IMG:CC - Iamgold: Poised For A Strong Uptrend As Gold Turns Bullish

2023-10-27 07:58:19 ET

Summary

• IAMGOLD Corporation has a Buy rating, but investors should wait for a significant pullback in the stock price first.
• The inverted US Treasury yield curve suggests an economic recession by 2024, which would benefit gold prices and IAMGOLD stock.
• IAMGOLD is well-positioned to benefit from the expected rise in gold prices as it will also experience increased gold production as a result of a new asset in Ontario.

This Analysis Assigns a Buy Rating to the Stock in IAMGOLD Corporation

IAMGOLD Corporation (IAG) has a Buy rating that should not be implemented immediately, but after a significant pullback, which this analysis believes will occur in the stock price due to a new wave of aggressive posturing from the US Federal Reserve.

The inverted US Treasury yield curve indicates that the aftermath of the hawkish stance will likely be an economic recession as early as 2024, which would bode well for gold prices and also for gold producer IAMGOLD stock.

The Canadian gold producer is well-positioned to benefit from the expected rise in gold prices given its strong positive correlation with the yellow metal. On top of this, the company will see a sharp increase in gold production as a new asset in Ontario begins producing ounces in early 2024.

How Past Performance Can Be Used to the Benefit of Retail Investors

It is often used for predictions because unless the normal course of things changes and is replaced by a new routine, the trend that has proven dominant over the years has the best chance of continuing to prevail in the future as well.

For example, in the case of IAMGOLD Corporation or IAG, the past plays a large role in the decisions that the retail investor must make regarding this stock, in anticipation of a new season of very strong increases in the price of gold which this analysis predicts.

Against this background, IAMGOLD must attract the attention of the retail investor, since the shares of this gold producer in Canada and Burkina Faso have a strong tendency to fluctuate significantly more than the fluctuations in the price of gold, and by taking advantage of this feature, the retail investor has a very real chance of making an excellent return the next time gold prices rise.

A significant portion of IAMGOLD's past share price performance, which can be summarized in the Seeking Alpha chart, also shows that this stock is poorly suited for investment strategies aimed at holding its shares in the portfolio for the medium/long term.

For example, if you take the past five years as a time horizon, shareholders of IAMGOLD had to accept a loss of 34%, while instead the price of gold rose by 39.53%, and in the wake of the precious metal, gold stocks listed in the US stock exchanges also rose by a whopping 51%.

In addition, by not taking gold price cycles into account, unchanged positions in this security run the risk of having to record a large loss on the balance sheet if the retail investor needs to recover the investment to cover sudden expenses or for other needs.

As the chart above shows, if the retail investor were to sell IAMGOLD shares now, he would find a significantly lower cash value than five years ago, assuming he had bought shares of this company on the US stock market.

Additionally, the stock has not paid dividends since 2013.

This is What the Strategy with IAMGOLD Stock Should Look Like

From IAMGOLD Corporation, one should instead take advantage of the large fluctuations that the stock price shows on the stock market by imitating the same trend as the price of gold.

Thus, by purchasing the shares of IAMGOLD, perhaps after a significant decline, the retail investor has the opportunity to earn a good margin of return in a short time provided the investment is made before a strong recovery in the gold price.

This strategy is in line with the current times because the consideration that must be given to cash now more than ever due to rising interest rates, makes it necessary to look for ways to revalue this asset as much as possible and thus prevent it from being allocated unproductively.

A Strong Correlation Between IAMGOLD and Gold Awaits the Bullish Gold Catalyst: The Economic Recession

The conditions for such a strategy to achieve the desired effects are all in place, including the strong positive correlation that IAMGOLD has with gold, and a new tailwind for the shares that should come from a substantial upgrade in the company profile, which could cross with the expected bullish sentiment in the gold price.

As the yellow area in the lower section of the chart above shows, IAG shares, and gold futures are positively and strongly correlated. The range is also very often close to the upper limit of the correlation coefficient range of -1 to +1.

