Each week, we span the globe to find income investments with competitive yields relative to risks we can identify. This week, we turn north to Canada, where the US dollar denominated (Yankee) bonds of IAMGOLD Corp. (IAG), a mid-tier gold producer, appear to be offering a yield to maturity of about 8.75%. IAG has been working diligently over the past year to lower its “all-in sustaining costs” of $1,196 per ounce sold at the end of second quarter of 2013, down to $1,136 per ounce sold at the end of Q2 in 2014. After projecting a strong ramp-up in production in the second half of 2014, its total cash costs per ounce are expected to benefit from achieving commercial production status on July 1st at its new Westwood mine. IAG also has some diversity within its operations as one of the top three global producers of niobium, a valuable metal used to strengthen steel for pipeline construction as well as for the auto and aerospace industries. Global demand and price for niobium has steadily increased over the past decade, and as a result of increased niobium production and sales in the first six months of 2014, IAG management has increased forecasts for production and operating margins for second half 2014. Consequently, we think the nearly 8.75% yield indicated in these 6 year, BB-/B1 rated IAMGOLD Yankee bonds offer an excellent return relative to the risks that we can identify, and have targeted them for addition to our global high yield Fixed-Income1.com and Fixed-Income2.com portfolios.
About the Issuer
Originally founded in 1991, IAMGOLD currently has a stake in six operating gold mines on three continents as a result of numerous joint ventures, acquisitions and mergers. Its niobium mine is one of the world’s top three, responsible for an 10% market share. It currently has joint venture interests at its Sadiola, and Yatela mines in Africa. It holds a 90% stake in the Essakane mine, also in Africa (Burkina Faso) and a 95% stake in the Rosebel mine, located in South America (Suriname).
The new Westwood mine is a significant addition to IAMGOLDS’s portfolio of mines. This mine is located amidst one of the biggest and richest gold mining areas in Canada, containing several significant gold deposits. It is also only two kilometers away from the now depleted Doyon / Mouska mine, where IAG refurbished the existing ore processing facilities to process ore from Westwood. This mine went into full commercial production beginning July 1, 2014, and is 100% owned by IAG. The only other currently producing mine in its portfolio that is 100% owned by IAG is the Niobec niobium mine, also located in Quebec. Significant factors of the Westwood mine are the average reserve grade, reduced cost per ounce for gold, and increased production.
Average reserve grade is measured in grams per ton (g/t). A gold mine with an average grade of 1.5 g/t, means that every ton of dirt mined will yield 1.5 grams of gold. The average grade across all of IAG’s mines is only 1.2 g/t. However, the Westwood mine has an average grade of 10 g/t, more than 7 times greater than the average for all of the other IAG gold mines. This translates to a lower price per ounce, with less labor and processing needed to gain access to the gold.
Westwood, in full commercial production, will produce gold at a lower cost per ounce than other IAG mines. IAG implemented cost cutting efforts across the company in 2013, achieving $125 M in cost reduction. This translated to a reduced, all-in sustaining cost per ounce of gold of $1,232. Cost reductions have continued in 2014, with price per ounce at the end of Q2 of $1,136, down 5% from Q1 2014. The cash cost per ounce from Westwood is expected to average between $750 and $850 for 2014. As cost efficiencies increase at Westwood, the company forecasts average cash cost per ounce of $630 to $690 over the lifespan of the mine (16-19 years).
Westwood will also add between 180,000 and 190,000 ounces of gold each year to IAG’s annual gold production, an increase of almost 25% over current levels. In short, Westwood adds remarkable production increase, reduces overall cost per ounce of mined gold and also reduces IAG’s geopolitical risk as it is located in its home country.
Finally, it is worth re-mentioning IAG’s Niobec mine, which is one of the world’s top three producers of niobium. Demand and price for niobium has increased dramatically over the past decade. Its primary use is as a steel hardener, used as an alloy element for certain types of high-strength and stainless steel, which is then used in the auto and aerospace industries as well as superconductors. In the first six months of 2014, IAG niobium production increased from 2.4 million kilograms to 2.7 million kilograms as compared to the same time period in 2013. Correspondingly, niobium sales (kg of niobium sold) increased 16% over that same time period, and the company’s operating margin went from $17 / kg to $19 /kg. We see this Niobium mine as a stable cash flow generating asset for the company.
