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Iamgold's decision to build gold mine is 'transformational bet,' Canaccord says

A decision to build the Cote gold project in northern Ontario is a "transformational bet" for Iamgold Corp. that is set to increase the company's cash flows and significantly boost its production profile, according to Canaccord Genuity Corp. analysts.

"Assuming successful execution, we believe the project could be transformational for the company, providing a long-life asset in Canada that could add [more than] 30% production growth by 2024, almost double the company's cash flow and diversify the company's geopolitical profile," the analysts said in a July 21 research note.

Iamgold made the decision July 21 to build the Cote project, a 70/30 joint venture with Sumitomo Metal Mining Co. Ltd.

In a related cost update, Iamgold projected initial capital expenditure of US$1.3 billion, increasing from the US$1.15 billion outlined in a 2018 feasibility study. Iamgold estimated its spend during the construction period at between US$875 million and US$925 million, with full production levels anticipated in mid-2024.

The project is one of the larger Canadian mine builds of recent years and is set to produce an average of 367,000 ounces of gold per year over an 18-year mine life. Iamgold plans to mine at a rate of 70 million tonnes per year and process 13.1 million tonnes of feed per year.

Assuming a gold price of US$1,350 per ounce, Iamgold estimated the project's net present value at US$1.1 billion, after taxes and discounted at 5%, with a 15.3% internal rate of return.

On a July 21 conference call, Iamgold President and CEO Gordon Stothart cast the mine build as the company's best use of funds to grow lower-cost production.

"It is considerably cheaper to build than to buy," Stothart said, pointing to multibillion-dollar gold mine acquisitions over the past decade or so.

Iamgold operates high-cost gold mines in West Africa, South America and Canada, with its Essakane, Rosebel and Westwood operations falling in the fourth quartile on the basis of all-in sustaining costs, according to the company.

But Iamgold projected the Cote project will produce in the second quartile over its mine life and in the first quartile over the first six years of production with all-in sustaining costs of US$771/oz and US$693/oz, respectively.

Stothart, who could not be reached for questions after the July 21 conference call, said he expected to have outstanding permits in hand by the end of August. Construction will ramp up later in 2020, starting with earthworks, with about 1,000 workers on-site in 2021 during peak construction.

Iamgold has about US$1.3 billion in liquidity, with US$800 million in cash and a largely undrawn US$500 million debt facility. The bulk of project spending is scheduled for 2021 and 2022, and the company plans to hedge most of its exposure to Canadian dollars and fuel over the course of construction.

Bruno Lemelin, Iamgold's senior vice president of operations and projects, said about 60% of detailed engineering has been completed, with 55% of total project costs under firm bids.

Initially, Iamgold plans to run a contract fleet at the mine rather than use an owner-operator model, Stothart said. However, he said Iamgold would eventually shift away from using a contract miner, as at its other operations.

"The nice thing ... is that you off-load the training and the buildup of the maintenance department for a period of time to a professional maintenance organization," Stothart said.

Iamgold is also targeting nearby prospects for additional resources that might add feed to Cote.

Craig MacDougall, senior vice president of exploration, said Iamgold has an exploration target of between 3 million and 5 million ounces of gold grading between 0.7 g/t and 1.2 g/t at prospects about 1.5 kilometers northeast of Cote. At the Gosselin target, drill intercepts have included as much as 412 meters grading 1.28 g/t gold. MacDougall said Iamgold planned to release an initial resource estimate in 2021.

While Canaccord analysts said the project could be transformational, they expect it to consume much of the miner's free cash flow over the next two to three years. "And with potential production not until 2023, we believe the longer-term benefits are likely to remain discounted by investors ahead of the capital and execution risk of a relatively large-scale project," they said.