Iamgold: An Organic Growth Story With Shaky Footing
Summary
- IAMGOLD released its preliminary Q2 results last month, reporting production of ~139,000 ounces, and a massive cut to FY2021 guidance.
- The lower output has been driven by weaker than expected results from Rosebel and Westwood, which have produced only ~92,000 ounces combined year-to-date.
- While IAMGOLD has the ingredients in place to be a huge winner, the team has been unable to even meet targets, which weighs on confidence around this growth story.
- Given the continued misses on guidance and recent capex increase, I have lowered the fair value to US$3.75, translating to a low-risk buy zone of US$2.44 or lower.
The Q2 Earnings Season for the Gold Miners Index (GDX) is finally underway, and one of the first companies to release its preliminary Q2 results was IAMGOLD (NYSE:IAG). Unfortunately, while most producers posted solid performance, IAMGOLD posted more disastrous results, with a cut in output guidance, an increase in Cote Lake capex, and a massive increase in the FY2021 cost outlook. While delays or deferred production are not a deal-breaker, the increased capex at Cote Lake weighs significantly on asset's After-Tax NPV (5%), reducing IAMGOLD's fair value. Given the continued misses on guidance and unfavorable Cote Lake update, fair value has slid to US$3.75, translating to a low-risk buy zone of US$2.38 or lower.
(Source: Company Presentation)
IAMGOLD released its preliminary Q2 results last week, reporting quarterly gold production of ~139,000 ounces, with 76% of production coming from its flagship Essakane Mine. Unfortunately, while Essakane had a solid quarter, Rosebel continues to post pathetic results, with a mere 25,000 ounces produced in Q2 2021 and H1 2021 production of ~72,000 ounces. This pales in comparison to FY2021 output guidance of ~232,000 ounces, prompting a massive guidance cut to ~150,000 ounces for FY2021. In Canada, Westwood didn't help matters, with 8,000 ounces contributed in Q2 2021 and guidance cut here as well to reflect a slower than expected ramp-up of personnel and additional safety measures through the implementation of further ground support. Let's take a closer look at the quarter below:
(Source: Company Filings, Author's Chart)
As shown in the chart above, IAMGOLD continues to have one of the worst production trends in the industry, with only a handful of producers seeing a ~40% decline in production since Q4 2018 like IAMGOLD has as of the Q2 2021 results. This disastrous performance can be attributed to seismicity at Westwood that has curtailed production, continued softness at Rosebel, and no attributable production from joint ventures. During Q2, Rosebel's poor production results continued, with heavy rainfall contributing to challenging operating conditions. This was made worse by high clay content from Saramacca, exacerbated by heavy rains, which negatively affected ore handling and mill throughput. Due to the headwinds, Rosebel saw production slide more than 50% year-over-year to just 25,000 ounces.
(Source: Company Filings, Author's Chart)
If we look at production from a mine-by-mine standpoint, we can see that Essakane had its best quarter in the past 18 months with ~106,000 ounces of production, translating to a 27% increase year-over-year. However, this beat was not able to offset the ~27,000-ounce decrease in output at Rosebel combined with a ~12,000 decline in production at Westwood (~39,000 ounces combined). So, while the boost in Essakane guidance with a narrower outlook of ~395,000 ounces (previously: ~377,000 ounces) is a plus, it won't be enough to save what's been a very ugly 2021 thus far. Based on updated guidance, costs are expected to come in at $1,415/oz, $160/oz higher than initially planned. Meanwhile, production is expected to come in below 590,000 ounces, which is 6% below the low end of previous guidance.
If IAMGOLD's issues were contained to deferred production at Westwood to provide better ground support to head back underground and challenges at Rosebel, this wouldn't be the end of the world. This is because it would just translate to a very FY2021 and the need to be more careful with Rosebel guidance going forward, given that the asset has been unable to meet its targets. However, the bombshell in the quarter was the announcement that IAMGOLD's share of Cote Lake capex has soared by $250 million, up from ~$900 million to ~$1.15 billion. This has overshadowed the fact that camp construction is 50% complete, and the project is at 27% completion, on schedule for commercial production before the end of 2023.
(Source: Company News Release)
IAMGOLD noted that the increase in capex was driven by increased structural, mechanical, piping, electrical, and concrete estimates for the processing facility, in addition to increases to mine facilities costs, increases in earthworks materials, and manpower estimates. In addition, COVID-19 costs and a higher exchange rate (Canadian Dollar to US Dollar) have affected the estimate, with 95% of estimated capital costs in Canadian Dollars and the Canadian Dollar up substantially relative to the US Dollar (UUP) over the past year. With the US Dollar recently trying to breaking out vs. the Canadian Dollar, it's possible that these capex estimates might ending up being a little high. However, the more significant increases are to materials, with the company noting that just $33 million of the $250 million increase is related to unfavorable currency exchange rates.
(Source: TC2000.com)
Given the significant increase in project capex, we've seen a dent in Cote Lake's NPV (5%), with attributable After-Tax NPV (5%) now coming in closer to ~$600 million. This has decreased IAMGOLD's attributable NPV (5%) to closer to ~$2.05 billion (excluding Boto). Some might argue that IAMGOLD should trade at 1.0x NPV (5%) with a jurisdictional upgrade coming from Cote Lake and the fact that it will be a near million-ounce producer. However, with a team that can't seem to meet targets with current assets, I believe even 0.9x NPV (5%) is generous. Instead, I think a more reasonable figure to use is 0.85x NPV (5%). This translates to a fair value of ~$1.74 billion. If we divide this figure by ~477 million shares outstanding, IAMGOLD's fair value decreases to US$3.65.
(Source: TC2000.com)
Previously, I noted that dips below US$2.75 would present low-risk buying opportunities, given that the stock would trade at a deep discount to fair value. However, with fair value revised lower and an inability to trust this team to deliver on its targets, I would view rallies into the US$2.80 to US$3.00 zone as an opportunity to exit at a small gain. While the stock could certainly go higher, the reward to risk isn't compelling enough here, especially with other producers beating targets and paying regular dividends. As shown in the chart above, support comes in at $2.35, with lower resistance at $3.25. This looks like the most suitable way to play the stock, given that it's uninvestable based on a consistent pattern of over-promising and under-delivering. So, from a trading standpoint, the best plan looks to be entering positions near support and trimming or exiting entirely as the stock approaches resistance.
(Source: Company Presentation)
Given the weak Q2 results and capex increase, I have revised my low-risk buy point from US$2.75 to US$2.38, with IAMGOLD unlikely to outperform its peers. This is derived from a 35% discount to fair value of US$3.65. An exceptional project like Cote Lake should have propelled IAMGOLD to much higher levels during the construction phase, but without confidence in the team, IAMGOLD will need to prove itself going forward. This should make it difficult for IAMGOLD to outperform its peers until Cote Lake finally meets production. Obviously, a rising tide in the form of the gold price could lift all boats, which would benefit IAMGOLD. However, with so many other producers firing on all cylinders, the opportunity cost of investing in IAMGOLD makes little sense.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of GLD either through stock ownership, options, or other derivatives. 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.
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Comments (15)
Thanks for update on IAG, IMO the years of "misses" are due to bad CEO's-previous was the worst and new CEO not much better; and this BOD tolerates the incompetence.I did add very little at $2.47 which reduced my average cost. If COTE production takes IAG over $4.30, I can sell my earliest (2013) shares to reduce my average cost further. That will get me down to $4.33. I may, or may not add a few more shares, if it drops under $2.30. At least, I now have options.Thanks Taylor. Your suggestions gave me the ideas to recover.
