Market Cheers Iamgold's Decision To Put Cote Gold On Pause

IAMGOLD announces decision not to proceed with the construction of Cote Gold project.

Previously, I noted that investors were worried about this major investment as many gold projects fail to deliver return nowadays.

This is a positive catalyst for the company which will provide some support for its beaten shares.

Recently, I have written about IAMGOLD's (IAG) 2018 production and 2019 guidance report and noted that both cost and production estimates for 2019 did not look good. I stated that the market was worried that Cote Gold project was coming at a wrong time when investors wanted to see tangible results rather than promises and new investments. This statement was vividly discussed in the comments section with the most bullish investors pointing to the various advantages of the Cote Gold project.

It turned out that IAMGOLD got the message from the market and swiftly announced that it was putting Cote Gold on pause: "We have substantially de-risked the Cote Gold Project, from both a technical and financial perspective, and believe in its potential to positively transform the company. However, we have decided to wait for improved and sustainable market conditions in order to proceed with construction".

Interestingly, this announcement came at a time when gold prices have materially improved, rising to $1300 per ounce after trading below $1200 per ounce in August 2018 which hints that gold prices were not the main factor in the decision:

The press release also contained a comment which, in my opinion, characterizes the main problem of the gold mining industry right now (I added emphasis): "The company will continue to advance engineering and permitting work at Cote, which it believes will add value. The company has added value over the past several years by: 1) identifying almost 10.0 million ounces in Measured and Indicated Resources at Cote (inclusive of Reserves), compared with less than 1.0 million ounces at acquisition; and 2) developing a Feasibility Study ("FS") Base Mine Plan and a FS Extended Mine Plan with improved net present values and internal rates of return as compared to the Prefeasibility Study".

I have always believed that a company has just two general ways to add value to its shareholders: 1) an increasing stock price and 2) returning cash to shareholders via dividends. Simply put, investors enjoy a growing share price (a growth stock), an ever-increasing flow of dividends (a cash cow), or (preferably) some combination of stock price growth and dividends.

I see an increasing gap between what the miners tell the investing public about the value (doing various studies, expanding reserves, obtaining permits) and what investors really need (a growing share price and a stable flow of dividends with a decent yield on cost). In this environment, there is no surprise that a chart of gold ETF (GLD) and IAG chart look so different despite IAG being a gold miner which should theoretically have positive leverage to gold price:

Obviously, the huge underperformance of IAG which is down more than 50% in a year while GLD is down just 5% made the management reassess its actions. Whatever catalyst made the management team put Cote Gold on hold, this decision is positive for the stock in the current market environment as the stock market is clearly afraid of miners spending available money on "growth" projects while having miserable (if any) dividends and lagging share prices. It remains to be seen whether IAMGOLD will take the next step in the right direction - with $745 million of cash and short-term investments at the end of Q3 2018, the company should focus on managing current mines and thinking of ways of returning some of this cash to shareholders who surely deserve it after years of pain.

Conclusion: the market cheers the decision to defer construction which comes on a positive day for gold which breached $1300/oz. It is likely that market fears regarding the drain on the cash side tied to the Cote Gold investment will abate and the stock may even have more positive momentum in the short-term. The company will provide its comments in the fourth-quarter report on February 20, and the market will be definitely keeping a close eye on whether Cote Gold decision is a shift in mindset or just a knee-jerk reaction to the lagging stock price. At this point, I'd expect volatile trading between $3.00 and $4.00, assuming no major changes in the gold price, as Cote Gold decision should provide support to IAMGOLD shares until further information regarding the company's plans is provided to the market.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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