Goldcorp: Your Must Have Gold Stock For 2013

Jan.14.13 | About: Goldcorp Inc. (GG)

Goldcorp Inc. (NYSE:GG) is a senior Canadian gold producer engaged in the operation, exploration, development and acquisition of precious metal properties in Canada, the United States, Mexico and Central and South America. The company has five mines in Canada and the U.S., three mines in Mexico, and three mines in Central and South America. Other than gold, the Vancouver based company also produces and sells copper, silver, lead, and zinc.

Why We Like Goldcorp

We like this Canadian gold miner for the following reasons:

  1. Strong pipeline of growth projects
  2. Significant near-term cash flow generation
  3. Operations in safe jurisdictions
  4. Strong balance sheet
  5. Investment grade credit rating
  6. High quality, low cost assets

GG is one of the few senior gold producers that can deliver strong growth over the next few years. The large Pueblo Viejo mine in the Dominican Republic started commercial production in December 2012, and will generate significant cash flows for the company in 2013. In the first five years of production the mine is expected to add 415,000 to 450,000 ounces of gold to GG's portfolio every year. Moreover, three more projects (Cochenour, Eleonore, and Cerro Negro) are expected to come online in the next couple of years, boosting gold production by ~60% by the end of 2015.

Growth profile, cash flow generation, political risk profile, organic growth and asset quality are the factors that we consider most important when analyzing a gold company. Goldcorp scores high on all these factors. It has a strong pipeline of growth projects. With the Pueblo Viejo mine in production now and most of the capital expenditure behind it, GG is expected to generate significant cash flow in 2013. The company has a strong investment grade balance sheet. It operates in jurisdictions with low political risk, and plans to continue operating in safe jurisdictions. It has a portfolio of high quality, low cost assets.

Reserves & Resources

As of the end of 2011, Goldcorp had proven and probable gold reserves of 64.7 million ounces, gold resources (M&I) of 28.2 million ounces, and total gold inferred resources of 23.13 million ounces. From 2007 to 2011, GG's gold reserves increased by almost 50%.

In addition to gold, the company had proven and probable silver reserves of 1.18 billion ounces, silver resources (M&I) of 418 million ounces and silver inferred resources of 108 million ounces. The table below lists the total reserves and resources for gold, silver, copper, lead, and zinc.

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Source: Company Documents

Operational Analysis

The company has 11 mines in North, South, and Central America. In addition, the company also has 8 development projects: three in Canada & U.S., three in Central and South America, and two in Mexico. Almost 80% of 2011 production came from the North American operations, and the rest from South and Central American mines.

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Source: Company Documents

Canada and U.S. Operations

Red Lake

The Red Lake mine located in the Red Lake District in Ontario, Canada is GG's top gold producer, yielding a total of 622,000 ounces in 2011 and 507,500 ounces in 2012 at very low cash costs. Red Lake mines have been in operation for over 60 years and have a total estimated mine life (reserves) of 12 years. Red Lake has total proven and probable reserves of 3.95 million ounces (proven: 0.98 million ounces; probable: 2.97 million ounces). Goldcorp's cornerstone asset produced a total of 507,500 ounces of gold in 2012 against guidance of 460,000-510,000 ounces. The Red Lake mine is expected to produce 475,000-510,000 ounces of gold in 2013.

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Source: Company Documents

Porcupine

The Porcupine gold mine is located in Timmins, Ontario, one of the world's great gold producing camps. The mine has been in operation for more than 100 years and has produced more than 66 million ounces of gold since the production began. The mine has an estimated mine life (reserves) of 13 years and total proven and probable gold reserves of 4.06 million ounces (proven: 1.44 million ounces; probable: 2.62 million ounces). The mine produced a total of 262,800 ounces of gold in 2012 against guidance of 265,000 ounces. The Porcupine mine is expected to produce 270,000-280,000 ounces of gold in 2013.

