It was a mixed bag of news for Iamgold (TSX: IMG; NYSE: IAG) shareholders, as the company released third-quarter results that moved in different directions.
The Toronto-based gold miner beat estimates on lower costs, but profits were hammered by falling gold prices, with commercial production at its Westwood mine in Quebec pushed back.
For the quarter, net earnings plummeted 68% year-over-year to $25.3 million, or just 7¢ a share, compared to $78 million, or 21¢ a share, the previous year.
Revenue was also down, though not to such an alarming degree, as it fell 13% to $293.5 million. While revenues were hurt by the lower gold price, Iamgold offset the damage with higher sales volume. The company had more production than sales in the previous period.
But there is little doubt that the price slump is taking a toll on Iamgold’s bottom line. And while president and CEO Stephen Letwin said on a conference call that the company is optimistic in its outlook for gold prices in the long run, he also said it would be more prudent in its budget plan for next year, steadying the company for a lower gold-price environment.
“Obviously we are all operating in a tough environment,” Letwin said. “The industry is going through a tough time and performance to date is what it is. But we have confidence that we are doing the right things to meet guidance and preserve cash by cutting costs, and allocating capital in the most attractive way for shareholders.”
So while the cost of sales for the third quarter was up $33.1 million to $218.3 million, the number is deceiving, as Iamgold has been successful in its broader cost-cutting program.
At the beginning of the year Iamgold boldly predicted that it would wipe out $100 million from its yearly operating costs, and the third-quarter results showed it was well on its way towards fulfilling its promise.
Costs have been lowered by $77 million so far this year, and the company is on target to meet its cost-reduction guidance.
“We are a low-grade producer, we are who we are, and because of that have to strive for cost efficiencies,” Letwin said, before adding that the company wouldn’t rest on its frugal laurels.
“We won’t stop here,” he intoned. “We will keep cutting, of course, without ever compromising safety or our sustainable-environment position.”
And while BMO Capital Markets Analyst David Haughton was impressed with the cost savings — all-in cash costs came in at US$807 per oz., compared to Haughton’s US$872 per oz. forecast — he was also slightly surprised about the positive earnings news.
“The EPS beat is mostly due to the operating costs being 7% lower than forecasted,” Haughton wrote in his research note. Haughton has Iamgold rated as “market perform,” with a $6 price target.
Looking closer at operations, the quarter’s gold sales of 195,000 oz. came on the back of 228,000 oz. production. And while those production totals included 43,000 oz. pre-commercial gold from Westwood, anxious investors will have to wait longer for the mine to reach commercial production. It expects that time to come in next year’s third quarter, which is one year later than expected.
The delay largely owes to a rock burst in August that forced the company to modify the mine for better safety. While rock bursts aren’t uncommon in underground mining, it coincided with the mine-service hoist issues that forced the lengthy delay.
Scotiabank analyst Tanya Jakusconek believes such a pushback at Westwood is significant, and she cut her price target by 50¢ to $6, after factoring in less production from Westwood into her model.
Letwin, however, remains upbeat on the mine’s prospects.
“We’re pleased with the work being done [at Westwood],” Letwin said. “There have been a few hiccups with operations this year that changed our ability to get to commercial production as quickly as we would have liked, but in terms of its economics, it is as strong or stronger than what we thought a year ago. This mine stands out as one of top performers going into the future.”
The company maintained an annual production guidance of 875,000 to 950,000 oz. gold, at cash costs between US$790 and US$840 per oz.
On Nov. 6 — the day after the results were released — the company’s shares were off 2%, or 10¢, to $5.08, on 2.33 million shares traded.
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