The Lean, Mean, Cost-Cutting Machine

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When the mining gets tough, the leaders get leaner.

Canadian mid-tier miner IAMGOLD (NYSE: IAG) is buying up royalty obligations to reduce costs at two key properties. Last month, IAMGOLD paid $13 million to Barrick Gold (NYSE: ABX) to cancel royalty obligations on the Doyon/Westwood property in Montreal and reduce operating costs by $80 per ounce. This morning, the company announced an offer to acquire French royalty company EURO Resources. EURO's principal asset is a 10% royalty interest on production from IAMGOLD's prolific Rosebel mine in Suriname. The acquisition could cost IAMGOLD about $104 million, but in the process the cash cost of gold production would be reduced by $50 per ounce over the life of the mine.

As the rapid escalation of mining costs has ratcheted up pressure on the world's metal miners, we've seen companies employ an array of means to keep those costs under control. Some of the big hitters have focused on reducing energy costs, exhibited by Barrick's purchase of a Canadian oil and gas company and Newmont Mining (NYSE: NEM)'s construction of a large power plant in Nevada. 

Barrick, for its part, appears content to convert long-term royalty rights to up-front capital, as evidenced by its $150 million sale of royalty assets to specialist Royal Gold (Nasdaq: RGLD) last month. Companies like Royal Gold and International Royalty (AMEX: ROY) specialize in securing low-risk, long-term cash flow through royalty interests in mining properties. This is somewhat similar to the innovative business model employed by Silver Wheaton (NYSE: SLW), only Silver Wheaton takes delivery of physical silver rather than royalty payments. In both cases, these transactions provide the purchaser with needed capital to advance development projects in a tight credit environment.

By purchasing royalty obligations on its own properties, IAMGOLD will boost long-term cash flow by increasing profit margins for each ounce of gold mined at these properties. That increased cash flow should assist with the timely development of the 1.5 million ounce Quimsacocha project in Ecuador and continued exploration of high-grade discoveries at Boto in Senegal.

Considering these prudent cost-cutting measures, nearly one million ounces of annual gold production, a treasure in cash and gold, and what strikes me as cheap valuation, I am digging IAMGOLD.

Further Foolishness:

• Cost increases are challenging metal miners
• Speaking of high-grade ores
• Take your pick of miners in the doghouse