Iamgold Corporation

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 2/5

IAG is a mid-tier gold producer with mining operations primarily in North America, as well as exploration projects in various other regions. It has struggled with execution and profitability as of late.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Iamgold Corporation (IAG) is a gold mining company, engaging in the exploration, development, and operation of gold mining properties. It has a history of fluctuating production levels, and its success is largely dependent on its ability to efficiently extract gold from its mines, manage costs, and explore new projects, and a lot of the performance relies on volatile gold prices.

Business Overview

Revenues & Operations: IAG generates revenue through the sale of gold, typically in the form of gold bullion. Its operations span several countries with the focus primarily on North America. The company operates several gold mines: * Essakane, a significant mine in Burkina Faso * Westwood, an underground mine in Quebec * The company also has several exploration projects.

Industry Trends: The gold mining industry is inherently cyclical, with company profitability driven by gold prices, which themselves depend on many macroeconomic factors, sentiment, geopolitical, and other issues. Companies operating in this industry are subject to commodity price risk which can be high. As the gold price moves up or down, companies like IAG see revenues and profitability change. It is difficult for gold miners to establish moats due to that. Gold mining has not seen high growth for a few years, and the industry is known for the risk of bankruptcy.

The company is not a price setter and doesn’t benefit from pricing power like other industries. They have to sell the gold they produce at the price offered by the market. * There’s been increased M&A activity in the industry, as companies look to consolidate, grow, or improve costs. * The supply chain and energy costs are a big factor for the health and performance of the companies. * ESG is becoming more important as investors and customers take into account sustainability and social responsibility.

Competitive Landscape: IAG faces competition from numerous other gold mining companies, ranging from large producers to smaller ones. The industry is highly competitive and often involves high operational risk, which makes cost control crucial.

What makes the company different?: It is a geographical diversified mid-tier gold producer with low-cost assets. At least this is the story that the company tells its investors. It also has a joint venture partnership to bring value at its Cote Gold Project.

Financial Analysis

Revenue Trends: IAG’s revenues are dependent on gold prices and sales volumes. The company has had variable revenues due to production levels and price changes. 2022 and 2023 had lower revenues due to the decline of gold prices.

Profitability: Profitability at IAG is dependent on mining costs, as well as gold prices. Over the last few years, they have seen negative profits due to many factors, such as cost overruns, production issues, impairment charges, etc. However, this also means that the company has a high operating leverage when times are better. In Q1 2024 they reported an operating cash flow of $158m and an adjusted net earnings of $49m and a loss from continuing operations at $101m.

Debt and Liquidity: The company has been taking a proactive approach to reducing debt, and has been working to strengthen their balance sheet. They have used proceeds from asset sales to pay some debt and have been aiming for a 10x debt-to-EBITDA ratio in the near-term, which they are aiming to bring down further. They have been struggling to refinance or reduce their debt pile in the last few years, since interest rates have moved higher. The company recently raised capital through equity offerings. As of their latest earnings call, they have 505 million in cash and their term debt sits at 1 billion.

Cash Flow Analysis: Cash flow is primarily derived from operations and is highly volatile. Capital expenditures are needed to keep the company operating, to mine new reserves, and for expansion of existing and new projects.

Recent Concerns & Controversies: There are major ongoing issues at IAG: * They have had underperforming productions at several of their mines.

  • They had issues with high operating costs.
  • The stock price has been volatile, falling substantially in 2022 and 2023 and has been struggling to recover.
  • The company has had very high turnover at the CFO position in the past few years, this has led to more uncertainty.
  • They have been burning through cash in recent times.
  • They have had to raise capital through equity issuances which are dilutive to shareholders.
  • Management is not happy with the performance of the company and has been aiming to improve it through cost cutting and improved operations. There have been positive signs in recent times, with operational improvements at the Essakane mine. Management is focused on improving their operating metrics.

The company acknowledges their debt load is high and are continuing their efforts to deleverage. In this process, they may sell some assets, which might reduce revenue and production numbers. Their focus on debt reduction over growth might be something that investors might dislike.

Moat Analysis

Moat Rating: 2 / 5

IAG possesses a very limited economic moat due to the following factors:

  • Intangible Assets: The company operates in a commodity industry where there isn’t a strong branding or loyalty. They cannot charge premiums, since gold is fungible. They operate on geological permits, which is not much of a moat since they don’t make production impossible to anyone, and many competitors operate on similar geological permits and the government can always issue new permits.
    • Switching Costs: There are zero switching costs as companies are easily replaced in the commodity business.
    • Network Effect: There’s no inherent network effect for a gold mining company. More customers don’t make it better for existing customers.
    • Cost Advantage: Even though the company is trying to focus on low-cost assets, they have had trouble with executing this properly and many competitors in the industry have a far better cost of extraction. They can have a cost advantage due to geological conditions, and they have some of them, but other competitors also have it. So, a very weak advantage if there is any.

Legitimate Risks That Could Harm the Moat and Business Resilience

  • Gold Price Volatility: The company is heavily exposed to fluctuations in gold prices which impact profitability and cash flow.
    • Geopolitical Risk: The mines are mostly in Africa where there is political and economic risk, plus potential regulations.
    • Operational Challenges: Execution of mining operations is challenging with potential setbacks.
    • Balance Sheet Risk: High debt is problematic when interest rates are high. The company’s high debt combined with volatile earnings makes the company vulnerable and increases risk.
    • Competition: Intense competition can hinder pricing power and force companies to lower prices.

While IAG may possess some assets, and has a focus on costs, these advantages are neither unique, nor enduring and are very reliant on many external factors.

Understandability Understandability: 3 / 5 IAG’s business is complex but not that complicated to understand. At the core, they mine gold and sell it, that part is simple. But understanding the various operational problems that they are going through and the various accounting methods of mining is more complicated, thus requiring some financial analysis to make any investment decision. It is also difficult to understand or anticipate the future performance of the company.

Balance Sheet Health Balance Sheet Health: 2 / 5 IAG has a concerning financial situation due to their high debt and low cash position, and the need for continued equity infusions. They have improved some aspects but it is still far from excellent. The company is not in a strong position.

The core issue is that while they are working to reduce the debt, and have been successful in this, they are struggling with poor operational performance, which makes any debt they have, a lot more problematic.