Iamgold Corp. (IAG, Financial) provided the market with preliminary operating results for 2016 on Jan. 13. It will report the entirety of its fourth-quarter and full-year 2016 results on Feb. 22.
Before the company releases its report, I will estimate the company's fourth-quarter earnings based on the preliminary operating results and the average gold price on the London BullIon Market. I will also determine if estimated EPS for the quarter will have an impact on the share price of Iamgold. If the company misses EPS expectations, it will produce a surprise of -50%, which is similar to the -45.5% surprise in fourth-quarter 2015.
For fourth-quarter 2016, analysts estimate EPS of zero cents.
Source: MarketWatch
Based on a gold production of 215,000 ounces and cash costs of approximately $740 to $770 for the fourth quarter of 2016, a gold margin of $451.71 per ounce of gold produced can be estimated considering the average price of gold was $1,221.71 per troy ounce.
I have been conservative by using the upper limit of Iamgold’s 2016 guidance on cash costs.
Table 1.
Source of data: Iamgold’s quarterly reports and Yahoo Finance
A gold margin of $451.71 per ounce of gold produced should generate a difference from the actual EPS to reach an estimate of negative one cent and a surprise of -50%.
To determine how the aforementioned surprise may impact the market value of Iamgold, I refer to what happened in fourth-quarter 2015. The miner reported a loss of 16 cents on Feb. 17, 2016, which generated a negative surprise of 45.50%.
I have estimated the exposure of Iamgold’s returns to the changes in the stock price and the price of gold over 250 trading days, according to the following model:
- RIAG= alfa + Beta1 x RMKT + Beta2 x Comex (daily) changes
- RIAG is the daily returns in the share price.
- RMKT is the daily return on the stock market (S&P 500 index).
- The Comex is used as a proxy for changes in the price of gold.
The event of interest is the company's earnings announcement on Feb. 17, 2016.
The event window (from Jan. 19, 2016 to March 16, 2016) consists of 20 days prior to the event, the day of the event and 20 days past the event.
I used the 250-trading-day period prior to the event window as the basis of estimation (from Jan. 20, 2015 to Jan. 15, 2016) for the announcement on EPS of Feb. 17, 2016. Estimates using the two-factor model parameters over the 250 days prior to the event are shown in the table below.
Table 2.
The table below represents the expected return (ER), the abnormal returns (AR), the abnormal cumulative return (CAR) and the abnormal return t-test (AR t-test) from Jan. 19, 2016 to March 16, 2016:
Table 3.
As it is shown by the table above, there was not an impact on the share price the day after the news was released. There was a negative abnormal return of 9.4% 12 days later with a standard error of 0.0376 leading to an AR t-test value of 2.502 (greater than 1.96).
Therefore, based on what happened in fourth-quarter 2015, if Iamgold misses expectations on EPS and generates a negative surprise of about 50%, there will not likely be a significant impact on the stock's market value.
The mid-tier gold producer will likely generate EPS of negative one cent for the quarter because it defined its gold reserves of 7.7 million ounces at the end of 2015 based on a gold price of $1,200 per ounce. This means the company can economically mine gold from its reserves when gold is trading steadily above $1,200.
This will likely not be the case since the average price of gold during this period on the London Bullion Market was only $22 per troy ounce above the gold price assumed by the company. In addition, the precious metal traded substantially below $1,200 per troy ounce beginning in the last week of November 2016.
Iamgold is currently trading around $4.87 per share, down 10 cents or -2.18% from the previous trading day. The gold stock gained 27.26% year to date and the average target price per share is $5.25.
The target price represents a 7.8% upside from the current share price. Four analysts out of a total of 10 suggest to buy shares of Iamgold today.
Disclosure: I have no position in Iamgold Corp.
Start a free 7-day trial of Premium Membership to GuruFocus.
