Gold industry needs to ‘get back to basics,’ Iamgold’s Letwin argues

At The Northern Miner’s Canadian Mining Symposium, held at Canada House in London, U.K., Iamgold (TSX: IMG; NYSE: IAG) president and CEO Steve Letwin spoke on gold. Below is the full, edited transcript of the session, held on May 22, 2019.

It’s a pleasure to be here, and I’m quite excited to see Canada House. I am quite impressed — compliments to our country.

Now this is a picture of the road that we’re building in Suriname. It’s a road that extends from our Rosebel gold mine and mill to our large gold deposit at Saramacca that we announced about two years ago. We have 1.5 million oz. gold, with an average grade of 2.2 grams gold per tonne.

We’ll be reaching the concession, and by the fourth quarter we’ll produce gold from Saramacca, moving the ore 23 km into the mill. This will change our Rosebel operation dramatically.

I was there [in mid-May] and spent the week on-site. It’s really a great discovery for the company, and I give my accolades to our people at Rosebel, and the exploration team at Iamgold.

Now, we had a panel discussion this morning (with Yamana Gold [TSX: YRI; NYSE: AUY] executive chairman Peter Marrone), and I might have a little different view than my colleague, in that I really do think we need to listen to our customers, and what they’re saying.

And our customers right now are the markets.

I don’t think there is a good understanding that we as miners have of the markets. We seem perplexed. We seem to be struggling with why we’re undervalued.

This hasn’t just been going on for a year. This has been going on now for eight years. It’s not like it’s a recent phenomenon.

We need to deal with reality. We need the markets in order to replace our reserves. We need to raise money, and this year has been the worst year in over a decade, in terms of our ability to raise equity.

And the markets need us, because eventually, we do need the markets to understand that the markets will make money off the fact that our reserves have depleted.

We need to replace our reserves, and we do need to get our product to market.

I talked this morning about our relative size as an industry. Fortunately or not, we are a rounding error in the market. Microsoft, almost a trillion dollars alone, and the top-10 gold miners, 121 billion.

In fact, Newmont Goldcorp, which is the largest gold company in the world, is ranked 653rd in the world, and about 300, in terms of North America. It gives you some perspective on where we sit, and maybe the idea of the potential of where we can go.

But the money has not been coming into our sector.

Let’s go back to the idea of why that is, and what we need to do.

We need to look at the self-funding model. We need to look at generating enough free cash flow to cover our capital, to cover our expenses in this interim time frame, because we aren’t going to get it from the markets.

Free cash flow is the theme of the day. It’s something that we need to focus on. It makes it very challenging for juniors.

Juniors have been the source of reserves for many mid-tiers and majors over the years, and it makes it very tough for them to go out and raise money — even flow-through funds today are challenging — and create reserves that many of the mid-tiers and majors have been able to acquire over time, and juniors have benefitted over time.

But I think you would agree that with almost 300 junior mining companies in Canada today, and 17 mid-tier companies in a shrinking pool of capital, this becomes quite challenging.

People right now — our customers, our market, if you will — want minimal debt, lots of free cash flow, dividends, high internal rate of returns and fast paybacks. In other words, they want everything.

They really aren’t interested in companies that are going ask for money, aren’t creating free cash flow, and are borrowing money. Whether we like it or not.

And we’ve got John Reed here from the World Gold Council, who I have the deepest respect for. This man is outstanding, and a great addition to the World Gold Council. I really enjoy him. He can give you a good perspective on where gold is going.

But right now, gold has been sitting at an average of US$1,250 for the last seven years, and so we have a bit of fatigue.

Investors want this low-capital-intensive, cash-producing asset — in effect, they are saying, “just keep producing cash, pay me a dividend, please, and don’t ask me for any money.”

That’s why it drives you to projects that make sense.

We have had a bad run. We’ve had marginal projects. We’ve destroyed capital. Of the trillion dollars we’ve raised, we’ve actually written off almost 30% of it in the last 10 years. And if you’re an investor, that would have put a trillion dollars in the S&P, that would be worth 2.77 trillion dollars today.

Where would you put your money, based on that performance? You wouldn’t put it in the gold equities.

We do need to change. To stand up here and say that we’ve been doing it right would be disingenuous.

And Iamgold needs to change. Iamgold needs to get better. Iamgold needs to deliver better returns.

If we don’t, we will continue not being able to raise money. And for Iamgold, we have what I believe is this fantastic project in northern Ontario called Côté, with 13 million oz. gold, 6 km off the highway, low grade, bulk tonnage.

We didn’t even announce it. We inferred that we were going to potentially go ahead with it, and we got slaughtered in the marketplace.

Our shareholders said: “You are not building that mine.” Simple.

And guess what? We’re not building that mine. And when we said we weren’t, the stock went back up again.

You do have to listen to your customers, and you do have to listen to the market. And it makes a difference.

And if you don’t, they will kill you, and you will not be around. They really don’t easily forgive. 
This is something that we need to do in the gold space. We need to get better. We need to get better organized. We are, in many respects, asking for forgiveness: “Please come back and invest in our industry.”

We need to get back to basics. Mining properly, mining high rate-of-return projects, creating free cash flow, and then maybe, maybe we can build again.

Because we have to get back to basics and demonstrate that we can do it: crawl, walk — and then you can run.

This just gives you some perspective. I’m a mathematician by training. I spent a lot of time in oil and gas. I’m a commercial guy. I’m not a geologist or engineer, but I believe a reasonable, commercial person.