As mentioned above, IAG has lost heavily over the past five years, while gold futures have gained significantly. However, this has nothing to do with the positive correlation. Investors don't need to get confused here. The correlation is positive because it explains what happened between these two securities over the last five years: When the price of gold rose, IAG shares most likely did that too. However, the price of gold has been able to recover its losses much more quickly and efficiently than IAG, which explains why the price differences five years ago and today point to a profit for gold and instead a loss for IAG.

Under pressure from the US Federal Reserve's "higher for longer" stance on interest rates, IAG shares are on track to become significantly cheaper relative to the growth opportunities.

This is because the higher interest rate to combat core inflation while increasing the risk of recession, of which consumer confidence is currently a strong indicator (as consumers account for more than 68% of US GDP ), increases the opportunity cost of holding gold and gold-backed securities rather than U.S. bonds and other fixed-income securities. Therefore, higher demand for fixed-income securities rather than zero-yielding gold tends to put negative pressure on the price of the yellow metal and its myriad securities, including IAMGOLD Corporation shares.

In the case of IAMGOLD or IAG, shares have a chance to trade cheaper than current levels compared to the rosy outlook. Currently, the shares of IAMGOLD, or under the symbol IAG, are trading on the New York Stock Exchange at $2.44 per unit, for a market capitalization of $1.17 billion, at the midpoint of the 200-day simple moving average of $2.60 and the 50-day simple moving average of $2.27.

Shares are also slightly above the $2.32 midpoint of the 52-week range between $1.30 and $3.34 but based on the 14-day RSI of 55.89 and its likely direction amid the "higher for longer" Fed, this analysis believes that shares can still go down significantly and reach $1.

This stock price target would, among other things, adjust the EV/12-month EBITDA ratio of IAMGOLD from the current level of 15.02x to around 7x, as Aswath Damodaran , a professor of business administration and equity valuation at New York University's Stern School of Business, suggests as fair value for gold mining and exploration stocks.

A share price for IAG stock at or near $1 would be similar to what happened in early autumn 2022, when further monetary tightening led to bearish sentiment toward U.S.-listed stocks and led to, among other things, that IAG stock fell to about $1.

Let's say $1.50 would also be good since this level was more common in the autumn of 2022.

The likelihood is high as IAG stock has a 24-month beta of 2.41x (scroll down to the "Risk" section of this Seeking Alpha webpage ), meaning the Canadian gold miner's shares are falling faster than the US stock market. Also, the major headwind for the gold price is resurfacing as Fed Chairman Jerome Powell hinted last week Thursday at the possibility of further rate hikes in order to return to 2% inflation. The main objective of monetary policy, namely the situation in the labor market, continues to support consumption, although eleven rate hikes have tried to dampen it.

But the fallout from the Fed's hawkish stance on interest rates will result in a significant worsening of the economic cycle, as the spread between the one-year US Treasury yield and the ten-year US Treasury yield, which currently consists of an inverted yield curve, continues to point to.

Currently, the one-year yield is 5.434% versus a 10-year yield of 4.908%.

Normally, the one-year yield must not exceed the 10-year yield, because the longer the term of the loan, the higher the risk of default, and the higher the yield (reward) must be. However, when the one-year yield exceeds the 10-year yield, the short-term outlook is considered very risky, indicating that something negative is ahead for the economic cycle.

This indicator is very good at predicting an economic recession. As the GuruFocus chart shows, seven of the seven declines over the past sixty years were predicted by this inverted yield curve indicator.

But an economic recession will send investors flocking to the safe haven of gold as they fear the relative headwinds could devalue the assets in their portfolios. Subsequently, the increase in gold demand could create strong upward pressure for IAG stock price as listed US-listed gold stocks provide a more practical way for retail investors to gain exposure to the gold price, while institutional investors are also looking for physical gold.