Porcupine, Canada (Source: Company Documents)

Musselwhite

Musslewhite mine is a fly-in/fly-out operation on the southern shore of Opapimiskan Lake in northwestern Ontario, Canada. The mine has produced over 3 million ounces of gold since achieving its commercial production in April, 1997. The mine has an estimated mine life (reserves) of 13 years and total proven and probable gold reserves of 2.28 million ounces (proven: 0.63 million ounces; probable: 1.65 million ounces). The mine produced a total of 239,200 ounces of gold in 2012 against guidance of 270,000 ounces. The Musselwhite mine is expected to produce 250,000-260,000 ounces of gold in 2013.

Musselwhite, Canada (Source: Company Documents)

Marigold

Located in Nevada, U.S., Marigold is an efficient open pit operation that has been in production for over two decades. GG has 66.7% ownership interest in Marigold. The mine has an estimated mine life (reserves) of 16 years and total proven and probable gold reserves of 2.32 million ounces (proven: 0.41 million ounces; probable: 1.91 million ounces). The mine produced total of 96,300 ounces of gold in 2012, 28% more than the guidance of 75,000 ounces. The Marigold mine is expected to produce 95,000-100,000 ounces of gold in 2013.

Marigold, Nevada, U.S. (Source: Company Documents)

Wharf

The Wharf mine is located seven kilometers west of Lead, South Dakota, in the northern Black Hills region. The mine has an estimated mine life (reserves) of 7 years and total proven and probable gold reserves of 0.7 million ounces (proven: 0.29 million ounces; probable: 0.42 million ounces)*. The mine produced total of 68,100 ounces of gold in 2012, 24% more than the guidance of 55,000 ounces. The Wharf mine is expected to produce 55,000-60,000 ounces of gold in 2013.

Wharf, South Dakota, U.S. (Source: Company Documents)

Mexico Operations

Peñasquito

The Peñasquito mine is located in the northeast of the State of Zacatecas in north-central Mexico, near the town of Mazapil. The mine achieved commercial production in 2010 on schedule and on budget. It was the largest cash flow generator in 2012. The mine has an estimated mine life (reserves) of 22 years and total proven and probable gold reserves of 16.5 million ounces and 3.7 million ounces of gold resources. The mine produced total of 411,300 ounces of gold in 2012, 8% more than the midpoint point of guidance range of 370,000-390,000 ounces. The Peñasquito mine is expected to produce 360,000-400,000 ounces of gold in 2013.

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Source: Company Documents

Los Filos

The Los Filos mine is located in the Nukay mining district of central Guerrero State in southern Mexico. The mine has been in operation since 2007 and was the largest gold mine in Mexico before Peñasquito's production surpassed it in 2012. The mine has an estimated mine life (reserves) of 14 years and total proven and probable gold reserves of 7.75 million ounces (proven: 2.5 million ounces; probable: 5.24 million ounces)*. In addition to gold, Los Filos has proven and probable silver reserves of 53.61 million ounces (proven: 13.45 million ounces; probable: 40.16 million ounces). The mine produced total of 340,400 ounces of gold in 2012, slightly lower than the guidance of 345,000 ounces. The Los Filos mine is expected to produce 340,000-350,000 ounces of gold in 2013.

Los Filos, Mexico (Source: Company Documents)

El Sauzal

Located in Chihuahua State, Mexico, El Sauzal is been a reliable, low cost gold producer and an important foundation for Goldcorp's Mexican operations. The mine has an estimated mine life (reserves) of 4 years and total proven and probable gold reserves of 0.26 million ounces (proven: 30,000 ounces; probable: 220,000 ounces)*. The mine produced total of 81,800 ounces of gold in 2012, slightly more than the guidance of 80,000 ounces. The El Sauzal mine is expected to produce 70,000-80,000 ounces of gold in 2013.

El Sauzal, Mexico (Source: Company Documents)

South and Central America Operations

Marlin

The Marlin mine is located in the western highlands of Guatemala, in the municipality of San Miguel Ixtahuacan. Marlin has been in production since late 2005 and produced its one-millionth ounce of gold in 2010. The mine has an estimated mine life (reserves) of 5 years and total proven and probable gold reserves of 1.25 million ounces (proven: 0.58 million ounces; probable: 0.66 million ounces)*. In addition to gold, Marlin has proven and probable silver reserves of 53.49 million ounces (proven: 18.92 million ounces; probable: 34.57 million ounces)*. The mine produced total of 207,300 ounces of gold in 2012, slightly lower than the guidance of 210,000 ounces. The mine is expected to produce 185,000-200,000 ounces of gold in 2013.

