IAMGOLD Corp Remains Vulnerable to Gold Price Downside

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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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 15, 2014, at 6:24 PM, Whitey wrote:

    John Paulson did not reduce his position in IAG and Gold Fields last quarter. IAG could be a good acquisition candidate. Don't forget it's huge niobium asset.

  • Report this Comment On May 15, 2014, at 8:48 PM, philbert wrote:

    got approx $5000.00 to buy gold. what do i buy?

  • Report this Comment On May 15, 2014, at 8:55 PM, philbert wrote:

    troy oz. ? coins? where can i buy them ?

  • Report this Comment On May 24, 2014, at 11:06 PM, kakakabat wrote:

    You forgot to mention that new production is coming and mined gold will be materially increased as operations in Essakane and later Westwood will add to the bottom line

    How about the mined but not processed stockpile? If IAG is right there is 20k gold in that too, which is $25mill straight since expenses were incurred in Q1.

    I agree, that the drop from $640 mill to $136 mill in cash is alarming, but that is nothing new as in the previous year cash dropped $400 mill as well. The company has been banking on high gold prices and it takes time to slow down the ship. I wouldn't count them out yet.

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Vladimir Zernov

Vladimir Zernov believes that fundamental analysis works best with energy and materials stocks and covers them on Motley Fool.

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