Should You Buy IAMGOLD After Earnings?

Gold

On Wednesday, IAMGOLD (NYSE:IAG) reported its fourth-quarter and full-year earnings for 2013. IAMGOLD operates five gold mines throughout the world. These include the following.

  • The Rosabel mine in Suriname
  • The Essakane mine in Burkina Faso
  • The Doyon Division mine in Quebec
  • The Sadiola mine in Mali (IAMGOLD owns 41 percent)
  • The Yatela mine in Mali (IAMGOLD owns 40 percent.) The company ceased operations here in the third-quarter, although it is still producing trace amounts of gold.

It also operates one of the world’s three producing niobium mines — Niobec — in Quebec. Furthermore, it owns a large late-stage exploration project called Cote in Ontario.

The company took an $840 million write-down resulting from a revaluation of the company’s gold mines in the face of lower gold prices. It also eliminated its dividend, which amounted to about $95 million annually. This is a devastating blow, although it is one that was to be expected given the general state of the gold mining industry. The weak share price performance has priced in this write-down, and so in our analysis, we can look at the specifics of the company’s performance.

The company had $19 million in operating earnings, which is much lower than the $90 million in operating earnings from the fourth-quarter 2012, though it shows that the company can operate profitably in a depressed gold price environment. Nevertheless, the performance of the company’s gold mines was not particularly impressive. Gold production for the year fell from 881,000 ounces to 784,000 ounces.  Costs rose from $1,090/ounce to $1,242/ounce.

But while this was disappointing, investors can take solace in the fact that the company remained profitable, and this profitability was due to the strong performance of Niobec. While the company’s gold mining operations saw declining production and rising costs year-over-year, Niobec saw an increase in production by an incredible 33 percent. Furthermore, operating margins at Niobec rose to $20 per kilogram so that the company’s operating profit there was $26 million for the quarter.

What this shows is that IAMGOLD is barely profitable as a gold miner — its costs are too high. While the company has taken measures to cut costs, such as cutting exploration, the fact of the matter is that it needs higher gold prices in order to be a viable investment.

With that being said, IAMGOLD is one of the better stocks to own if you believe that the gold price is going to rise from here precisely because it has high costs. The market is so pessimistic given the current gold market environment that IAMGOLD shares are extremely inexpensive, and it will move substantially higher if the gold price rises. Not only does the company produce nearly 800,000 ounces of gold, but it is on the verge of releasing the results from its economic assessment of what will be its largest gold mine — Cotes. These results were actually supposed to come out late last year although it has been delayed. However, going forward, it is expected to show a mine plan that will generate 500,000 ounces per year for 16 years.

Therefore, while IAMGOLD’s fourth-quarter and 2013 results were not very good, IAMGOLD shares remain compelling — even if it is risky. If the price of gold rises, the shares will soar. If the price of gold remains flat or falls slightly, then the company is protected from losses given its high margin niobium mine. Finally, IAMGOLD has the potential to grow its gold production substantially presuming it is able to bring its Cotes mine into production in the coming years.

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