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Morningstar | Seismic Activity Forces Iamgold to Reassess Westwood’s Mine Plan; Lowering Fair Value Estimate. See Updated Analyst Note from 07 May 2019

Iamgold produces about 800,000 to 900,000 ounces of gold a year, one of the smallest gold miners under our coverage. Production stems mainly from three mines, which magnifies the impact on our companywide fair value estimate should any individual mine run into problems. Unfortunately, this has come to pass in early 2019.

Iamgold’s Westwood mine in Canada experienced increased seismic activity, leading to a 63% year-over-year decline in production to 15,000 ounces. This appears to be a longer-term concern, as the company is now studying a revised mine plan to improve safety, which management admitted will likely lead to run-rate production below initial targets. Our fears were further confirmed when Iamgold reduced its workforce at Westwood by one third in March.

The company reaffirmed its full-year guidance of 810,000 to 870,000 attributable ounces at all-in sustaining cost (AISC) of $1,030 to $1,080. After revising our forecasts, we think the company will miss this guidance, producing just 770,000 ounces at AISC of $1,140 per ounce. We’ve also reduced our exit multiple assumption to 5 times to reflect lower free cash flow conversion that we previously anticipated. In all, this leads us to lower our fair value estimates to $3.30 and CAD 4.50 per share, down from $5 and CAD 6.50, respectively. We maintain our no-moat rating. Although shares trade below our fair value estimate, we reiterate our very high uncertainty rating. Iamgold’s concentrated portfolio magnifies the impact of individual mine risks, leading to large swings in value.

After last raising the interest rate in December 2018, the Fed has paused its increases, leaving the federal-funds target rate at a range of 2.25% to 2.50%. Amid signs of a slowing economy including slowing consumer spending and business investment, the Federal Open Market Committee, or FOMC, now sees no rate hikes in 2019. The dot plot has reflected a meaningful change in expectations, as the December dot plot implied two rate hikes this year.

The market view is even more bearish. Current interest rate options not only imply no chance of a rate hike but more than 50% chance that there is at least one rate cut by the end of 2019.

All else equal, the turn in the Fed’s sentiment on its rate hike path has reduced the downward pressure on investment demand for gold that we’ve observed over the last few years. However, the FOMC would likely return to rate hikes if inflation were to strengthen due to stronger economic growth. Although pressure on investment demand for gold has softened, we don’t expect a strong resurgence in the near future.

On the back of stabilizing investment demand, gold prices have settled in the high-$1,200 to low-$1,300 per ounce range, falling roughly in line with our forecast for a nominal gold price of $1,300 per ounce by 2020.