 million. In addition, all-in sustaining cost [AISC] margins were higher, up from $373/oz to $543/oz, thanks to the average realized gold price of $1,781/oz. However, this should have been a much better quarter for margins if not for the industry-lagging all-in sustaining costs reported by the company. Assuming the company meets cost guidance of $1,255/oz, costs will be more than 20% above the industry average, which sits closer to ~$1,010/oz.

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

As shown above, IAMGOLD saw an improvement in its earnings trend last year, reporting annual earnings per share [EPS] of $0.19, a significant improvement from the year-ago period. Looking ahead to FY2021, annual EPS is expected to increase by more than 30% to $0.26, which continues to trend in the right direction. However, this has little to do with operations and is tied solely to the gold price, which is not the case for several other miners that have improved costs, grown production, and are seeing an additional lift from the price of gold. Based on FY2022 annual EPS estimates of $0.34, IAMGOLD is trading just below 10x earnings.

So, is the stock a Buy?

While the company's Cote Lake production that is now 18% complete is set to turn around the company, the company has yet to show that it can over-deliver, and I prefer to own the leaders in a given industry group. It's clear from IAMGOLD's earnings trend that's made minimal progress in years that the company is not a leader, and Cote Lake production is not close enough for the market to begin re-rating the stock just yet, with production set to begin in FY2024. Therefore, given the company's Tier-2 jurisdiction profile and high costs, I believe a fair earnings multiple for the stock is 12, translating to a fair value of $4.08 based on FY2022 earnings estimates. To bake in a margin of safety, I prefer a 30% discount to fair value, meaning the low-risk buy zone for the stock would be $2.86.

(Source: Company Presentation)

IAMGOLD reported a slow start to the year, and the company will need a better H2 from Rosebel and the resumption of underground mining at Westwood to meet production guidance. In terms of cost guidance, the low end of $1,230/oz looks ambitious, with an outlook based on an average crude oil (USO) price of $47.00. While IAMGOLD has an impressive organic growth profile with Cote Lake in the wings, I see the stock as an under-performer until the mine comes online. Therefore, I believe there are better opportunities elsewhere in the sector. However, if I was looking to buy the stock and didn't mind owning a laggard, dips below $2.90 would present low-risk buying opportunities.

Analyst’s Disclosure: I am/we are long GLD. 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.

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.