Iamgold lowers costs, but analysts remain cautious

Iamgold (TSX: IMG; NYSE: IAG) had a messy third quarter — widening its adjusted loss on the back of lower gold sales — but it has cut its operating costs, leaving analysts questioning if the company’s focus on cash preservation is enough to succeed in today’s low-price environment.

“We continue to operate in tough times, and because of that, there has been no break from our drive to further reduce cost,” Iamgold’s CEO Steve Letwin said on a recent earnings call.

Iamgold registered a net loss of US$84 million, or US21¢ per share, which is up from a US19¢-per-share loss in the same period last year. The net loss included a US$20-million unrealized derivative loss and a US$15-million adjustment to normalize the costs at the Westwood gold mine in Quebec, after production was interrupted. Excluding such one-time items, the adjusted net loss was US12¢ per share, above the US9¢-per-share adjusted loss that analysts had expected.

The lower adjusted net loss came from lower operating earnings, executive vice-president and CEO Carol Banducci said. Cost of sales fell 13% to US$228 million, while revenues declined by 28% to US$208 million on lower sales.

Quarterly gold sales tumbled by 40,000 oz. to 186,000 oz., as production decreased from both Westwood and the Rosebel gold mine in Suriname, and the closure in 2014 of the Mouska gold mine in Quebec.  

Westwood produced only 2,000 oz. — compared to 36,000 oz. in the third quarter of 2014 — as the company shifted its focus on development, after a seismic event at the underground mine in May. Iamgold spent the past few months on rehabilitation and development, as well as revising the mine plan, which is expected out in January.

“We are developing a plan to make sure that we mine safely, and that we are not susceptible to seismic activity … it has the potential to be our lowest-cost and highest-grade mine,” the company’s vice-president of investor relations Bob Tait says.

Rosebel churned out 70,000 oz., down from 83,000 oz. a year ago, owing to sliding grades and throughput. To trim costs, Iamgold is reducing Rosebel’s workforce by 10%. It is also looking at “innovative ideas” to improve throughput, as Rosebel transitions into hardrock without spending much capital, Tait notes.

Meanwhile, the Essakane mine in Burkina Faso “is doing terrific.” It cranked out a record 107,000 oz. gold, which is up 29% from the earlier year, helped by higher grades and throughput. This brought consolidated quarterly production to 197,000 oz., down 12% from the earlier year.

The average realized gold price also slid by 12% to US$1,121 per oz.

“We can’t do anything about the price of gold. It’s out of our control. And we can’t do much about the sentiment. But what we can do is work, and focus on our costs,” Letwin says.

Compared to the same period last year, total cash costs fell 7% to US$791 per oz., and all-in sustaining costs dropped 8% to US$1,027 per oz. The biggest improvement came from Essakane, where all-in sustaining costs fell US$277 in the past year to US$922 per oz.

Letwin described Iamgold’s balance sheet as strong, with US$783.4 million in cash, equivalents and gold bullion, adding that the company prefers to plow such money back into operations.

“We are much better off investing in our own assets and organically improving our cost structure, and maximizing revenue — because we just can’t seem to find anything out there that we can add to our portfolio right now that is going to generate cash, as opposed to use cash,” Letwin said.

“An absence of any initiative other than to ‘protect’ cash does not generate any excitement or potential for equity re-rating,” Mackie Research analyst Barry Allan argues in a client note. “We maintain a ‘hold’ recommendation, but also fail to see any reason to actually hold the equity.”

Allan cautions that “with high all-in sustaining costs of US$1,027 per oz., there is little working margin at current gold prices, and operations are slowly consuming the balance sheet.” He revised his $3 target downward to $2.40.

“The lack of alternative acquisitions raises questions on the execution of company strategy, and presents uncertainties, despite the cashed-up balance sheet,” CIBC analyst David Haughton comments.

The setback at Westwood could overshadow cost-saving measures at Essakane and Rosebel, likely making the stock less attractive in the market, Haughton adds. He rates Iamgold as a “sector underperformer,” with a $1.70 target.

But Tait argues Iamgold’s move to invest in its assets is a “good strategy in these times,” as it leverages the investments the company has already made. “So you don’t get surprises. But you can get surprises if you do acquisitions,” he says.

Meanwhile, Iamgold has kept its full-year production guidance at 780,000 to 815,000 oz., while increasing Essakane’s output and decreasing Westwood’s. However, it has trimmed its 2015 cash cost guidance to US$825 to US$865 per oz. — from US$850 to US$900 — and lowered its all-in sustaining cost target to US$1,050 to US$1,150 per oz., from US$1,075 to US$1,175.