Why Morgan Stanley Just Started IAmGold At Underweight

• IAMGOLD Corp (USA) IAG shares are up 5 percent in the last five trading days.
• Morgan Stanley’s Brad Humphrey initiated coverage of the company with an Underweight rating and a price target of $1.35.
• A higher cost structure and challenges with growth are likely to be difficult obstacles for IAmGold to overcome, Humphrey said.

IAmGold continues to focus on reducing its costs. It has managed to reduce its all-in sustaining costs, or AISC, by more than 17 percent since 2013. Analyst Brad Humphrey added, however, that gold prices are at $1,100/oz, which puts the company in a tough position, with negative FCF, above-average costs, declining cash and declining output.

IAmGold’s higher cost structure may be forcing the company to choose capital preservation over M&A or organic growth, since its development pipeline requires higher gold prices, Humphrey pointed out.

“The impact on near-term output from the seismic activity in Q2 at Westwood remains unknown, the transition to harder rock at both Essakane and Rosebel are driving unit costs, and Sadiola is nearing the end of its life. Lower gold prices could prove a significant headwind,” the analyst wrote.

Although IAmGold’s cash balance offers a sufficient lifeline over the medium term, at the current metal prices, “barring operational or metal price improvements issues could arise in 2020 when its senior notes mature,” the Morgan Stanley report stated.

If gold prices would gain some momentum, IAmGold could be an attractive name, given its higher cost structure and development pipeline. The company seems to be very sensitive to gold prices, and a 5 percent change in Morgan Stanley’s base case price deck results in an increase of about 40 percent in the NAV estimate, Humphrey noted.