Description

IAMGOLD is a name that appears to be new to VIC.  As the name implies, the company mines for gold.  It has three significant and two less important assets - each of its three major assets appears to be at least capable of justifying the company's entire Enterprise Value and I believe the company itself is worth some 3-4x what it's trading for.  The three important assets are:

• The producing Essakane mine in Burkina Faso

• This mine produces ~365,000 ounces of gold annually to IAG’s interest and has ~8 years worth of remaining reserve mine life

• The producing Rosebel mine in Suriname

• This mine produces ~250,000 ounces of gold annually to IAG’s interest and has ~16 years worth of remaining reserve mine life

• The Cote mine currently under development and located in Ontario, Canada

• This is a world class deposit of which IAG owns 66.5%

• The mine is slated to begin production in 2024 and produce ~500,000 ounces annually over its first 5 years; it has an 18 year mine life with potential for significant extension

And the less important assets are:

• The Westwood underground mine in Quebec, Canada

• This mine has had problems related to earthquakes which have prevented it from becoming the major asset IAG had expected

• The Boto development project in Senegal

• This is a very high quality, low-cost but rather small development project

For context, the company (as of 8/2) has a $1.3bln Market Cap and, with ~$430m of net cash a ~$870m EV.  Each of the 3 major projects above would appear to be sufficient to at least account for the entire Enterprise Value.  Specifically:

1)      Essakane has been running with AISC of ~$1,000-1,110/ounce and a technical report from early 2020 estimates LoM average AISC of slightly below $1,000/ounce pointing to somewhere on the order of $250-300m of pre-tax FCF annually.  Modifying the technical report for current gold prices points to an NPV5 for IAG’s stake in the mine of ~$1.4bln (after local taxes).  At the $1,350 gold price assumed in the report, the current NPV5 would be some $600m.

2)      Rosebel has seen some recent issues related to: a labor contract renegotiation, Covid related on-site personnel caps, and weather which pushed production down to 210k ounces in 2020 and recently led to reduced 2021 guidance of 150k ounces.  This lower production has also pushed up AISC since the start of 2020.  Historically (and prospectively), the mine produced ~250k ounces net to IAG’s interest at AISC’s of around $1,000/ounce.  A technical report from 2018 taking into account the development of a brownfield extension to the Rosebel mine projects costs declining below $1,000/ounce.  That said, a simple DCF assuming (i) $1,000 AISC (ii) 250,000 ounces/year until depletion (iii) $350m of non-sustaining capital as indicated in the report and (iv) a 37.5% local tax rate points to an NPV for IAG’s ownership stake of $400m at $1,350 gold prices and ~$1.1bln at current gold prices.

3)      Cote is a world class deposit located in a great jurisdiction.  Despite a recent increase in the estimated development costs of the project, the economics remain strong and can be summarized as follows:

Note: This does not include an allowance for the increase in CapEx though it also does not include capital expended to date – the two are basically a wash.  IAG’s interest is 70% in the #’s above.

Cote also has the possibility for very meaningful exploration upside and reserve extension.

Notably, IAG uses a $1,200 gold price to determine reserve cutoff for external reporting – this is a much more conservative number than its peers and implies there could be meaningful upside to the numbers discussed even without any exploration success.

IAG’s other assets (Westwood and Boto) are worth something but are not particularly important to the investment case so, in the interest of brevity, I will exclude them.

Adding up the various pieces points to a value for IAG some 70 to 250% higher than its current price depending on the price of gold:

Note: I have excluded corporate taxes as the timing of their payment is uncertain and IAG trades at half of book implying the investment will have to work quite well before corporate taxes become a big drag.

Other Metrics:

Below are some other data points for triangulating IAG’s value:

Note: Forward values use consensus #’s.  Improvement to 2025 is due, primarily, to Cote coming into production but also from lapping issues at Rosebel.

Perhaps more interesting is a comp analysis showing what multiple of FCF - calculated as “EV/(Production * (Gold Px – (AISC+(Growth CapEx Tied to Current Reserves/Reserves)))” - and Reserves/Production various gold miners trade at.  At any gold price, IAG is a stand-out – it both trades at an extremely low multiple of FCF and has many years of production remaining in its reserve base.  That is, it is trading at a lower multiple of FCF but has the assets to sustain that FCF for longer than its peers.  I don’t hold these charts out as being perfect or definitive but, rather, believe they are broadly correct and indicative of how much people are paying up (or not) for exploration or other sorts of uncertain upside.

