EUR 850.00 For Business Accounts Only

Morningstar | Trimming Iamgold FVEs on Higher Sustaining Capital Expenditures in 2Q. See Updated Analyst Note from 09 Aug 2018

In the second quarter, Iamgold produced 215,000 attributable gold ounces, largely in line with last year’s 219,000 ounces. Costs increased a bit, with all-in sustaining costs reaching $1,077 per ounce from $975 per ounce. With year-to-date attributable production of 450,000 ounces at AISC of $1,012 per ounce, Iamgold is within striking distance of management's reiterated full-year guidance for 850,000-900,000 ounces at $990-$1,070 per ounce, which we think is achievable.

Although the company maintained its 2018 production and cost guidance, it reduced its capital expenditure outlook to $325 million from $365 million. Of the reduction, $60 million was due to nonsustaining capital spending being pushed into 2019, which had little impact on our model. However, a $20 million increase in sustaining capital led us to slightly increase our longer-term sustaining capital forecast. As a result, we’ve lowered our fair value estimates for no-moat Iamgold to $6.50 per share and CAD 8.50 per share from $7 and CAD 9, respectively. With the shares trading just above $5 and CAD 6.60, we think Iamgold looks slightly undervalued on a risk-adjusted basis.

In June, the U.S. Federal Reserve raised the federal-funds rate by 25 basis points to 1.75%-2%. This was the second rate hike of the year. Most officials at the central bank expect two additional rate hikes in 2018. The market appears to be largely in line with this view, as current interest-rate options prices imply a more than 66% chance that there will be at least two hikes for the full year.

All else equal, the prospect of higher inflation adds to gold's investment appeal, which is one reason exchange-traded fund gold holdings rose through most of 2018 and spot prices remained above $1,300. However, as we had anticipated, higher inflation has emboldened the Fed to pursue rate hikes at a quicker pace, which lifts the real interest rate and, in doing so, increases the opportunity cost of holding gold.

Historically, we've observed a strong inverse relationship between the real interest rate and the price of gold: When the former rises, the latter tends to fall. We thought it was only a matter of time before gold investment adjusted to the higher opportunity cost, leading not only to slowing investment demand but also outflow of gold from ETFs back into the gold market. Our prediction has begun to take hold as ETFs saw outflows in all regions in June.

On the back of weak investment demand, gold prices have fallen to slightly above $1,200 per ounce. Nevertheless, we still believe gold has a promising future, and we forecast a nominal gold price of $1,300 per ounce by 2020. We expect that in the long term, Chinese and Indian jewelry demand will fill the gap left by waning investor demand.

For more on why rate hikes present a significant risk to near-term gold prices, please see our August 2017 report, "Gold Is Standing on One Leg."