Sumitomo joins Iamgold at Côté gold project

VANCOUVER — Iamgold (TSX: IMG; NYSE: IAG) been searching for a partner to help shoulder capital development costs at its Côté gold property, 130 km southwest of Timmins, Ont., and it has found a fit in Japan’s Sumitomo Metal Mining.

After a year of behind the scenes discussions, Sumitomo agreed on June 5 to pay US$195 million for a 30% undivided interest in the project, with Iamgold holding the remaining interest.

Sumitomo will pay US$100 million upon closing, and the final U$95 million within 18 months, or after the filing of a feasibility study scheduled for year-end 2018. The companies will form an unincorporated joint venture to advance the project.

The Côté project lies roughly 20 km southwest of Gogama, Ontario. Credit: Iamgold.

Côté’s low-grade, gold-copper mineralization is associated with brecciated intermediate to felsic and locally mafic intrusive rocks. The alteration and mineralization reportedly indicate “a large system interpreted as an Archean gold-porphyry deposit.”

The property hosts proven and probable reserves of 196 million tonnes grading 0.94 gram gold per tonne for 5.93 million contained oz. gold. The calculations are based on a reserve price of US$1,200 per oz. gold.

Drill rigs at the Côté gold property in 2011, before Iamgold aquired the project by buying Trelawney Mining and Exploration in 2012. Credit: Iamgold.

Iamgold acquired the asset via the $585-million acquisition of Trelawney Mining and Exploration five years ago. The company took a US$400-million impairment on the asset in 2015 due to “falling gold prices” before suspending operations at the site.

“Sumitomo has a strategic objective to get its gold production up over 1 million oz.,” Iamgold senior-vice president of business development Jeffery Snow said during an investor conference call. “Côté is just a beginning for them and they’ll look aggressively for other acquisitions. They hope to partner with us in that search for opportunities.”

Iamgold has released a prefeasibility study on the project, which was prepared in conjunction with Amec Foster Wheeler and Roscoe Postle Associates.

The study models a US$1.1-billion development that would produce 320,000 oz. gold annually over a 17-year mine life at all-in sustaining costs of US$689 per ounce.

GMP Securities analyst Steven Butler noted that Iamgold’s operating unit cost estimate, at US$15.43 per tonne  milled, “reconciles closely” with Agnico Eagle Mines (TSX: AEM; NYSE: AEM) and Yamana Gold’s (TSX: YRI; NYSE: AUY) Canadian Malartic mine, 25 km west of Val-d’Or, Quebec.

Iamgold CEO Stephen Letwin. Credit: Iamgold.

“Côté is a much larger capital project than some in our portfolio, and obviously it takes more years to reach positive cash flow,” Iamgold president and CEO Stephen Letwin said. “The large capital requirement drove us towards de-risking the project and bringing in a partner.”

The open-pit operation would feature a 32,000-tonne-per-day processing circuit that includes primary and secondary crushing; tertiary high-pressure grinding roll crushing and ball milling; gravity concentration and cyanide leaching; and gold recovery using carbon-in-pulp, stripping and electrowinning.

The average production grade would be an estimated 0.94 gram gold, while the life-of-mine stripping ratio is pegged at 2.85.

“We understand why Côté would have a low ‘consensus value’ due to associated risks and uncertainties,” Letwin said. “We hope this deal will solidify a higher valuation for the asset because, in our view, there’s been an underappreciation of its worth. The recent mergers and acquisitions activity in our space shows it’s very, very difficult to find quality assets in North America that have received environmental permits and are close to infrastructure.”

The study indicates an after-tax net present value of US$703 million at a 5% discount rate, along with a 14% internal rate of return and 3.5-year payback period. All economic results assume a gold price of US$1,250 per oz.

An outcrop at Iamgold’s Côté gold property in Ontario. Credit: Iamgold.

Iamgold received environmental assessment approval from the Ontario Ministry of Environment and Climate Change in January, which followed a positive decision on the federal environmental assessment issued by the federal Ministry of Environment and Climate Change last year.

Sumitomo reported in another press release that there is a “view to begin construction in 2019 and production in 2021.”

BMO Capital Markets analyst Andrew Kaip has a “market perform” rating on Iamgold and a $5 price target. He noted that “the Côté crushing circuit makes use of high-pressure grinding rolls, which could add technical and operating risks to the project. The company also plans to use thickened tailings, currently upstream, and could benefit by moving to centre line.”

Iamgold shares has traded within a 52-week range of $4.18 to $7.65 per share, and closed at $6.68 at press time.

The company has 465 million shares outstanding for a $3.1-billion market capitalization, and reported cash and equivalents of nearly US$1.2 billion in March.

“What we want to underline today is that this is not just about Côté, which is the first of many transactions with Sumitomo,” Letwin says. “Both parties are entering into this agreement with the intent to partner on developing future gold mines.”