Why IAMGOLD Shares Dropped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of gold and niobium miner IAMGOLD (IAG 0.02%) careened 10% lower Wednesday morning after the company reiterated 2013 production guidance for between 875,000 and 950,000 ounces, while revealing a substantial increase in projected total cash costs of between $850 and $925 per ounce (including royalties).

So what: Although industry analysts had prepared for some cost escalation after the miner revealed a range of operating challenges last November (see related article: "A Touch of Tarnish at IAMGOLD"), this cost escalation proved worse than expected. BMO Capital Markets had forecast 2013 costs of $730 per ounce, while Credit Suisse had anticipated costs of $652 per ounce. Given what we now know regarding prevailing cost dynamics after low-cost operators Goldcorp (GG +0.00%) and Yamana Gold (AUY +0.00%) began reporting an all-in cost metric, IAMGOLD's elevated cash costs are seen challenging the miner's ability to sustain positive cash flow for the year ahead.

Now what: While there can be no question that IAMGOLD faces a range of substantial near-term operating challenges at several key operations, with the shares now in single-digit territory I find the resulting value proposition for long-term investors extremely compelling. With the recently acquired Côté gold project already meaningfully enhanced with 7.6 million indicated ounces, a substantial treasury in cash and gold bullion, world-class niobium and rare-earth element assets, and a reiterated outlook for 80% production growth over the next five years, I view IAMGOLD shares beneath $10 per share as an unmistakable bargain.