IAMGOLD Corp Remains Vulnerable to Gold Price Downside

High costs and significant capital spending put IAMGOLD in a vulnerable position in the event of further gold price deterioration.

May 15, 2014 at 10:08AM

Cost performance remains the single most important factor for gold miners as gold prices continue to flirt with the $1,300 per ounce level. This is why IAMGOLD's (NYSE:IAG) shares remain under pressure this year. Although the company recently reported a decrease in all-in sustaining costs, those costs continue to be too close to the current gold price, leaving IAMGOLD vulnerable to gold price downside.

Costs will remain high through 2014
IAMGOLD's all-in sustaining costs were $1,198 per ounce in the first quarter, ranking the company among higher-cost producers like Gold Fields (NYSE:GFI) and Harmony Gold Mining (NYSE:HMY). For example, Harmony Gold Mining's all-in sustaining costs were $1,224 per ounce in the first quarter, in line with fourth quarter all-in sustaining costs of $1,222 per ounce. The situation for the company remains tense, as Harmony Gold Mining is unable to show meaningful progress on the cost front this year.

Gold Fields is in a better situation than IAMGOLD, with all-in sustaining costs of $1,066 per ounce. However, there's still a lot of work to do for Gold Fields, as industry leaders have already pushed their costs way below the $1,000 per ounce mark.

IAMGOLD expressed optimism about its future cost performance during its quarterly earnings call. The company stated that it might be able to bring cash costs down by $100. However, this will probably not happen until 2015. This year, the company maintains its all-in sustaining cost guidance of $1,150-$1,250 per ounce as well as its $400 million capital spending guidance.

Cash burn continues at current prices
IAMGOLD's capital spending continues to exceed its operational cash flow. The company received $28.1 million of cash from operations in the first quarter, while it spent $104.3 million on its investment needs. The difference between cash inflows and outflows is more remarkable if we compare the cash balance at the end of the first quarter of 2013 with the cash balance at the end of the first quarter of 2014. 

A year ago, IAMGOLD possessed $648 million of cash on the balance sheet, while it had $139.9 million at the end of the first quarter of this year. Without significant improvements on the cost front this year, IAMGOLD's operational cash flow could increase only if gold prices rise. Should gold prices stay at current levels, the company will continue to use cash from the balance sheet.

Importantly, IAMGOLD had $174 million worth of gold bullion at the end of the first quarter. The company also has access to $750 million in revolving credit facilities. This means that liquidity is not an issue for IAMGOLD in the near term. That said, the difference between operational cash flow and capital spending remains an issue. In case of further gold price downside, the company will likely cut its investment program.

Bottom line
Consistently high costs remain an issue for IAMGOLD. The company's bottom line is highly sensitive to gold price downside, which puts pressure on IAMGOLD shares. The company stated that it expects costs reductions in 2015, but investors would like to see faster improvements. One can expect further downside in IAMGOLD shares if gold prices reach the $1,250 mark.

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Vladimir Zernov has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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