According to Bloomberg Businessweek, gold is in the 11th year of a bull market. Not since 1920 have we seen such an unprecedented winning streak. Many experts continue to see the yellow metal as a safe haven in a very unstable economic world. Where prices move from here is anyone's guess. What I do know is that investors interested in gold stocks look no further than Canada's Iamgold (NYSE:IAG).
Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.
As of October 12, the price of gold was $1,685 an ounce. Gold producers profit from the spread between what it costs them to acquire and extract proven reserves from the ground and the price people are willing to pay for that gold. Seeking Alpha suggests IAMGOLD's cost to buy its reserves based on market cap and the cost to extract those reserves is slightly less than $800 an ounce. This tells me two things. First, that IAMGOLD's profit margin on each ounce of gold it produces at present is theoretically 50%, although the true number is probably somewhat less. The second point, and the more important one, is why anyone would buy the physical asset when, in theory, it can be acquired for 50% less simply by investing in Iamgold. Even Goldcorp (NYSE:GG), Eldorado Gold (NYSE:EGO) and Yamana Gold (NYSE:AUY), whose market cap and extraction costs per ounce are higher; still present deep discounts to the metal itself. (For related reading, see How Gold Affects Currencies.)
Iamgold is more than its name suggests. It's not just a gold producer; it also produces niobium, which is used to strengthen steel while simultaneously lightening it, making niobium far more useful than gold could ever hope to be. Most importantly, steel production continues to rise and as such, niobium is in serious demand. Other potential contributors include copper, silver and diamonds, although gold is still the big workhorse. The company announced October 11 that it produced 222,000 ounces of gold in the third quarter, up from 188,000 in the second quarter. In terms of niobium, it produced 1.2 million kilograms in Q3 compared to 1.1 million kilograms in the prior quarter. It expects to have a strong fourth quarter with 2011 full-year gold production of at least 870,000 ounces, which means total revenues could be over $2 billion this year, its best ever.
Strong Balance Sheet
Iamgold, like most gold producers these days, is flush with cash. This is for two reasons. First, gold prices are at near-record levels. Secondly, in Q2 it sold its minority position in two gold mines in Ghana for gross proceeds of $667 million. Sitting with $1.2 billion in cash at the end of the second quarter and no debt, an acquisition, which has been its method of growth in the past, seems logical. In the second quarter conference call, CEO Steve Letwin suggested it's looking at gold producers with 2 million ounces in reserves and annual production of at least 150,000 ounces. Most importantly, it wants to own properties in countries it feels it can safely do business. This includes Canada, Surinam, West Africa, French Guyana and Colombia. Its long-term business plan is to own majority control of all of its mines in countries that present less political risk. It's hard to argue with this approach. Until it finds an attractive acquisition, it will continue to work on maximizing production and profits at each of its mines. (For more, see Gold: The Other Currency.)
The Bottom Line
Presidential candidate Ron Paul's owned Iamgold stock for many years as a hedge against inflation. It's hard to argue with the man that many consider the brightest of the candidates looking to represent the Republicans in the 2012 election.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!