IAMGOLD vs. New Gold: Why cheap and undervalued aren’t always the same thing

IAMGOLD and New Gold are both mid-tier gold producers with a portfolio of operating mines that generate strong cash flow. However, while New Gold sells for a P/E of 18.7, IAMGOLD sells for a P/E of just 6. IAMGOLD is also “cheap” relative to New Gold based on other metrics too. The question is, is IAMGOLD undervalued or is it cheap for a reason?

Market cap per ounce of reserves

IAMGOLD has 11.3 million of ounces of proven and probable gold reserves, whilst New Gold has 7.7 million. However, the market is valuing New Gold’s reserves at $471, whist IAMGOLD’s are valued at $182 (which is below the market average).

Market cap per ounce of production

In 2013 IAMGOLD is expected to produce 913,000, whereas New Gold is forecasting production of 460,000 ounces. However, the market is placing a higher value on New Gold’s above-ground ounces ($7,926), than it is on IAMGOLD’s ($2,253).

Operating cash flow multiple

As mentioned in my last article, the operating cash flow multiple reveals how the market values profitable production. Again, New Gold’s OCF multiple is 6.8, whilst IAMGOLD’s is just 3.0 (which is below the market average).

IAMGOLD vs. New Gold: Vital statistics

IAMGOLD vs. New Gold Vital statistics

Why is IAMGOLD cheap?

The question is, is IAMGOLD undervalued or is it cheap for a reason?

Relative to New Gold IAMGOLD has a higher Net Profit Margin (48% vs. 25%), and a higher Return On Equity (22.9 vs. 7.9).

On the surface it looks as though Mr Market has made a mistake and that IAMGOLD is undervalued and represents a decent buying opportunity. After all, the company also has $399 million in cash and pays an attractive (4.53%) dividend.

The truth however, is that the market is placing a lower value on IAMGOLD versus New Gold for good reason.

As far as valuation is concerned, the key difference between the two companies is their cash cost. To produce an ounce of gold it costs IAMGOLD $695, whereas it costs New Gold $275. The problem however, is that the number a company reports as it’s “cash cost” is not the true “all-in” cost of sustaining its operations. The all-in cash cost includes the cost of exploration as well as Capex, and for some companies these costs push up the true cost of production considerably.

Right now for example, New Gold’s all-in sustaining cash cost is around $830. However, thanks to high Capex and exploration costs, IAMGOLD’s all-in cash cost is around $1,600, and with gold currently trading at around $1,445 (down from $1,800 two years ago), this presents a serious problem longer-term.

This is a not a problem that is limited to IAMGOLD, there are a several gold producers that cannot produce gold profitably at this lower gold price (at least, not indefinitely).

The precious metals mining industry is under tremendous cost pressures thanks to rising energy and labour costs. As a result several high profile producers have recently changed their focus from “growth at all costs” to a much more cost conscious business model. It is also why larger companies such as Goldcorp (NYSE:GG) and Yamana Gold (NYSE: AUY) have begun reporting an all-in cost metric.

It is also worth noting that due to these lower metals prices we are likely to see some producers stockpile metal rather than sell it in the open market.

Another reason that the market places a higher value on New Gold versus IAMGOLD is that all of its operations are in politically safe regions that have a long history of mining. These include Canada, the US, Mexico, Chile and Australia. However, IAMGOLD’s operations include mines in West Africa (Burkina Faso and Mali) which have higher political risk.

Earlier this week several equities research analysts lowered their price target for IAMGOLD. RBC Capital cut its forecast from $10.00 to $6.00, while Societe Generale downgraded their price target from $8.40 to $5.40. Scotiabank also decreased their price target on shares of IAMGOLD from $9.00 to $6.50.

Conclusion

This type of comparative analysis can reveal companies that have been incorrectly priced by the market and are therefore undervalued. However, IAMGOLD is selling at a discount for a reason and demonstrates that cheap and undervalued aren’t always the same thing.

This article also demonstrates that the market values quality, and this is certainly the case with New Gold.

  1. It’s an interesting collection of data points, but the argument is essentially simple, and fails to adequately establish the conclusion. The article says no more than this: given its high cost of production, Iamgold is worth less per unit than New Gold. However, that much is obvious, the real question is how much less is it worth, a more diligent study should have been done.

    In addition, the author raises the data point of the net profit margin, which is seemingly misleading, in that Iamgold has higher costs, but also a higher net profit margin, and massively higher ROE. These both stem from the presented “Earnings” figure of USD806 million. Since this is far more than the actual attributable earnings figure of USD334.7 million, it deserves some explanation.

    It is possible that the author’s argument, if it were simultaneously tidied up and amended, would hold water. However, there seems to be no persuasive power in the argument as presented, and the data points, in some cases, do not provide clarity.

    Disclosure: I own equity in Iamgold. I do not own stock and have not personally run the numbers on New Gold. I am not planning on trading in the next three days.

  2. So this cash cost vs earnings figure issue – what’s going on here? All in cash is a weird number if there is maintenance vs exploration capex included in those figures. I think you should look at capex historic and return on that capex for example. Take this example for instance. This year I spend 1600/oz on explo capex and and crank out and sell gold at 1600/oz . I’m breakeven. But what if next year I sell gold again at 1600/oz and have only maintenance capex of 100/oz yielding profit of 1500/oz. And not to mention, my back of the envelope valuation of niobium business is 900mm based on CBMM deal not too long ago. EV of 1.8bn currently less 900mm yields about 900mm for all the gold on its BS, present value of profits from future gold production, etc. There is about 200mm of gold bullion on BS so backing that out even leaves you with 700mm in present value for future gold profits. Is that right? Considering that EV was close to 4bn beginning of this year, subtracting 200mm of gold bullion and 900mm for niobium business, 2.9bn for present value for future gold profits was what was attributed. So gold prices dropping 20% wiped off 2.2bn of value or 75% of present value attributable to future gold profits? (calculated: 2.9bn minus current present value of 700mm). That may be right because of high operating leverage for miners and high costs (all in) for IAG, but it sounds a little excessive at first glance. Especially given my view that 1) gold prices should stabilize and 2) niobium business will realize value in market via a sale or JV (and is insulated from gold prices) and 3) investors selling mining ETFs forced the selling of all its constituents indiscriminately regardless of pros and cons amongst them.

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