The Market Is Reading IAMGOLD Correctly (NYSE:IAG)

IAMGOLD (NYSE:IAG) was in trouble. Rising costs had been reducing margins as illustrated by the green bars in the chart below…

… and as a result, free cash flow (red line below) had dropped deep into the red numbers many quarters ago thanks to excessive capital spending at the company’s Cote gold project. Meanwhile, various operational issues reduced free cash flow even after netting out growth capex to a trickle as illustrated by the blue line in the chart below.

The company had been bleeding cash for much too long, and the balance sheet had turned into a train wreck of worrisome proportions.

We detailed the company’s predicament in our last post, predicting asset sales as the most likely measure to mitigate the liquidity crunch that seemed inevitable without a capital initiative. The market has shown agreement with the picture we painted in our last post, and the share price has suffered accordingly. It has taken until the dying days of this year for the predicted asset sales to materialize in fullness, and the market breathed a sigh of relief when the news was finally released just before Christmas. The liquidity crunch has been avoided — for now — thanks to the sale of the Boto gold project; and the sale of a 10% stake in the Cote project to the company’s existing JV partner Sumitomo Metal Mining. Just like it had been avoided in October when the company sold its Rosebel mine.

The price chart illustrates the market reaction starting with the Rosebel sale in October, and culminating in the mentioned sigh of relief just before Christmas, with shares trading at $2.60 at the time of writing.

So how does this share price compare to the tangible value currently attributable to shareholders? Here is our take:

N.B. This table differs considerably from a similar table posted here. The main discrepancy lies in the valuation of IAMGOLD’s residual stake in the Cote project. The recent sale of a 10% stake in the Cote project for $340 million indicates a higher value than stated in the most recent technical report. We prefer to conservatively use the valuation documented by IAMGOLD in this report. We submit the market takes a similar view.

Shares are therefore trading at 0.68xNAV at present, considering the $3.81 in attributable value per share as calculated above, and the present share price of $2.60. Whether one sees a buying opportunity at this point depends on one’s view on the risks still present for IAMGOLD. We see the following risk factors to consider in this context:

• Liquidity is still a concern. On paper, the company has sufficient funds to complete mine construction at the Cote project. However, cost overruns and delays have been a constant factor at the Cote construction site. The company has been vague in naming the causes in any detail, and it is therefore difficult to gauge the probability of further capex increases, which in turn would lead to renewed liquidity concerns. Moreover, we see a strong probability that working capital needs for commissioning and ramp-up are still lacking. Much will depend on the Essakane mine, and its ability to generate sufficient cash flow to this end.
• Essakane has been a reliable performer in recent quarters as evidenced by the chart below which we have pulled from our data base. This mine is located in Burkina Faso’s North where Islamic terrorists pose severe security threats, as evidenced by an assault on a bus convoy taking workers to the mine site in October 2021 and plenty of similar incidents in the area over the past few years. Security-related risks abound.
• The collective bargaining agreement for the Westwood mine expired in November and negotiations are still ongoing. This is the only unionized mine that we are aware of in the Abitibi region and there is always reason for shareholders to worry at such times. Operations at Westwood are still affected by the seismic issues reported in late 2020 and the mine has been running at a noticeable loss ever since.

Summary & Investment Thesis

IAMGOLD has addressed the immediate liquidity issues, and has positioned itself to complete mine construction at the Cote mine. Plenty of risks remain, and given the history of this “transformational” capital project, the market is taking a cautious view. In light of the listed risk factors, we would argue that 0.7xNAV represents a reasonable discount for now, and we fail to see a significant mispricing applied by the market at this moment.

The company’s Senior Unsecured Notes have traded up to 80 cents on the dollar, which already represents a notable gain for those who followed our recommendation back in August. Nevertheless, this price indicates a market view in line with the valuation reflected in the share price. The 5.75% coupon still translates into 7.2% yield on the reduced cost base at present and we argue, this debt instrument is still the preferable way to invest in IAMGOLD at this point.