On Tuesday, Canadian gold miner IAMGOLD (NYSE: IAG) reported its first-quarter results. Gold, eh? Well, some of the numbers look nice and shiny, but at what expense to shareholders? Let's dig in to see what all the fuss is about.
After two sizable acquisitions in 2006, IAMGOLD has swiftly moved from being an explorer to a producer. Thus the 229% year-over-year revenue increase is not something extraordinary, particularly in light of the 377% higher mining costs. In fact, the company sported not only a high overall cost level, but also a significantly higher cash cost per ounce of gold produced. And gold produced was lower than during any quarter in 2006. Various operational and personnel snags were to blame.
In recent years, CEO Joe Conway had unsuccessfully attempted tie-ups with both Wheaton River -- now a Goldcorp (NYSE: GG) subsidiary -- and Gold Fields (NYSE: GFI). Other players repeatedly spoiled these merger attempts. In 2006, Conway found his "merger of equals" with the acquisition of Cambior, a fellow Canadian miner with a weaker financial position but a strong reserve upside and better operational and technical expertise. IAMGOLD purchased Cambior at a 31% premium in an all-stock deal.
Announcing that merger, Conway stated that the "combined strengths of both companies will result in benefits for all shareholders." Mr. Market didn't see it that way, and IAMGOLD shares dropped nearly 13% the day of the announcement. They've sagged even lower in subsequent months.
To sum up, shareholders have been diluted to fund this lavish deal that gave the company enough reserves to declare itself a soon-to-be million-ounce producer. Doesn't that have a nice ring to it? One million ounces. Perhaps Wall Street analysts find this number particularly dazzling -- only one out of 13 is negative on the stock.
There is potential for yet more dilution in the future, since Conway has stated that he may look at more deals. Sure, the company can vault its way into the top tier of producers, but it appears that growth will continue to be funded at shareholders' expense. A look at the past three years, through the end of 2006, reveals compounded annual growth in tangible book value of 61.6%. Sounds great, until you unearth the doubling of shares outstanding over that same period.
The company looks relatively cheap today by various measures, but the lack of respect for shareholders makes this one a pass in my book. You're better off looking for a management team focused on earning maximum returns, rather than on hitting a nice, round production milestone.
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Fool contributor Toby Shute does not own shares of any company named above. The Fool has a disclosure policy.
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