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IAMGOLD Corp. Message Board

  • warmcamp warmcamp Oct 19, 2013 12:34 PM Flag

    Don't rush please

    IAG is one of stronger gold stocks with reasonable valuation at the moment. Based on present earning rate, PE ratio is in 15-20 range. Comparing with peers shows that IAG ratio is one of the lowest in the sector. For example, GG, another strong gold producer, has PE in 25-30 area. Again, all numbers are based on present earnings (i.e. based on present gold price).

    At the same time, one should understand that PE=15-20 is not low comparing with general market norms. Also, this sector does not receive market favor, i.e. sentiment is negative. It indicates that any trading/buying here should be done cautiously and taking profits, if they materialize, is not the worst idea.

    It must be noted that, in case gold price doesn’t improve materially, all gold stocks will stay under negative pressure. The main reason for this comes from mining fundamentals. Mining is a capital-intensive industry. It means, in practical accounting sense, that, by and large, mining stocks have earnings looking better than cash flow. It is typical at this point that gold stocks have positive earnings (if it’s a good gold stock) and negative cash flow. The latter is not sustainable in long-term and gold price improvement is the only way to fix it.

    Regarding book value, it is not worth much in this sector. Shortly speaking, mining book value is not tangible, using plain English.

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    • Wow thanks, very good post--maybe the best I've ever read on a board

    • Noticed you posting on other PM boards as ell. Would appreciate your opinion on some of the better PM stocks that have the best opportunity for price increase going forward. Thank you.

      • 1 Reply to jklemming
      • Jklemming, in my opinion, “better gold stocks” means combination of two qualities. Firstly, it is upside potential, if gold price goes up (this is quite ordinary thing, common to many stocks in the sector) and, secondly, it is comparative safety in case gold price doesn’t go up (this is more restrictive feature). The second restriction leaves few stocks in the list, e.g. in alphabetical order: GG, EGO, IAG, NGD. This list is not complete; some other stocks could be added, e.g. AGI or AUY.

        Please note that IAG has the strongest upside potential in the list; its price-to-sales ratio is much lower; likely, the lowest among peers (comparatively safe gold stocks). The reason is that market discounted this stock heavily during last 1-2 years probably assuming that this is hopelessly high-cost producer. It came as certain surprise that IAG was able to withstand currently hostile gold environment by keeping operations profitable. It is able to keep profits (costs) on almost the same level as other companies in the list that were long considered as bona-fide low-cost producers.

        This change of tune (from high to low cost) still goes largely unnoticed, imho, because the whole sector is under uniformly bad pressure. When situation changes, hopefully, and if management keeps doing good work (so far they do it) then IAG stock can be due for upside re-valuation.

        I believe you see that considerations above are relatively complex. If market goes in simpler way, e.g. strong gold drop or rise then these considerations are not worth much. If gold drops a lot then everything goes down and if gold goes up strongly and quickly then it will be the most beaten stocks, currently on brink of bankruptcy, that would go up the most.

    • Warmcamp wrote a great post IMO -- people have to respect profits, and cash out occasionally, if they want to make money in this very volatile market. People also have to look at the current projects which are making money, and those that are in the pipeline, and realize that the projects with high all-in-costs are hardly great assets to be holding at the moment.
      Those miners with lowest overall all-in-costs (ALAMOS, etc) are currently receiving greater valuation for a reason. (Yet admittedly, I never have owned ALAMOS due to that higher valuation.) And IAG does better than some other miners for a reason.
      I think IAG is one of the safest bets because their dividend attracts more than just daytraders and hedge funds; there are many compelling reasons to own it, but the "book value" argument is not one of them. For example, RVM has a book value over 2 dollars, and it trades well under 1/3 book value these days. However, Troy is being delayed for the umpteenth time and their great Rock Creek mine may not ever get permitted. It probably remains overvalued now, even though it trades less than half what it did a few days ago.
      Anyway, best of luck to all. And to be clear, I like IAG, but I've bought many for reasons like "priced under book value", or else made choices based on book value, and it's never worked out for me. Warmcamp's post was in that sense someone trying to be genuinely helpful here, which is rare on any Yahoo board.

      • 1 Reply to benandemmiboo
      • Ben, I appreciate your kind words. Actually, yes, I try to be helpful by posting information and opinions that are close to realistic, imho. I started investing in PM stocks about 10 years ago; got help during my first years from other people and try to pay back now.

        Re book value, mining companies have it mostly in “property and plant” category which means capitalized expenses. Mining business requires lot of money; it often takes billion dollars to build a gold mine. All construction expense gets capitalized and listed as part of book value in balance sheet. This expense is depreciated during life of the mine, but companies also incur additional capex (called “sustaining”) when mine is already in operation. This expense is capitalized too, i.e. book value can continue increasing if sustaining capex exceeds depreciation (quite common case).

        The consideration above explains why mining stock “fair value” is not necessarily connected to “book value”. Fair value is mostly associated with earnings and mineral assets (metal-in-ground, i.e. mineral reserves and resources), while book value means money spent to dig these metals out of ground. One company could spend a lot and produce a little of metal with high cost (it will have high book value, paradoxically); another company could spend a little and produce a lot of metal with good profits (book value is lower, but actual value is better).

        It is easy to find in this sector now companies with good book value and nothing to show for that (no earnings, losses, close to Chapter 11). Fortunately, IAG is not in that list. The main strength of this stock is that earnings exist and balance sheet is comparatively strong. It makes this stock better than sector peers, though it doesn’t make it better than average market equities. This sector is in bad shape and it makes IAG speculative play with strong potential in case of sector turnaround. Again, it is still better than many other gold stocks having potential to capsize.

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