Iamgold: Q1 Was Simply Bad

IAMGOLD (IAG) has made two major decisions this year – put Cote Gold project on pause and laid off 32% of workers from Westwood mine. The market cheered the decision to postpone the heavy-capex project and had a mostly neutral reaction to the lay-off. However, it was obvious that any sustainable price upside may come only after investors see actual financial results that could prove that the company is putting itself on the right track, following poor performance that pushed the stock from the $5.00-6.00 range seen in the first half of last year to the $3.00-4.00 price levels that were prevailing before Q1 results were released. IAMGOLD has just reported its Q1 results, and unfortunately, any sustainable recovery in the share price is postponed – the results are simply bad.

IAMGOLD reported production of $185,000 ounces at all-in sustaining costs (AISC) of $1086 per ounce. The company maintains its full-year production guidance of 810,000–870,000 ounces at AISC of $1030-1080 per ounce, but at this point it looks like it is aiming for the lower end of the production guidance and for the higher end of the cost guidance. Current production and cost problems are vividly illustrated by the following table from the Q1 press release:

Source: IAMGOLD Q1 2019 press release

Production was materially down at Westwood and Essakane in comparison with the first quarter of the previous year. For Essakane, the reasons are lower grades and throughput which was expected. The Westwood mine suffered due to the impact of increased seismicity in December 2018. Seismicity can be a mine killer, at least from an economic point of view, so it is not surprising that the market reacts harshly to the report. Here are the comments on Westwood provided by the company: “The risk of seismicity varies according to the geometry of the openings and mining sequence. To manage this, we are studying various design approaches to Westwood with a preliminary life of mine plan expected in the fourth quarter 2019, followed by a NI 43-101 compliant plan in the first half of 2020.” The company expects improvements in the mine starting from the second quarter, with the fourth quarter being the strongest this year. My bet is that the market will trust this information when it sees it in the second-quarter earnings release.

Unsurprisingly, lower production led to poor financial results. The company recorded a net loss of $41.3 million, and I’d note that it even had a gross loss (cost of sales includes operating costs, royalties and depreciation expense):

Source: IAMGOLD Q1 2019 earnings report

Net cash from operating activities was just $8.8 million, while capex was $69.7 million – not the numbers that investors would like to see in a report.

Adding insult to injury, the company reported that Yatela mine in Mali (IAMGOLD has a 40% interest in the mine) was sold to the government of Mali for $1. This is not the end of the story as Sadiola Exploration Limited, a joint-venture between IAMGOLD and AngloGold Ashanti (AU), will have to pay $18.5 million for rehabilitation and closure costs. Frankly, I have mostly forgotten that this legacy mine even exists, with the only active story in Mali being IAMGOLD’s and AngloGold Ashanti’s attempts to sell Sadiola mine (IAMGOLD has a 41% interest in the mine). The report did not contain any positive news on the potential Sadiola sale: “The process is at a preliminary stage and there is no certainty of its outcome.

With many bad news in one report, IAMGOLD’s stock immediately fell under pressure:

From a practical point of view, it is very important to remember that the company is not heading into bankruptcy (such fears often arise in cheap sub-$5 stocks that move down). IAMGOLD had $673 million of cash and short-term investments at the end of the first quarter, while debt was $394.5 million. In addition, the company will get $170 million in December 2019 for 150,000 ounces of gold that it will deliver in 2022. Current performance is bad, but the financial position is very solid, and the company does not have the means to destroy the balance sheet now that Cote Gold was postponed. In this light, bottom-picking after a strong sell-off may yield good results for traders and longer-term investors. However, I’d note that the market is unlikely to deliver anything bigger than a regular technical rebound before it sees tangible evidence of improvements from the company.

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