Iamgold defers Côté expansion, studies bigger build

Iamgold (TSX: IMG; NYSE: IAG) has deferred a planned expansion of Côté Gold while it studies a much larger build that could nearly double the Ontario mine’s processing rate to 70,000 tonnes a day. The stock soared.

Three months ago, Iamgold expected its year-end study to model an expansion from 36,000 tonnes a day to 50,000-55,000 tonnes. It now plans to push the existing plant toward 40,000 tonnes first and has shelved between $500 million and $750 million (C$700 million-C$1 billion) of spending tied to the 50,000-tonne option. Côté, about 500 km north of Toronto, is 70% owned by Iamgold with Sumitomo Metal Mining (TYO: 5713) holding 30%.

“We have adjusted the scope of this work to reflect the significant size and opportunity at Côté,” CEO Renaud Adams said on a second-quarter conference call with financial analysts Friday.

The rethink comes as high gold prices swell cash flow across the sector, giving large producers more room to fund growth while returning more money to shareholders. Newmont (NYSE: NEM), Agnico Eagle Mines (TSX, NYSE: AEM) and Kinross Gold (TSX: K; NYSE: KGC) all reported stronger second-quarter free cash flow while keeping annual production guidance broadly intact.

Côté is one of Canada’s newest large gold mines, having reached commercial production only two years ago. Combining Côté with the adjacent Gosselin deposit has given Iamgold scope to bring a much larger resource into the mine plan, but higher processing rates would force earlier development of Gosselin and require more tailings capacity. The year-end study is to show how aggressively the miner plans to pursue that growth.

Toronto-listed shares of the company rose 12% to C$25.25 Friday afternoon in Toronto, giving Iamgold a market capitalization of C$14.5 billion ($10.4 billion). The stock has more than doubled over the period, trading between C$9.80 and C$34.09.

Expansion path

Iamgold plans to release an updated mine plan by year-end that combines Côté and Gosselin for the first time. Management expects it to show a larger reserve base and longer mine life while setting out the upgrades needed to sustain about 40,000 tonnes a day. The report will separately examine larger expansion options.

A 70,000-tonne scenario would change how the two deposits are mined. At 36,000 to 40,000 tonnes a day, Iamgold can draw down Côté for longer before moving heavily into Gosselin, Adams told analysts. At about 70,000 tonnes, it would need to mine both pits much earlier.

The larger expansion would not materially change work over the next two to three years. Iamgold plans to open more of the pit, add mining capacity, cut costs and lift plant throughput before committing to another major build. Management had previously expected the 50,000-tonne expansion to begin around 2029 or 2030.

Côté produced 96,200 oz. in the three months ended June 30, on a 100% basis, including 67,300 oz. attributable to Iamgold. The plant processed more than 1 million tonnes in June after Iamgold replaced a conveyor belt and commissioned a second cone crusher.

The company expects Côté to produce 390,000 to 440,000 oz. this year on a 100% basis.

Resource scale

The March resource update outlined 838 million measured and indicated tonnes grading 0.75 gram gold per tonne for 20.3 million contained oz. for Côté, Gosselin and the zone connecting them. Another 177.1 million inferred tonnes graded 0.61 gram for 3.48 million ounces.

Measured and indicated ounces rose 12% from the year-end estimate, though the increase did not come from drilling alone. Iamgold raised the gold price used to model the Côté resource to US$2,500 an oz. from US$2,100 and lowered the minimum resource grade to 0.25 gram per tonne from 0.30 gram. The higher price assumption and combining the deposits into one model drove much of the increase, Iamgold said.

Gosselin now contains 310.9 million indicated tonnes grading 0.74 gram gold per tonne for 7.43 million oz., plus 41.4 million inferred tonnes at 0.67 gram for 890,000 ounces. Iamgold expects the year-end work to convert part of that resource into reserves as it folds Gosselin into the operating plan.

Tailings needs

The larger mine would require more waste and tailings storage. Côté’s existing tailings facility can hold about 233 million tonnes, but adding Gosselin will require extra capacity, chief operating officer Bruno Lemelin told analysts.

Iamgold is studying an expansion of the storage area as well as placing tailings and mine waste in depleted parts of the Côté pit. Management plans to use the next few years to advance environmental studies and permitting while it settles on the larger mine design.

Funding room

Iamgold approaches that decision with a stronger balance sheet. It ended June with $501 million in cash, no borrowings under its revolving credit facility and about $1.35 billion of available liquidity. The company reported $369 million of mine-site free cash flow in the second quarter.

That gives Iamgold more room to improve the existing Côté operation while delaying its biggest expansion cheque until management decides how large the Côté-Gosselin mine should become.

Iamgold posted second-quarter adjusted net earnings of $241.6 million, or 42¢ a share, more than triple the $77.3 million, or 13¢ a share, a year earlier. The miner kept its full-year production target at 720,000 to 820,000 attributable oz. of gold, with all-in sustaining costs of $2,000-$2,150 per oz. including royalties and total capital spending of about $500 million.

Costs are running high so far this year. First-half all-in sustaining costs were $2,195 per oz., above the full-year range. Iamgold expects lower costs in the second half as Côté production rises.