Iamgold cuts production outlook due to Westwood rock bursts

Toronto-based gold producer Iamgold (TSX: IMG; NYSE: IAG) has trimmed its 2015 company-wide production forecast by 5% due to a “localized seismic event” at its Quebec-based Westwood gold mine. 

Westwood is on the Doyon property, near the past-producing Doyon mine, 40 km east of Rouyn-Noranda and 80 km west of Val-d’Or. It reached commercial production last July, and is ramping up to design capacity. But the relatively new underground mine has seen its fair share of problems. Iamgold has reported three rock bursts so far, with the latest occurring on May 26. 

The fallen rock trapped nine workers for up to 18 hours, but all were safely evacuated and unharmed. Iamgold suspended mining in the affected area until it fully reviewed the ground conditions, but says gold production in the mill was unaffected due to Westwood’s ample stockpiles, and many operating underground stopes. 

While the mid-tier producer is still assessing the impact on costs, on June 29 it nearly halved Westwood’s annual production to 60,000 to 75,000 oz. gold, down from 110,000 to 130,000 oz., explaining the incident will have a “more significant impact on 2015 production than originally indicated.” 

As a result, Iamgold lowered the midpoint of its company-wide 2015 forecast by 5% or 42,500 oz. It now expects to churn out between 780,000 and 815,000 oz. gold, down from 820,000 to 860,000 oz. The new guidance includes an increase of 10,000 oz. gold, mainly from its joint-venture Sadiola mine in Mali, slightly offsetting the lost ounces at Westwood.

National Bank Financial analyst Steve Parsons writes that “all reported rock bursts at Westwood to date (08/13, 01/15, 05/15) took place in the vicinity of levels 104-06 to -10, at a depth of around 900 metres,” adding that investors might question the mine’s stability. 

In a release, Iamgold’s president and CEO Stephen Letwin said that this area of the Abitibi was prone to seismic activity, and that the company intends to “invest further in the development of the mine to ensure a safe operation.” Letwin says he’s confident the mine could become Iamgold’s “lowest-cost” producer.

Parsons, however, cautions that the “implications on near-term costs and mid-term production” may not look good for Iamgold. He models total cash costs at Westwood will increase to US$1,286 per oz., from US$847 per oz. This pushes up his previous company-wide total cash cost estimate by 4% to US$859 per oz. 

(Parsons’ model differs from Iamgold’s 2015 original cost guidance of US$825 to US$865 per oz. for its three owner-operated mines, and US$850 to US$900 per oz. for all of its mines.) The revised cost guidance should be out on Aug. 5, with the miner’s second-quarter results. 

Raymond James analyst Phil Russo writes that Iamgold remains his “most highly levered name to gold,” and that the reduced annual production and anticipated change in costs could weaken the company’s robust cash position, given current low spot prices. 

Parsons anticipates Westwood’s importance as Iamgold’s sole Canadian producing asset is “partially tarnished” until the miner resumes access to level 104, or operates without incident into 2016. He has also trimmed Westwood’s estimated production in 2016 and 2017.

Bob Tait, Iamgold’s vice-president of investor relations, says that while parts of level 104 are opening, the company does not expect a lot this year. “We could be pleasantly surprised and get access — obviously there is rehabilitation work going on, and ultimately it’s up to the CSST, the provincial safety authority. But the rest of the mine is functioning.”  

Tait says Iamgold will be cautious at Westwood, while keeping its mining methods. For example, the company has changed the spacing between sublevels to 36 metres from 18 metres previously to add stability.  

Despite the growth potential Westwood could offer with its projected 20-year life, Russo writes that the mine’s “early challenges” could provide the market a reason to discount the asset, “particularly given the market’s current aversion for assets unproven.” (Westwood represents 27% of Russo’s net asset value for Iamgold.) He rates the company as a “market perform.”  

Parsons has reduced his $3.25 target to $2.90 per share, but has a “sector perform” rating.