Iamgold Corp. Acquires Trelawney Mining: An Opportune Strategy towards Stability
COMMENTARY–ProspectingJournal.com–At Iamgold Corp. (IMG-T) there was always a lingering inevitability about last Friday’s acquisition announcement. The company had announced it would pay C$585 million to acquire Canadian gold junior Trelawney Mining (TSX-V:TRR), in effect giving Iamgold full control of Trelawney’s flagship project, the Cote Lake deposit in northern Ontario. The acquisition has since proven a blessing for Trelawney shareholders, with share prices having increased by as much as 41 percent to date. The move also signaled a line of intent, giving credence to Iamgold’s much promised philosophy of economical diversification. But perhaps the most intriguing aspect of the equation remains in what was not spent. Before Friday’s announcement, Iamgold proclaimed the luxury of sitting on $1.4 billion in cash, with near-zero debt on its balance sheets. With $C585 million spent, the bulk of its cash still remains and many expect that there is much more to follow.
Steve Letwin, chief executive officer of Iamgold, noted, “the acquisition of Trelawney creates a larger and more geographically balanced portfolio of long-life gold assets for Iamgold”. In acquiring the Canadian junior Iamgold will now double its total inferred resources, and where it was just 18 percent prior, Canada will now account for 35 percent of the company’s resource base. It is believed that the Cote Lake deposit could become a mine in five years. Letwin noted that the deposit “will produce from 400,000 ounces to 500,000 ounces a year and will move us to the 1.5 million ounce to 1.6 million ounce range”. Producing 1.6 million ounces will see Iamgold double its current production of 850,000 ounces a year, with Letwin stressing that he plans on reaching this target by 2017.
Last year a few eyebrows were raised when Iamgold decided to sell its stake in the Tarkwa and Damang Mines in Ghana, for a total of $667 million. It is now evident that the company had adopted an approach that would see it sell stake in less politically safe jurisdictions, such as that in Ghana, and opt for more stable resource bases. Ontario definitely fits the bill and is deemed one of the world’s friendliest mining jurisdictions and there is little doubt that the Cote Lake deposit will prove a long-term asset, given that the company has money to spend in developing the site. But what will it do with the remainder of the $1.5 billion of cash at hand?
Iamgold’s activity over the past year has embodied Steve Letwin’s philosophy. In mentioning his transition from Ghana to Canada we have touched upon his plans to expand geographically. There are many benefits to doing so. For one, it achieves a lessening reliance on any one particular resource base and offers greater security in the wake of a potential shock or supply disruption at a deposit or mine. Shareholders are also provided with an air of security in knowing that their stocks are not vulnerable to the uncertainties of more volatile mining environments, like that in Ghana. But there is more to his philosophy than simple geography and relocation. In a previous article, I mentioned that gold mining equities were severely underperforming the performance of gold itself. Well it’s true, and Iamgold’s CEO, Steve Letwin, is well aware of it.
He states, “if we’re going to buy, we’re going to buy now. These equities are ridiculously cheap, some of them”. Steve Letwin has been advocating for a mantra of counter-intuitive buying and selling. With mining equities and stocks so undervalued, he believes that now is the time to buy, particularly when rival companies are struggling to boast a comparative cash position. And it makes sense. Iamgold is in the process of making several acquisitions at a time where it can most benefit from cheaper costs. It is thinking in the long-term in an industry in which this works to great effect. In light of his statements, one could bet that the company seeks to continue to take advantage of the current fragility in gold equities, and that much of its remaining cash will be spent sooner than later. Letwin noted that Iamgold aims to invest a portion of the $1.5 billion in expanding its African developments, but the rest is only speculation.
Letwin portrays a demeanor of quiet contentment. It is founded in a long-term philosophy and a massive cash position. And for us observers, there is an unavoidable feeling that this won’t be the last time we hear about Iamgold.