IAMGOLD’s Hopes Rest on Higher Gold Prices

Will IAMGOLD's 2018 Earnings Help or Hurt Stock? (TSX: IAG)

The gold price rally has rubbed off positively on IAMGOLD stock in the past three months as its shares have shot up nearly 50%. However, IAMGOLD isn’t a convincing bet to take advantage of the improvement in gold prices as its latest results show.

IAMGOLD was on thin ground heading into its second-quarter report, and the company’s results proved that it would be prudent for investors to look elsewhere to take advantage of higher gold prices.

IAMGOLD Sends the Wrong Message

IAMGOLD’s results turned out to be terrible as its revenue was down 11% from the year-ago period and it also posted a larger-than-expected loss of $0.03 per share. But this was not where the company’s troubles ended as it lowered its full-year production guidance and also guided for a higher cost profile.

The company now expects to produce between 765,000 ounces and 810,000 ounces of gold this year, blaming suspension of mining at Rosebel as well as lower grades. IAMGOLD was earlier predicting production between 810,000 ounces and 870,000 ounces this year, which means that it has reduced its expectation to the tune of 6%.

At the same time, the company is now calling for total cash costs between $860 and $910 an ounce as compared to the earlier estimate of $765-$815 an ounce. So investors who were expecting good news from IAMGOLD based on the restart of mining at Rosebel will be disappointed with the company’s guidance.

The higher costs will reduce IAMGOLD’s ability to take advantage of the recent spike in gold prices and could reduce investor confidence in the stock, especially after its poor showing last quarter.

What’s Going Wrong?

IAMGOLD is struggling on account of weak grades, which are leading to lower output and higher costs.

IAMGOLD has been struggling on account of spiking costs and weaker output. The company’s second-quarter gold production came in at 198,000 ounces, down 4% from the prior-year period.

What’s more, IAMGOLD was unable to sell all of the gold it produced on account of inventory timing problems at Rosebel. Also, the company is struggling on account of weak grades, which are leading to lower output and higher costs.

That’s because weak grades mean that a company has to mine more waste tonnage to access the gold ores. So, even though IAMGOLD’s average realized gold price increased in the second quarter to $1,314 an ounce as compared to $1,299 an ounce a year ago, its gold margins actually declined to $419 an ounce from $487 an ounce a year ago.

The only scenario in which one can expect IAMGOLD to make a comeback is if gold prices keep jumping higher and that enables the company to do better than Wall Street expectations. The price of the yellow metal is currently at more than $1,500 an ounce, and experts anticipated that it could rise further in the coming months thanks to the macroeconomic uncertainty.

Goldman Sachs believes that gold might hit $1,600 an ounce in six months time. If that happens, IAMGOLD’s bottom line could improve because of favourable year-over-year price comparisons, otherwise there is not much to like about this senior gold producer.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Harsh Singh Chauhan
Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.

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