Iamgold Corp., the gold producer with mines in Canada and Mali, says the metal will rise to a record $2,500 an ounce as global output peaks and ore grades decline.
The industry has exploited its best-quality gold reserves and is being forced to tap lower-grade and higher-cost deposits, Iamgold Chief Executive Officer Steve Letwin said.
“I really think now we are at Peak Gold,” Letwin, 57, said in a Jan. 10 interview at his company’s Toronto headquarters. “Nobody has seen the kind of production profiles they thought they were going to see.”
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Iamgold can prosper in such an environment because it has available cash, low debt and experience running mines where ore is less rich, Letwin said.
“There will be a transformation here and our job is to stay lean and mean, keep our balance sheet strong and stay alive to see the benefits,” he said.
Global gold production in the first nine months of 2012 fell 1 percent from a year earlier to 61.5 million ounces, according to data compiled by Bloomberg. The average ore grade of reserves at 12 large producers including Iamgold fell 51 percent to 0.028 ounce per ton in 2011 from a decade earlier, the data show.
“One of two things has to happen” for gold miners, Letwin said. “Either we stop as an industry pursuing it because the costs keep rising at a faster rate than the price, or the price of gold has to go up to reflect the cost inflation.”
Declining ore quality and rising mine-development costs have sent gold-production costs soaring and curbed profitability. That’s also forced miners to explore and work in more remote or politically unstable parts of the globe.
Among its global assets, Iamgold owns stakes in two mines in Mali, where insurgents have seized control of the north. French troops intervened in the West African nation on Jan. 11 to reverse an advance by the rebels, and European and U.S. policy makers have expressed concern north Mali may become an Islamist militant base that would destabilize regional states from Nigeria to Algeria.
Letwin said his preference is to stay in Mali, and he would consider buying out the 41 percent of the Sadiola mine controlled by Johannesburg-based AngloGold Ashanti Ltd., which is the mine’s operator. Iamgold also owns 41 percent of Sadiola, which is 510 kilometers northwest of the capital, Bamako.
“My preference would be to buy it, I’m not afraid of Mali, even with everything that’s going on there,” Letwin said in the interview last week. “If the price was right we would look hard at increasing our interest in Sadiola.”
Globally, the gold-mining industry has been beset by rising costs and budget overruns in the past year at companies including Barrick Gold Corp., the world’s biggest.
The industry has fallen out of favor with investors. Iamgold, the sixth-largest producer in Canada, dropped 35 percent in the 12 months through Wednesday in New York, the fifth-worst performer on the 30-company Philadelphia Stock Exchange Gold & Silver Index. The index dropped 10 percent in the past five years while gold has gained 91 percent.
Gold for delivery in February was little changed at $1,683.20 an ounce in New York Wednesday. The metal has advanced for 12 consecutive years and traded at a record $1,923.70 in September 2011.
“I really do believe, unless the demand for gold drops, you are going to have to see $2,500,” said Letwin, who spent more than a decade at Enbridge Inc., Canada’s biggest oil pipeline operator, before joining Iamgold in 2010. He said he couldn’t give a timeframe for the rise to $2,500.
Gold production has failed to respond to surging prices and demand, said Kenneth Hoffman, a Bloomberg Industries analyst in Skillman, New Jersey.
“The reason that there is no supply response is that there is just not the metal out there to find,” Hoffman said. “Finding good, high-quality gold mines that can put out a significant amount of product is almost impossible.”
The notion of Peak Gold output echoes the Peak Oil theory, which holds the earth is running out of crude and production will stop rising before declining. Most gold is used as a store of wealth and very little is used in electronics and other industrial applications, said Phil Streible, a commodity broker at R.J. O’Brien & Associates in Chicago.
“Peak Gold can be misleading as, unlike oil, gold is not consumed and the amount of gold above the earth increases every year,” he said in a telephone interview.
The largest gold miners “need to replace production, and as much as they find it vulgar they are going to have to go to lower-grade,” Letwin said.
Iamgold had $896.8 million in cash and cash equivalents as of Sept. 30, the sixth-highest total of any gold producer bigger than $1 billion, and long-term debt of $638.3 million, according to data compiled by Bloomberg. The average of the 50 biggest gold miners was net debt of $500 million, according to the latest filings.
“The thing with Iamgold is their balance sheet is their critical strength, one, and two, they have an inhouse build team,” Paolo Lostritto, an analyst at National Bank of Canada in Toronto, said by phone yesterday. “I don’t think that’s widely appreciated.” Lostritto rates Iamgold outperform, the equivalent of buy, and has a C$19 price target.
Iamgold fell 0.2 percent to C$10.82 yesterday in Toronto.
The shares dropped 19 percent on Nov. 14, the most since Iamgold started trading in 1996, after third-quarter output missed estimates and the company cut its 2013 forecast. Production will be lower this year because of “poor” performance at Sadiola, and a slow start at the company’s new Westwood mine in Quebec, Iamgold said at the time.
“The delay in the production caused us to get a hit out there and we are making good progress in trying to recover from that,” Letwin said.
The company, which is also expanding its Essakane mine in Burkina Faso and considering growth options at Rosebel in Suriname, expects to declare commercial production at Westwood at the end of March. Iamgold also owns a niobium mine in Quebec, where it’s seeking a partner to help fund an expansion to boost output of the rare metal used in high-strength alloys.
Iamgold bought Trelawney Mining and Exploration Inc. last year for about C$585 million ($593 million) to add a project in northern Ontario. While the Cote Lake mine will be a lower-grade operation, it will still generate “attractive” returns at $1,500 an ounce gold, Letwin said. Construction at the mine is scheduled to start in 2015, he said.
While Iamgold’s balance sheet is “a positive,” one reason the company doesn’t have a lot of debt is that it’s not building any new mines until it starts work on Cote Lake, which limits its output growth potential until then, Michael Scoon, a Toronto-based analyst at Stifel Financial Corp, said by phone.
Iamgold has “set the stage for a reasonable 2013,” Scoon said. “We’re hoping for a year here where they do deliver on their quarterly production and financial results and in the context of strong gold prices we think the company should do quite well.”
Gold equities will probably struggle to rise unless gold prices increase above $1,850, which could result in a “defined and material” move upward by the stocks, Letwin said.
“The market is going to be in a tough place for a while,” Letwin said. “If we trade in this zone of $1,600 to $1,800, I think the equities are going to be pretty limp for the rest of the year.”
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