Iamgold CEO Letwin: Gold Could Be Lower For Longer

In November 2011, IAMGOLD Corp (TSE:IMG) quoted nearly C$24 on the TSX. It closed yesterday at C$2.83, down to lows last seen in 2001 (Figure 1 – Monthly chart).

Iamgold-chart-monthly

Figure 1 – Iamgold monthly chart

To a large extent, of course, the decline in the gold price is responsible, but the company recognizes that it must reduce its cost of production of gold (‘all-in sustaining costs’, or AISC) from the current level of US$1,115 reported in the third quarter.

“Cost reduction and disciplined capital spending remain a constant focus and are reflected in costs per ounce trending downwards for the third consecutive quarter,” Iamgold CEO Steve Letwin said in a statement. “At US$1,115 an ounce, all-in sustaining costs are down US$69 an ounce from the first quarter of this year, moving us closer to our near-term goal of US$1,100 an ounce.”

Ideally, however, Letwin would like to trim expenses by a further US$100 per ounce, or nearly US$100 million annually.

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Figure 2 – CEO Steve Letwin

In an interview with Bloomberg, Iamgold CEO Steve Letwin said, however, that he expected gold prices, and therefore company valuations, to remain low for a while yet.

“Our reality is gold could stay in the $1,100 to $1,300 range for another five years,” he said, and suggested that in the interim, companies should reduce costs, strengthen balance sheets and use M&A to achieve lower cost profiles.

Engaging with the downturn

Recently, the company sold its Niobec mine, which produced niobium, a material used to toughen steel, to a consortium headed by Magris Resources, a company founded by Aaron Regent, the former head of Barrick Gold Corp. (TSE:ABX), for US$530 million. (Read our earlier article “Aaron Regent and His Marquee Investors Acquire Niobium Mine” here)

“This sale unlocks the value of Niobec for our shareholders, positions Iamgold as a pure gold play and significantly improves our liquidity, which provides us with the opportunity to further improve the grade and cost structure of our portfolio of gold assets,” Letwin said at the time.

The company was able to improve its cash position at the end of the third quarter by 42% from June 30, 2014. It reduced its 2014 capital expenditure guidance by 10% to US$360 million +/- 5%.

The company’s focus on cost control, liquidity and balance sheet strength is also apparent in its November 10 statement which announced a reduction in the size of its executive team by 40%, a reduction of 10% in the corporate general and administrative costs in 2015 and a cutback in the number of corporate memberships, including withdrawal from the World Gold Council.

A solid balance sheet is key to surviving in commodities, said Letwin in the Bloomberg interview. “The one thing you learn is you never run out of cash,” he said. “That’s the same here in the gold business. You’ve got to keep a very strong balance sheet because at times like this the banks start to squeeze you.”

These measures regardless, Standard & Poor’s Ratings Services last week lowered Iamgold’s long-term corporate and issue-level ratings on the company to ‘B+’ from ‘BB-‘, and removed the ratings from CreditWatch, where they were placed with negative implications Oct. 3. “The downgrade primarily reflects our expectation that IAMGOLD’s core credit ratios and operating efficiency will weaken following the sale of the company’s Niobec Inc. subsidiary,” said Standard & Poor’s credit analyst Jarrett Bilous.

Combine to survive

On M&A, Letwin revealed that Iamgold was on the lookout for attractive acquisitions, while it could also consider selling itself. Active discussions were in progress regarding potential transactions, and one could materialize as early as next year, he said on the interview.

In a recent presentation, the company also laid out the criteria for evaluating an acquisition candidate.

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Figure 3

“We would look for an acquisition that adds value, that would change our mix so that we have a lower all-in cost,” he said. “We would look at corporates that would do the same thing. Either we use our paper and cash to create a better entity overall, with a smaller player, or we become part of a bigger player.”

Images credits:

Title image of mining and Figure 3 – Iamgold presentation

Figure 1 – www.tradingview.com

Figure 2 – CEO.CA

 

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