Iamgold: Significant Growth On Deck (IAG)

It’s been a rough start to 2023 for the Gold Miners Index (GDX) which has started out the year down over 13% in what’s typically the two best months of the year. This is certainly disappointing for investors that were hoping for a continuation of the Q4 rally in GDX, and it’s despite a very mild pullback in the gold price that has still left it firmly above the psychological $2,000/oz level. The sector-wide selling can partially be attributed to weaker than expected production out of some larger producers, but Iamgold (NYSE:IAG) was certainly an exception with a significant beat vs. its annual guidance midpoint of 440,000 ounces.

Unfortunately, the beat and Cote Gold remaining on schedule haven’t been enough for it to evade the sharp correction we’ve seen, and while its current largest mine did add a year of mine life, it’s still staring down a relatively short life and worsening security situation in the Sahel Region of Burkina Faso. In this update, we’ll dig into the Q4 and FY2023 results, the 2024 outlook, and why the Iamgold investment thesis is finally changing for the better after a decade to forget with steadily declining production at rising costs.

Q4 & FY2023 Production

Iamgold released its Q4 and FY2023 preliminary results last month, reporting quarterly attributable production of ~136,000 ounces of gold, a sharp decline from the year-ago period. However, the company was lapping production from its Rosebel Mine in Suriname (since sold), and its continuing operations had a better year combined with production up 17% year-over-year (Q4 2022: ~118,000 ounces). This was driven by throughput (~3.11 million tonnes) and recoveries that offset slightly lower grades at Essakane, and much higher grades at Westwood related to the increased proportion of feed from the underground vs. surface mining. In fact, Westwood’s quarterly production was up over 50% year-over-year to ~28,000 ounces, a much more respectable figure vs. the sub 80,000 annualized rate in the last quarter of 2022.

Digging into the results a little closer, Essakane processed ~3.11 million tonnes at 1.32 grams per tonne of gold for ~108,000 ounces produced, translating to flat production year-over-year. Unfortunately, annual production was down sharply (~372,000 ounces vs. ~432,000 ounces), but this was as expected and in line with guidance, with grades expected to be down year-over-year. And while Essakane will continue to be one of the larger mines by scale in West Africa, production is expected to dip again next year with costs remaining elevated on the back of lower grades and higher throughput plus a year of significant sustaining capital spend. On a positive note, Westwood should have another solid year and build on its ~93,000 ounces produced in 2023, with continued progress on underground development and access to more higher-grade stopes.

Finally, looking at how Iamgold delivered vs. its full-year guidance, the company reported a second consecutive significant beat vs. its annual guidance midpoint, a significant improvement from 2021 under previous leadership. In fact, 2022 and 2023 production averaged a beat of ~66,000 ounces (25,000 ounce beat vs. midpoint in 2023 or ~6%), a significant improvement from the ~64,000 ounce miss in 2021 (~601,000 ounces vs. 665,000 ounce guidance midpoint). This helps to explain the outperformance of the stock this year vs. the GDX after regaining some of the market’s trust, and it will certainly be an exciting year ahead as the company finally turns on one of Canada’s largest gold mines near Gogama, Ontario.

2024 Outlook & Recent Developments

While Iamgold hasn’t provided guidance yet, Iamgold is set to see a significant increase in gold production next year, with Cote Gold set to begin production by Q2. For those unfamiliar, Cote is one of the largest gold mines constructed globally in North America in the past few years, dwarfing other assets like Magino in scale, and being one of the largest mines built in Canada since Meliadine. In fact, Cote’s production profile will be in line with that of other monster assets like Meliadine, Blackwater and Greenstone on a 100% basis (~365,000 ounces per annum over the life-of-mine), but well ahead on a first-five year basis with production expected to be just shy of 500,000 ounces. Notably, it will also have a 20+ year mine life if Gosselin can be brought into the mine plan, helping to reduce Iamgold’s cost profile and significantly increase its weighted average mine life vs. Essakane (five years) and Westwood, which is a smaller and shorter life asset and reliant on satellite deposits for feed besides feed from the current underground mining operation.