On the cards, IAG should profit amazingly when gold prices have a bull market, in line with a beta gold coefficient of 3x and a determination coefficient of 38%. The beta gold 3x means that a positive change in the price of gold, on average, is potentially reflected in a three-fold increase in the IAG share price. The coefficient of determination instead means that a change in the price of gold determines 38% of the change in the price of the stock, which is an acceptable level for the assumed relationship. These values were derived from a linear model using 52-week future gold price returns as input and 52-week IAG stock price returns as output. 52 weeks was considered a sufficient testing period as the next markets are likely to look like the last 52 weeks due to the persistence of the same geopolitical and macroeconomic factors.

The combination of these factors and the growth catalyst of an improved business profile has the potential to have an amazingly positive impact on IAMGOLD Corporation's share price.

The same considerations apply to shares of the stock in IAMGOLD Corporation traded on the Canadian market.

On the Toronto Stock Exchange, under the ( IMG:CA ) symbol, shares were trading at CA$3.41 per unit as of this writing for a market cap of CA$1.61 billion. Shares are trading below the 200-day simple moving average of CA$ 3.51 but significantly above the 50-day simple moving average of CA$ 3.10.

Shares are also above the middle point of CA$ 3.165 in the 52-week range of CA$ 1.80 to CA$ 4.53. Additionally, the 14-day RSI's trend of 63.60 suggests that shares have plenty of room for downside in a high-interest rate environment and create more attractive entry points for a Buy rating.

About IAMGOLD Corporation: The company's Profile is Strengthened

Toronto, Canada-based IAMGOLD Corporation produced 220,000 ounces of attributable gold in the first half of 2023 from its assets consisting of a 90% interest in the Essakane mine in Burkina Faso and a 100% interest in the Westwood mine on 1,925 Hectares of land in Quebec and is now expected to add another production line in Ontario, Canada called the Côté Gold Project.

The company is targeting between 410,000 and 470,000 ounces of attributable gold production for the full year 2023, but with the addition of the Côté Gold Project, which is expected to cast its first yellow metal in early 2024, annual production will follow massively upgraded as Ontario's mining assets will deliver 495,000 ounces in each of the first 6 years.

The mine will be operated by IAMGOLD Corporation, which also holds a 60% indirect interest in the asset, while Sumitomo Metal Mining Co., Ltd. (SMMYY) and Treelawn Group Inc. complete the trilateral joint venture with 32.2% and 7.5% interest in the Côté gold project.

The Côté Gold Project mine has an estimated mine life of approximately 18 years and over this period the operator will mine a total of 6.578 million ounces of gold, or 367,000 ounces per year.

The sharp increase in the price per ounce of gold, which is expected to take place as early as 2024 as a result of higher demand for safe-haven gold against recessionary headwinds, will therefore meet the tailwind of significantly higher gold production thanks to the contribution of the Côté Gold Project, in addition to existing Essakane and Westwood.

But it's not just the overall IAMGOLD production that will benefit from the Côté gold project in Ontario, as the All-In Sustaining Cost per ounce of gold sold (AISC/ounce), which is estimated at $1,625 - $1,700, will also be significantly improved following the introduction of the new line of gold production in the rock-bottom mining region of Ontario.

It has to be said that IAMGOLD can really breathe a sigh of relief in terms of total AISC/ounce from managing three mining facilities instead of just two starting in 2024. Keep in mind that costs will continue to move towards the upper limit of the forecast range for at least the remainder of 2023 and for some time in 2024 due to inflationary pressures and the threat of a recovery in energy costs due to the conflict in Ukraine and Hamas' attack on Israel. However, this trend will affect not only IAMGOLD but other companies as well.

While recognizing the transitory nature of most of the situations that have recently caused IAMGOLD's AISC/ounce to increase its margin above the industry average (IAMGOLD's AISC from continuing operations was $1,525/oz. in the first quarter of 2023 or indeed $1,912/oz. in the second quarter of 2023 versus the industry average of $1,358/oz .), the Côté Gold Project can, however, work as an effective mitigating force once its performance in Ontario is combined with that of Westwood and Essakane.