Some other things to keep in mind here:

• IAG uses $1,200 Gold to calculate reserves while many of the comps use prices of $1,500.

• The analysis uses current production levels and thus does not give IAG credit for its peer leading growth trajectory

• The analysis assumes IAG’s long-term AISC is $1,000/ounce while the company is targeting <$900/ounce.

• The numbers next to the tickers represent my view on average jurisdiction quality (1 being worst, 3 being best)

• The values used in this analysis (other than the EV’s) are a couple months stale at this point

Why This Opportunity Exists and a Final Comparison:

This opportunity appears to exist for two reasons:

First, because of IAG’s historic troubles at Westwood (where earthquakes prevented IAG from making it into the major asset they had guided the market to expect), the recent issues as Rosebel (which appear to be resolving as the company expands camp capacity to accommodate Covid protocols, weather normalizes, and the company has completed a contract renegotiation), and the recent increase in the cost of Cote (driven, in large part, by cost inflation across the sector).  The market appears to be extrapolating these problems out and assuming that IAG will never be able to operate its assets without issues.  This seems quite pessimistic and more than accounted for in the valuation.

Secon, because IAG’s growth is several years out and the company is not returning capital as it invests in building its high quality assets. Investors in the gold sector, at present, seem fairly short-sighted and much more focused on companies which are returning capital rather than those which are investing it.  I’ve seen this a few times over the last couple years where companies bringing on new, large projects which have good economics even excluding the already sunk costs trade at discounts that far more than account for the execution risk.  When the cash flow starts up, they tend to revalue.

Normally, I would wait to buy something like this until we were, say, 18 months from Cote's start-up (as the market doesn't seem to get excited until we're within 12 months of the FCF machine getting turned on) but, given the dramatic discount to fair value I've purchased this well in advance of what I expect to be the catalyst.

As an example of the market’s preferences, Newmont, a market darling:

• Has ~$400 of Enterprise Value for every ounce of gold-equivalent reserves (IAG $63)

• Has ~$7,000 of Enterprise Value for every ounce of gold-equivalent production expected in 2021 (IAG ~$1,500)

• Has a similar ~$7,000 of Enterprise Value for every ounce of gold-equivalent production expected in 2024 (IAG <$870)

• Trades at 2.4x tangible book value (IAG ~.5x); ~22x projected 2025 earnings (IAG ~3x); and around 10x 2025 free cash flow (IAG ~2x)

On the other hand, IAG pays no dividend as it conserves cash to build Cote (and probably Boto) while Newmont pays a 3.6% dividend which has been growing rapidly over the last several years (but is approaching a level where it will begin consuming all of earnings).

Notably, if Newmont were to run out its reserves and liquidate (without any of the typical inefficiencies that entails) the company would be expected to generate somewhere around the current market cap in earnings (22x earnings and ~20 years of production) and a further ~40% of the market cap from its current book value over 20 years; the IRR would be a bit better than the 2% return that implies. 

IAG, on the other hand, if it never generated another dollar of earnings and never saw its production rate rise with the completion of Cote, would return some 200% of its market cap to investors over some 20 years and provide a better IRR than Newmont.

Obviously, (i) Newmont isn’t going to liquidate and is likely to add value over time and (ii) IAG is likely to generate profits in the future but how much more than its tangible assets can or should a large mining company be worth?  How much less should another be worth?  I don’t see any issues with IAG that justify the massive discount it trades at (to peers and NAV) but would welcome any feedback to that effect.

Some Other Facts:

• IAG has cash and borrowing availability of $1,500m which significantly exceeds its market cap of $1,300m.

• IAG received a buyout offer of $1,890m in mid 2019 (reportedly rejected by IAG on the basis of price) – since then, the company’s net cash position has increased by ~$200m and gold prices have risen $500/ounce

Catalyst

• Completion of Cote in 2024
• Resolution of temporary issues at Rosebel
• Implentation of capital returns