Based on the most recent update from the company, pre-commissioning of the primary circuit is underway, with full commissioning expected to have begun at the end of January with the first material from the autonomous haul fleet. The fact that this is a mine employing an autonomous haul fleet is another differentiator for Cote Gold, making it one of the few mines (including the massive Boddington Mine in Australia) to use this technology. The benefits to autonomous haulage outside of improved productivity (no need for breaks or shift changes) are reduced truck maintenance, lower manpower needs and, in turn, reduced camp size/accommodation costs. Most importantly, though, there’s a lower risk of injury with no employees required to man its 23 CAT 793F trucks, with its Caterpillar’s (CAT) AHS fleet traveling ~100 million miles without a lost-time injury as of 2022. As for Cote Gold, 14 trucks had been commissioned as of Q3 or ~60% of the planned 23 total haul trucks.

Finally, the last relevant development is Iamgold’s recent acquisition of Vanstar Resources (OTCQX:VMNGF) announced in December. Vanstar’s primary asset is a 25% interest in the Nelligan Project, with the Vanstar acquisition for ~$31 million giving Iamgold full ownership of this asset (75% interest previously). Based on the current resource base, Iamgold paid a very attractive price of ~$24/oz based on a ~5.2 million ounce resource base (100% basis), and ~$63/oz on indicated ounces, well below the median price of ~$130/oz for $100+ million transactions in Tier-1 ranked jurisdictions over the past five years. Notably, this is in line with Iamgold’s plan to become a Canadian-focused company, with the first step towards that being bringing Cote into commercial production, increasing its production profile to 700,000+ ounces with over half of production from Canada (Westwood/Cote Gold), and increasing further when the company buys back its 10% Cote Gold interest sold to Sumitomo (OTCPK:SMMYY).

Iamgold is confident it can increase the Nelligan resource, suggesting an even lower price paid if Nelligan can grow to 6+ million ounces of gold in resources.

Valuation

Based on ~500 million fully diluted shares (post-Vanstar deal closing) and a share price of US$2.50, Iamgold trades at a market cap of ~$1.25 billion. This leaves the stock trading at just ~0.70x P/NAV vs. an estimated net asset value of ~$1.72 billion. Meanwhile, Iamgold trades at one of the lowest P/CF multiples sector-wide at just ~3.7x FY2024 estimates ($0.66), though this can partially be attributed to its lower margins relative to peers. This is because while Cote Gold will pour first gold in the coming months (sub $1,000/oz AISC), it won’t be in commercial production until 2025. Hence, Essakane and Westwood will dominate the production profile for their final year, with Cote unlikely to contribute more than 170,000 ounces on an attributable basis. That said, 2025 should be a transformational year with Cote firing on all cylinders, and this is what makes Iamgold an interesting play for patient investors.

Using what I believe to be fair multiples of 0.95x P/NAV and 5.5x cash flow and a 65% weighting to P/NAV vs. P/CF, I see a fair value for Iamgold of US$3.50. This points to a 37% upside from current levels and a reasonable upside for this turnaround story, especially with a significant increase in its free cash flow yield looking out to 2025. That said, I am looking for a minimum 40% discount to fair value to justify starting new positions, and this translates to an ideal buy zone of US$2.12 or lower. So, although Iamgold is getting closer to its buy zone and the stock certainly seems to have found a floor at US$2.00 where buyers have been showing up immediately, I continue to see more attractive bets elsewhere in the sector and would need a pullback closer to US$2.12 to get more interested in IAG.

Summary

Iamgold had a solid Q4 and full year in 2023 and enters 2024 much stronger with the company less than two months away from first production at Cote Gold. This is a transformational asset for the company, similar to Valentine for Calibre (OTCQX:CXBMF), as it will simultaneously improve the company’s jurisdictional profile, increase its margins, and lift its overall gold production. And while Iamgold may not pay a dividend nor have the scale of Kinross (KGC), the portfolio rationalization and move to being a more Americas-focused producer has certainly set up a solid turnaround thesis for investors, with the potential for a continued recovery after what’s been a brutal ~80% decline since its 2016 peak.

That said, 2024 will be a mediocre year for Iamgold as Cote works to ramp up (20 months to target throughput of ~37,000 tonnes per day), and 2025 will be the real year where Iamgold enjoys the fruits of its labor. Hence, while I believe there’s a good chance the floor is in for Iamgold at US$2.00 per share, the limited free cash flow generation this year could result in peers with more robust free cash flow profiles outperforming. To summarize, I continue to see IAG as a solid turnaround story in the sector, and I would consider buying the stock for a swing-trade on any pullbacks below US$2.12.

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