High Costs Put Pressure on This Gold Miner

IAMGOLD's high costs result in deferral of growth projects, which is not positive for long term performance of the company.

Feb 25, 2014 at 9:15AM

Despite the recent rise in gold prices, cost performance continues to be extremely important for gold miners. Miners with lower costs tend to outperform those who struggle on the costs side. However, it is not that easy to cut costs if you are a low-grade producer like IAMGOLD (NYSE:IAG). Low grades at the mines automatically transform into higher costs as more tons of ore should be processed in order to produce each ounce of gold.

Costs stay at relatively high level
IAMGOLD has recently reported that its fourth quarter all-in sustaining costs were $1,242 per ounce. However, for the full year costs were a tick lower at $1,232 per ounce. The company has realized $125 million in cost reduction in 2013, but this was not enough to push costs lower.

IAMGOLD expects to produce 835,000 – 900,000 ounces of gold at all-in sustaining costs of $1,150-$1,250 per ounce this year. The high end of production guidance will mark an almost 8% increase from last year's production level.

The low end of the cost guidance will lead to a 7% decrease in costs, but they will still stay relatively high as low grades leave little room for improvement for the company. In comparison, Kinross Gold (NYSE:KGC), which reported fourth quarter all-in sustaining costs of $1169 per ounce, guided its 2014 costs at $950-$1050 per ounce. As gold prices stay above the $1300 mark, Kinross Gold's costs are in the comfortable territory.

Growth projects under question
IAMGOLD stated that the decision to move forward with its projects will depend on their ability to generate a sufficient return along with securing the necessary funding. The company's cautious approach is understandable, as its margins at current gold prices are thin.

In its effort to save cash and solidify the balance sheet, IAMGOLD suspended the dividend at the end of 2013. The company also decreased its capital spending by approximately 40% to $400 million. The cutting of capital expenditures happened across the entire industry. Even the above-mentioned Kinross Gold couldn't stay above this trend, slashing its capital spending by almost half.

The result of decreased spending and capital preservation is the deferral of projects. IAMGOLD stated that the full expansion at its Rosebel mine in Suriname will be deferred until 2015. Additionally, the company will not be funding expansion at its niobium-producing mine, Niobec, on its own.

The expansion of Sadiola mine in Mali is dependent upon the decision of AngloGold Ashanti (NYSE:AU). IAMGOLD stated that it wants AngloGold Ashanti to step up and contribute to the expansion at Sadiola and added that it was not going to fund the entire capital cost of the mine on its own.

AngloGold Ashanti officials were asked about Sadiola's future during the recent earnings call, but they did not say anything specific about what they were going to do with this mine. It looks like the project could be deferred far into the future, or even abandoned.

Bottom line
High costs make IAMGOLD vulnerable to the downside in the gold prices. As long as gold prices continue to rise, the company should demonstrate decent performance. However, the deferral of several projects is not good for company's long term performance.

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