Iamgold Corp. (IAG, Financial) announced in a press release on March 9 it plans to issue a $400 million corporate loan in senior notes with maturity in 2025.
Each note bears a 7% annual interest rate.
The proceeds will be used by the Canadian mid-tier gold producer to redeem a previous corporate loan of $489 million, consisting of 6.75% notes due in October 2020.
The redemption date of the old corporate loan is around April 2, while the new offer's closing date is around March 16.
Considering the company has total liquidity of $763 million, of which $652 million is cash and equivalents and $110.7 million is restricted cash, it has plenty of cash available to fund the redemption of the old corporate loan even if fully withdrawn.
The company’s balance sheet is also solid because it does not have short-term debt. The company has a long-term debt to equity ratio of 21%, which is below the industry average. With an interest coverage ratio of 12.87 times, Iamgold will not have any problems covering interest expenses on the outstanding debt.
Replacing the old corporate loan is smart because it will extend the availability of financial resources being invested in mine development for the Coté Gold project and greenfield exploration activities.
Carol Banducci, Iamgold executive vice president and chief financial officer, explained the company's four-year plan was to increase gold production and reduce costs.
"While we continue to be very comfortable with our strong financial position today, reducing our long-term debt and extending the maturity date of our notes to 2025 improves our capital structure and supports our ability to fund our growth pipeline over the four-year horizon and beyond," Banducci said.
The company plans to reach a total annual gold output of one million ounces starting in 2020 through organic growth, which represents 23% growth from 2016 total gold production.
The miner closed full-year 2016 with 813 thousand ounces of gold produced, a 0.9% increase from the total gold production in 2015.
The company also aims to reduce all-in sustaining costs by 10% to 15%, from $1,057 per ounce of gold in 2015 to between $900 and $950 per ounce of gold in 2020.
The replacement of the old corporate loan is characterized by a higher interest rate, which influences the intrinsic value of the stock. An increase in the interest rate, from 6.75% to 7%, results in an increase in the weighted average cost of capital (WACC) and a lower terminal value. The terminal year earnings, cash flow or dividend (depending on the method used to determine the stock's intrinsic value) will be divided by a value equal to the difference between the WACC (taken as the discount rate) and the growth rate. Thus, once the two corporate transactions have been completed, the present value of the stock will be lower than it currently is.
Iamgold is trading around $ 3.59 per share. It is trading at 0.73 times its book value and at 5.19 times its EBITDA.
Disclosure: I have no positions in Iamgold Corp.
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