But since 2004, gold has actually done well, if you bought gold. The S&P has done even better. Look at what the GDX has done. Should this be a surprise to us that we’re struggling with raising money? It shouldn’t be. Look at what’s happening: 2016 and 2017 were great years. In 2016, Iamgold was the number-one performer on the TSX, and in 2017, number three.

I was CEO of the year, which now I see as a curse. Whenever you get voted that, don’t accept the award.

The next year, you’re the worst performer. Not quite. It was third, but now this year, it’s not good.

But look at what has happened, and this includes both common and flow-through shares. My good friend here from Pear Tree — unbelievable people, in terms of raising flow-through funds — have done a great job for us. They will tell you that things have gotten tougher. And you can see that 2019 isn’t looking really good for any of us.

The other thing that’s changing is that we’re seeing a lot more passive investors, versus active investors. Passive investors and capital-intensive businesses do not go well together.

Do you know what a passive investor is? They’re driven by quantitative measurements. Algorithmic fund traders — they really don’t care about you. They care about what they can do during the day on a high-frequency trade.

So, 35% of Iamgold stock is held by passive fund indexes. When they wake up in the morning, they’re either going to go long or short on us every day.

Something like Côté doesn’t make any sense to them.

And so, during this time, short-term returns and cash flow become even more relevant.

We’ve also become much more risk-averse, geographically. When I started in the business, West Africa was loved, in 2010, 2011. We have mines in West Africa.

This gives you some idea of where the mines have been built lately. Look at Australia, look at Canada, look at the U.S., look at West Africa — a lot more sensitivity to geography, which also impacts where capital is going.

Mark Bristow and John Thornton did a great deal merging Randgold and Barrick.

My colleague may have had a different view in terms of the necessity for consolidation. I’m not going to disagree with him in terms of saying bigger isn’t necessarily better. I don’t necessarily think bigger has to be better, either.

But there are too many of us in a shrinking capital pool. It happened in the oil and gas business.

This deal between Randgold and Barrick was good for the industry, and it needs to be repeated.

Now that it has happened at the major level, I strongly believe it needs to happen at the mid-tier level. There are too many mid-tier gold companies in a shrinking capital market.

There needs to be more consolidation, and the market is telling us that. They applauded both of those deals.

So that will come, and you do hear the rumors about us.

I’ll tell you why you hear the rumors. You hear the rumors because we have added more reserves in the last three years than any other mid-tier company. We’ve gone from under 7 million oz. to almost 20 million oz. proven reserves.

We have become an attractive target for companies that want to replace reserves at a very low rate, and good value. It’s math. And it is time for consolidation.

So, yes, we are a target. Mathematically, we have to be a target.

If the U.S. dollar weakens, the gold story becomes more positive. If the U.S. dollar continues to be strong, we will continue in a range-bound trading area, which will force more consolidation.

I’m not being negative about gold. I’ve been in it nine years, and I love it. I’m the largest independent shareholder of Iamgold. Nobody can tell me I don’t believe in my company. Nobody can tell me I don’t believe in gold.

But you have to deal with facts … we simply are seeing more near-term exploration, and more gold being produced worldwide — 109 million ounces. When I started, we were at 87 million a year. So, there’s a lot of gold being produced.

Yes, we hope demand will improve, but that demand will be tied to this U.S. dollar.

We are seeing optimism. Russia and China are trying to get off the U.S. dollar, because the U.S. is using their dollar as a weapon. Trump is doing everything he can for America.

Do you think China and Russia like the U.S. dollar? I would use the word hate. Anything they can do to get off the U.S. dollar, they’re doing, and you’re seeing it happen.

So, yes, there is optimism that maybe this U.S. dollar starts to weaken. Hopefully that happens soon. China’s official reserve is growing significantly. They believe in gold.

But in the gold business, we’re getting enough feedback from the market, from our customers to tell us to get busy living.

We need to get to this self-funded, self-sustaining, safe and profitable model.

That’s what we’re doing at Iamgold. Right now, we are cutting, we’re focusing on free cash flow. We’re focusing on a self-funding model. We’ve had to let people go. We will continue, unfortunately, to reduce our workforces, where necessary. We will continue to focus on productivity. We will continue to focus on the allocation of capital where it matters. We have an extremely strong balance sheet — one of the best in the industry.

But if we don’t do that, we will lose that advantage. We have over $1.2 billion in liquidity, but we have to keep that strong. We are one of the leading of the mid-tiers in terms of cash and cash equivalents, and in terms of net cash. This is a strength.

But unless we get to a self-funded model, it won’t remain a strength. I am committed personally, we are committed as a company to make that happen. I stand in front of you and tell you it’s happening today. It will happen.

Net debt per share, same thing, same metrics. And we have a fantastic pipeline.

So, we come up in rumors all the time. We have a shovel-ready project in Senegal called Boto … we have a fantastic project at Côté — a 450,000 oz. producer, 25-year mine life, 6 km off a major highway, surrounded by infrastructure. We had a 1.5 million oz. discovery on Saramacca, on a trend line that we believe has 5 million oz. in Suriname. We have a mine at Sadiola, which has 3.5 million oz. proven reserves.

We have a whole list of projects in Quebec: Nelligan, Yorbeau, Monster Lake. All really strong projects.

But the market doesn’t care.

What they care about is free cash flow, free cash flow, free cash flow.

Until they get off that, that’s what we’re going to do. We’re going to give them free cash flow.

When the market does change and we see this pipeline become valuable again, then what Peter Marrone said this morning will happen. Stocks will rise.

And hopefully, we don’t go back to what we did before and destroy a whole bunch of value.

So, we have great positioning, key themes around performance. Let’s get our act together, Iamgold. Let’s show that we can generate free cash flow, returns to the shareholder, and be the differentiator.