A significant part of the marginal growth in the AISC/oz. will still disappear if the underlying cause is resolved. This is actually easier to achieve at Westwood than at Essakane Mine. In Westwood, the company's teams are engaged in development and rehabilitation work, the impact of which on the balance sheet will be much lower going forward, as the activities are moving faster than expected and as an indication, most of the consequences were already felt in 2023 rather than 2024. In Essakane, the insecurity of the situation in the country of Burkina Faso due to recurring terrorist attacks, unfortunately, continues to pose a threat to mining activities at the Essakane mine as well. The success of these activities, which are mainly stripping activities, is fundamental because it affects the possibility of access to the storage of precious metals.

If the significant increase in costs may have contributed to the bearish sentiment on IAMGOLD over the past five months, now with its positive impact on overall production and costs, the Côté Gold project will certainly help restore a climate of confidence around this stock, perhaps just in time to join the tailwind from the expected recession (as early as 2024)-induced rise in gold prices.

The comparison between the Côté Gold project with Westwood and Essakane in terms of production and costs provides a meaningful indication of the impact of the introduction of the second production line in Canada on IAMGOLD's future profitability.

The Côté gold project will mine 495,000 ounces at an AISC of $851/ounce in each of the first six years, while for the full year 2023, Essakane is expected to mine 340,000 to 380,000 ounces of gold at an AISC of $1,234/ounce, and Westwood is expected to mine 70,000 to 90,000 ounces of gold at an AISC of $2,568/oz. Besides the tangible results from development and rehabilitation work, the performance of the Westwood mine will also benefit from higher-grade material coming from the Fayolle deposit, located approximately 30 kilometers northwest of the Westwood complex.

Furthermore, the Côté gold project in the IAMGOLD's portfolio of operating mines will significantly lower the country risk weighing on the business, as over 50% of total production will now come from gold mine-friendly jurisdictions in Canada compared to the current 20%, so the high risk as the Sprott Mining Risk Heat Map 2023 estimates for Burkina Faso will be offset more effectively.

The Financial Situation Seems Sufficient to Sustain the Business

IAMGOLD can sustain all the above activities, including the $425 million to $475 million expected for the financing in H2-2023 of the Côté Gold project, with a balance sheet that looks solid as of June 30, 2023.

The company was able to utilize total liquidity of $1.2 billion, of which 62.3% was in cash and cash equivalents and the remainder in the credit facility.

Net debt was $280.3 million and total debt was $965.8 million, of which $450 million was under secured senior notes bearing an interest rate of 5.75% per annum, maturing on October 15, 2028.

Additionally, the majority of the Côté Gold Project is funded by a $400 million term loan agreement that closed on May 16, 2023, meaning the credit facility remains undrawn. The latter represents a notable source of funding to support future operations, including Côté's ramp-up phase, which will soon provide the company with significant additional production of attributable gold.

Meanwhile, the five-year loan contract will not be the most economical in terms of the financial costs to be borne since, compared to the current 5% yield on five-year US Treasury bonds, the contract implies variable interest costs based on the Secured Overnight Financing Rate (SOFR) + 8.25% per year.

However, the company is expected to receive gross proceeds of approximately $197.6 million from the sale of the Boto Gold Project and other mineral activities in Senegal in April 2023, of which 16% is expected before year-end. In addition, IAMGOLD will raise approximately $84.4 million through the sale of certain assets in Mali and Ghana, which is expected to be completed by the end of the current year.

Conclusion

The IAMGOLD stock is assigned a "Buy" rating to be implemented following a decline in the share price which this analysis assumes is highly likely.

The fallout from the restrictive policies will be an economic recession as early as 2024, with headwinds strengthening gold's safe-haven qualities. Such a situation should bode well for shares of the Canadian gold producer IAMGOLD Corporation.

The Canadian gold producer is strongly positioned to benefit from the expected rise in gold prices. An upgrade to the company's profile is likely to be triggered by a new facility in Ontario that will begin producing ounces in early 2024.

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