Iamgold Corporation (IAG, Financial) released on Jan. 26 the results of its scoping study on the Côté Gold Project, which is located in the northeastern part of Ontario, Canada, where the mid-tier gold producer is determining a mineral deposit.
Even though the PEA or scoping study is neither a feasibility study nor a pre-feasibility study, the premises of a financially robust project for Iamgold and its shareholders exist based on the following elements:
- Once the company has built the mine and is running it at its full capacity, the mining company will be able to produce “on average 302,000 ounces of gold a year at average total cash costs of $564/oz and all-in sustaining costs of $686/oz,” Iamgold said.
- The production from Côté Gold will represent approximately 30% of the total gold production attributable to the company according to the most recent guidance on gold production and costs. Gold will be produced at the mine over a time span of 21 years, at a total cash cost which is 29% lower than the company’s total current cash cost of $795 per ounce, and 35% lower that the company’s total current AISC of between $1,000 and $1,100 per ounce.
- The gold project is located in a friendly mining jurisdiction and in a proven mineralized area. The eastern part of Ontario, as well as the whole Canadian province, has been producing gold for more than a century, and it lies on the Precambrian rock which is extremely rich with gold in terms of concentration and diversity of mineral deposits.
- Iamgold has already obtained the necessary clearances from the Canadian authorities. This means that the path that is leading the Canadian gold producer to complete its pre-feasibility and feasibility studies is paved.
At this stage, however, it is very difficult to assess the value of this gold project that can be incorporated in the value of the stock, because only a feasibility study will clearly define the economic viability of this project.
The feasibility study will also show other useful data such as:
- The geometry of the ore deposit. This element is extremely important because in the presence of a horizontal or vertical shaped ore deposit, the mining process will be simpler than in the case the ore deposit is odd-shaped or lies at an angle. The latter involves higher mining costs.
- The metallurgic test results, the cost to transport the fuel to the mine site, energy costs, the cost to build a permanent camp, etc.
However, the data currently reported by the company with the PEA makes it possible for me to assess the stock.
Using the net present value, after-tax of $543 million and dividing it by the number of Iamgold’s shares outstanding, which is approximately 450.7 million, I get a value of $1.20 per share.
We can look at $1.20 per share, which is the discounted value per share of the projected earnings generated by the gold project exceeding the anticipated costs, as the value of the gold project that can be incorporated in the analysts’ average target price of the stock, assuming that this has also been determined according to a present value valuation model and not based on valuation heuristics that are a function of P/E multiples.
As described in "The Intelligent Investor," the discounting model, and more properly the discounted earnings model, is a test to detect bargains.
Therefore, adding $1.20 to the current analysts’ average target price per share of $5.19, I get a value of $6.39 per share, which represents a 45.6% upside from the current share price of $4.39.
The analysts’ average target price for Iamgold ranges between a low of $3.38 per share and a high of $7.51 per share.
Of course, whether Iamgold’s share price will reach $6.39 or not, depends on the future movements of the price of gold on the markets.
Disclosure: I have no position in Iamgold Corporation.
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