What: Shares of IAMGOLD (NYSE:IAG), a gold-mining company primarily producing in North and South America, as well as West Africa, announced second-quarter earnings after the closing bell yesterday, and appears to have pleased Wall Street and investors. Shares of the mid-cap gold miner shot higher by as much as 11% during Thursday's trading session.
So what: For the quarter, IAMGOLD reported attributable gold production of 197,000 ounces, all-in sustaining costs (AISC) of $1,114 an ounce, and a gold margin improvement of 36%, to $513 an ounce. Net operating cash flow improved 125% because of its higher margins, to $71.2 million. Although the company ended up losing $0.03 per share, IAMGOLD netted an adjusted profit of $0.01 per share when taking into account one-time costs and benefits. By comparison, Wall Street analysts had anticipated a $0.02 quarterly loss per share.
In addition to better-than-expected quarterly results, IAMGOLD's CEO, Stephen Letwin, in an interview with Bloomberg TV, seemed pretty candid about his company's shot of lowering its AISC amid an expected rise in gold prices. Letwin went on record as predicting a $1,400 year-end gold price, as well as a move to $1,500 an ounce by 2017. Each $100 per-ounce move higher in gold provides IAMGOLD with $80 million in cash flow that goes straight to its bottom line.
Letwin also noted that production ramp-ups at its Westwood mine in Canada, and a planned plant expansion at its Sadiola mine in Mali, could be instrumental to lowering its AISC. Of course, the plant expansion is dependent on cooperation from its Sadiola joint-venture partner AngloGold Ashanti (NYSE:AU) also approving the expansion.
Now what: On one hand, rising gold prices bode well for IAMGOLD, which expanded its year-over-year margins substantially in Q2. There are a number of catalysts fueling gold's ascent, and none show any signs of slowing. For example, market and global uncertainty continue to shuffle investors toward the shiny yellow metal. Brexit-based uncertainty, slowing growth in China, and U.S. political uncertainty, clearly have investors concerned about the near term. We're also seeing growing demand from central banks and investors for gold.
However, the biggest catalyst that could keep gold soaring are plunging global yields. If the opportunity cost of passing up bonds in favor of gold remains low, investors will probably keep buying up precious metals.
On the other hand, IAMGOLD's year-over-year AISC actually rose slightly from last year, which puts into doubt just how much IAMGOLD can further reduce its expenses. A lot depends on what AngloGold Ashanti chooses to do at Sadiola, and whether IAMGOLD can maintain a similar level of production. Also keep in mind that labor costs of operating a mine in Africa tend to be higher than North or South America, due to political instability in the region.
I'm encouraged by IAMGOLD's quarterly results, but I don't consider the stock to be a bargain here. If it can lower its costs, that opinion might change. But with its near-term outlook still somewhat in flux, I'm going to watch this gold miner safely from the sidelines.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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