After suspending the dividend equity holders last December, IAG’s balance sheet benefited and appears to be quite healthy. Perhaps the most noteworthy item on IAG’s balance sheet is the large amount of cash, cash equivalents and gold bullion. As of June 30, 2014, IAG had about $297.3 million in cash and gold. This amount alone would cover close to half of its long-term debt of $650 million leaving it with a net debt of $350 million. The company has also renewed its existing short form base shelf prospectus as of January 2014 qualifying the distribution of securities up to $1.0 billion. If needed, IAG should rather easily be able to raise additional capital through the offering of additional equity to help meet its debt obligations.
IAG has a healthy interest coverage ratio of 8.93. This was computed with the omission of the one-time impairment charge on the year-end 2013 balance sheet of $881.1 million. Without this charge, IAG recorded operating income for 2013 of $217.9 million.
Gold mining requires large investments in hard assets such as heavy machinery as well as substantial investment amounts to purchase the land where mines are located. On IAG’s balance sheet for year-end 2013, these mining assets are valued at $2.5 billion. These should also be saleable assets should IAG require additional funds to pay bondholders.
Issued in September 2012 with a 6.75% coupon rate, IGA’s $650 million debt note matures in September 2020. Moody’s rates these bonds B1, one below the IAG’s corporate family rating of Ba3, while S&P rates it at BB-.
The default risk is IAMGOLD’s ability to perform. Mitigating this risk is its strong balance sheet (large amounts of cash and gold bullion in reserve), as well as the value of IAG’s hard assets, which we think sufficiently covers the value of this $650 million long-term debt. In addition, IAG could issue additional equity to help with interest payments or debt principal.
Since its main revenue comes from the sale of gold on the open markets, its revenue stream is sensitive to movements in the price of gold. Gold prices can be affected by numerous factors, such as the strength of the US dollar, global economic conditions, supply and demand, interest rates, and inflation rates, all of which are beyond IAG’s control. Gold prices appear to have established an equilibrium price in the last few months between approximately $1,200 and $1,300 per ounce. Additional price declines could compromise IAG revenues and ultimately, its ability to pay interest due on its debt obligations. However, we are encouraged by IAG’s initiative to cost cutting as evidenced by its exceeding its $100 million cost cutting goal in 2013, reducing total cost by $125M for the years. Also, with the new Westwood mine now in commercial production, IAG’s production cost per ounce will continue to trend downward, increasing profitability. We also see the niobium mine as providing cash flow diversity, independent of the gold markets.
IAG has significant exposure to geopolitical risk through its operations in Africa and South America. IAG’s Essakane mine, located in Africa, and their Rosebel mine, located in South America, together produced 70% of its gold production in 2013. The company continues to work on strengthening its relationship with the governments in both locations. As a result of these ongoing improvements, IAG was able to negotiate better tax rates and tariffs in Burkina Faso. (Essakane mine).
There is exposure to foreign currencies in that IAG transacts at the local level for the cost of production of its mines in various locations, including Burkina Faso, Suriname and Mali. With the company’s base of operation in Canada, there is also some exposure to rate fluctuations between the Canadian and US dollar.
We think these 8.75% IAMGOLD US dollar bonds have similar features and risks to other Yankees bonds such as the such as 8.25% HudBay Minerals, the 8.25% Gajah Tunggal, or the 8.45% Camposol S.A bond, which we have reviewed previously on our Bond-Yields.com blog.
Summary and Conclusion
IAMGOLD appears to have positioned itself strategically well for the long-term. Through its company- wide cost reduction program in 2013, its new low-cost gold production at the Westwood mine and its solid balance sheet, we feel the company is prepared to weather the uncertainty of fluctuating gold prices. Therefore, we see the 8.25% yield of these slightly longer 6 year, B1/BB- rated bonds from IAMGOLD as an excellent return relative to the risks that we can identify, and have targeted them for addition to our balanced and globally diversified high yield income portfolios, FX-1 and FX-2.
Issuer: IAMGOLD Corporation
Yield to Maturity: ~8.75%
Disclosure: Durig Capital and certain clients may have positions in IAMGOLD 2020 bonds.
Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports. We welcome inquiries from other advisors that may also be interested in our work and the possibilities of achieving higher yields for retail clients..
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