A Contrarian Bet on IAMGOLD Corp.

 | Jun 17, 2013 | 1:00 PM EDT  | Comments
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spwr

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Few sectors in the market have performed worse than the gold miners over the last six to 18 months. Falling gold prices, negative investor sentiment and rising operating costs have decimated most of the miners during that period.

The performance of gold and silver mining stocks reminds me of most of the solar sector during much of 2012. At that time, solar stocks like First Solar (FSLR) and Sunpower (SPWR) lost more than half of their value and were some of the poorest performers in the market. Since they bottomed in mid-to-late 2012, however, they have exploded to the upside and have been some of the strongest performers in the market.

I think the miners could see a similar performance reversal sometime in 2013. Sentiment on the sector is atrocious after most mid-and large-cap plays in the sector have been cut in half, or more, in this decline. Miners are cutting costs, however, as well as delaying/cancelling new projects. Most are priced at historical lows using a variety of metrics such as price to book value. Any bump in precious metal prices, or just a start of a lessening of the negative sentiment on the sector could cause many names to move up substantially.

I went digging through the wreckage this weekend to see if I can find any deep bargains for patient value investors (and my own portfolio of course). Based on my research IAMGOLD Corp. (IAG) looks absurdly cheap. This Canadian based mid-tier producer is going for a third of its price of late last year and also pays a generous dividend yield as well.

Company Overview:

IAMGOLD Corp. is a mid-tier diversified gold & niobium miner based in Canada with assets in North America, Africa and South America. Its properties consist of high quality, long-lived assets.

 

 

Valuation:

From a traditional valuation perspective, IAG is very cheap. At $5.20 a share, the stock is selling at 9x this year's expected earnings.  IAG has doubled its dividend payouts in recent years and now yields a robust 4.8%. The stock is selling substantially below book value per share after its recent decline. In addition, IAG is priced at 5x operating cash flow. It gets over 40% of its revenues from geopolitical stable North America and recently signed a long term agreement with Suriname  on its largest producing mine, removing that risk for investors.

Financial Flexibility & Balance Sheet:

One of the core things I look for possible investments in commodity-based equities like gold miners is their balance sheet and financial flexibility. IAG comes up strong in this measure as they are keenly focused on maintaining a strong balance sheet and financial liquidity (See Chart). The company has produced strong and consistent operating cash flow over the past few years even as gold prices have fluctuated wildly.  IAMGOLD produced a more than 20% return on capital in the challenging year of 2012, significantly above its peers. It also is executing against a plan to remove $100mm in costs in 2013.

Catalysts:

One of the final things I like about this stock is that it is starting to pick up some positive comments from analysts and other positive catalysts for the first time in quite a while. Global Hunter Securities initiated the shares as a "Buy" last week with a $7.50 a share price target. In addition to the agreement in Suriname, the company also reported encouraging drill results from its mine in West Africa Finally, Clarus named IAG as one of its favorite low-leveraged names in the sector in May.

Author's Note: I plan to start building an equity position in IAG this week. I also intend to buy out of the money long dated bull call spreads as I believe upside on the sector/stock could be explosive if sentiment and/or gold prices turn up.

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