IAMGOLD Beats by a Penny

Zacks

IAMGOLD Corp. (IAG) reported second quarter adjusted earnings per share (EPS) of 20 cents, ahead of the year-ago level by a couple of cents and beating the Zacks Consensus Estimate by a penny. Including impairment of marketable securities and foreign exchange translation, EPS in the quarter stood at 14 cents, down 30% from the year-ago quarter EPS of 20 cents.  

Higher gold sales and gold prices helped revenues increase by 19% to $410.6 million in the quarter and outperform the Zacks Consensus Estimate of $369 million. Gold sales increased by 33,000 ounces or 17% to 226,000 ounces and average realized gold price increased 5% to $1,593 per ounce in the quarter.

Mining costs escalated 25% to $250 million in the quarter, reflecting higher operating costs, inventory movements mostly from sales exceeding production and higher depreciation, depletion and amortization.

Gross earnings from mining operations improved 10% to $160 million in the quarter, helped by higher revenues that offset increased mining costs. The gold margin upped 5% to $856 per ounce as the increase in the average realized gold price offset higher mining costs

Production Numbers

Gold production during the quarter increased 9% year over year to 204,000 ounces. At the Rosebel Mine in Suriname, gold production was 94,000 ounces, up 8% from the prior-year quarter, mainly due to higher throughput and higher recoveries.

The Essakane Mine in Burkina Faso produced 81,000 ounces of gold, 30% higher than the second quarter 2011, aided by the removal of the technical issues that limited production in 2011, partially offset by lower grades in 2012.

The Sadiola mine in Mali produced 22,000 ounces of gold, down 33% from the prior-year period, due to lower throughput resulting from low mill availability, lower grades mined and lower recoveries on graphitic ore. Production at the Yatela mine in Mali was 5,000 ounces for the quarter, lower than the prior-year period, due to comparably lower ore tonnage being fed to the heap leach pads.

At the Niobec Mine, niobium production was 1.2 million kilograms, up 9% from 1.1 million kilograms in the prior-ear quarter. The increase was attributed to higher conversion of niobium pentoxide and higher recoveries, offset to some extent by lower grades mined.  

Financial Position

As of June 30, 2012, cash, cash equivalents and gold bullion reduced to $614.9 million from $1.3 billion as of March 31, 2012, manly due to the $480.4 million payment for the Trelawney acquisition. Operating cash flow increased to $52.7 million from $12.2 million in the prior-year quarter.

Project Updates

In the second quarter, IAMGOLD completed the acquisition of Trelawney Mining and Exploration Inc. The acquisition gives IAMGOLD control over Trelawney’s Côté Lake Project located near the Swayze Greenstone Belt in northern Ontario, Canada.

Following the acquisition, approximately 3,600 meters of drilling has been completed, and a NI 43-101 technical report will be filed in October 2012. A pre-feasibility study is expected to begin in the fourth quarter 2012.

During the quarter, IAMGOLD filed the resource study for the Westwood project and start-up date for production is early 2013. At the Essakane mine in Burkina Faso, more than 41,600 meters of drilling was completed, including approximately 15,600 meters targeting the Essakane Main Zone on the northern extensions of the current life of mine pit as well as within or immediately below the expansion feasibility study pit design. Furthermore, the construction of the expanded plant commenced last month and is expected to be completed by the end of 2013.

At the Rosebel mine in Suriname, approximately 36,000 meters of diamond drilling was completed during the quarter, mainly at the Mayo, Koolhoven and Pay Caro deposits, to increase the confidence in the existing resource inventory and focus on resource expansions. The installation of a temporary pre-crusher, a larger pebble crusher and an expanded gravity recovery circuit have been completed and are expected to have a positive impact in the second half of 2012.

A third ball mill is under construction and will be completed early in the first quarter 2013. A feasibility study is in progress and expected to be completed by the first quarter 2013, which will provide more detail around various aspects of the expansion project.

IAMGOLD is also making progress on the feasibility study on the Niobec mine based on block-caving and the establishment of the financing framework for the expansion. The completion of the study is expected by the third quarter 2013 and the permitting process should be finalized by 2014.

IAMGOLD continues to look for options for exploiting the large Rare Earth Elements resource near its Niobec mine operation and the completion of a scoping study is expected by September-end.

Outlook

For fiscal 2012, total attributable gold production is expected to range between 840,000 and 910,000 ounces. Cash cost per ounce is expected in the range of $670 to $695. Average gold price is expected to be $1700.

Niobium production for the year is expected to be between 4.6 million and 5.1 million kilograms. IAMGOLD estimates capital expenditure to be within $800 to $840 million.

Our Take

The Côté Lake Project will add to IAMGOLD’s mineral resources by approximately 30%. The acquisition will significantly expand IAMGOLD’s operating footprint in Canada, considered a stable jurisdiction. Canada will now account for 35% of the company’s resource base.

It is expected that the Côté Lake deposit has the potential to become a mine in five years. The deposit will produce between 400,000 ounces and 500,000 ounces a year and will catapult IAMGOLD’s production to 1.5 million ounces to 1.6 million ounces. The targeted production of 1.6 million ounces doubles IAMGOLD’s current production of 850,000 ounces a year. This is expected to be realized within the next five years.

IAMGOLD has a pipeline of development and exploration projects and continues to tap accretive acquisition opportunities.  The company’s growth plans are strategically limited to certain regions in Canada, and select countries in South America and Africa.

The Trelawney acquisition will lower IAMGOLD’s geographic risk profile. However, the Côté Lake Project is currently at an early stage, and runs the risk of high operating costs, and technical and permitting challenges.

Toronto-based IAMGOLD is a leading mid-tier gold mining company with an annual production of approximately one million ounces from five gold mines across three continents. In the Canadian province of Québec, the company also operates Niobec Inc., which produces more than 4.5 million kilograms of niobium annually, and owns a rare earth element resource close to its niobium mine.

It competes with the likes of Barrick Gold Corporation (ABX), Newmont Mining Corp. (NEM) and Randgold Resources Limited (GOLD). The stock retains a quantitative Zacks #5 Rank (short term Strong Sell rating) over the near term.

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