Marlin, Guatemala (Source: Company Documents)

Alumbrera

Located in Belen, Argentina, the Alumbrera mining operation is one of the world's largest and lowest-cost gold and copper operations. GG's stake in the project is 37.5%. The mine has an estimated mine life (reserves) of 6 years and total proven and probable gold reserves of 1.1 million ounces. The mine produced total of 136,600 ounces of gold in 2012, slightly lower than the guidance of 140,000 ounces. The mine is expected to produce 120,000-125,000 ounces of gold in 2013.

Alumbrera, Argentina (Source: Company Documents)

Pueblo Viejo

Pueblo Viejo is located in the Dominican Republic, approximately 100 kilometers northwest of the capital city of Santo Domingo. GG has a 40% ownership interest in the project and Barrick Gold (NYSE:ABX) holds the remaining interest. Pueblo Viejo is one of the largest gold assets in the world. It has a projected mine life of 30 years and proven and probable gold reserves of 25.3 million ounces, with GG's share amounting to 10.1 million ounces. The project achieved first production in August 2012 and commercial production in 4Q12. The mine produced a total of 41,300 ounces of gold in 2012, compared to the guidance of 53,000 ounces. The mine is expected to produce 330,000-435,000 ounces of gold in 2013.

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Source: Company Documents

Development Projects

Other than the 11 operational mines, the company has 8 development projects: 5 in North America and 3 in South and Central America. Cerro Negro in Southern Argentina is an advanced-stage development project with expected production in late 2013. The project has attributable proven and probable reserves of 4.5 million ounces and gold resources (M&I) of 0.55 million ounces. The project is expected to produce 525,000 ounces of gold annually in the first five years of production.

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Éléonore in Quebec, Canada is being developed as an underground gold mine. Commercial production is expected to start in 2014. According to a pre-feasibility study in 2011 the project is expected to add 600,000 of annual gold production to GG's portfolio over an approximate 15-year mine life.

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The Cochenour project is an important part of Goldcorp's future plans in the Red Lake district. It is expected to add 225,000-250,000 of annual gold production once in production in 1H15. Other development projects include Cerro Blanco in Guatemala, El Morro in Chile, Noche Buena in Mexico, Camino Rojo in Mexico, and Dee JV/South Arturo in U.S.

Financial and Credit Analysis

Goldcorp's cash margins have increased significantly over the last few years. From only $540 per ounce in 2007 the margins increased to $1387 per ounce in 2012 (YTD). GG's cash costs on the other hand remained low during the period. GG's EPS also grew significantly over the same period from $0.55 in 2008 to $2.21 in 2011. EPS is expected to drop to $2.0 in 2012 but is expected to increase again in 2013 to $2.46 per share. GG has Y/Y quarterly earnings growth of almost 50%. The company is also boosting strong profitability. It has a profit margin (TTM) of 30%, operating margin of 41.5%, and EBT margin of 39%. The company has a trailing twelve month return on equity of 7.7%, return on assets of 5.5%, and return on invested capital of 7.4%.

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GG has a solid investment grade balance sheet, and minimal debt among its large peers. While some of the biggest gold miners are struggling with huge debt loads and potential ratings downgrade, Goldcorp's ratings are the most secure. Standard & Poor's rating agency recently said in a press release "Goldcorp's rating is the most secure. It likely wouldn't face a downgrade unless the gold price dropped by 50% because of its strong track record of boosting output, lowering costs and maintaining a stable debt burden".

Its debt-to-equity ratio is only 0.03 compared to 0.18 of the rest of the industry. Similarly, the debt-to-assets ratio is only 0.03 compared to the industry average of 0.11. GG has EBITDA-to-interest ratio of 46.74, far better than the industry average of 18.46. The debt-to-EBITDA ratio of 0.53 is less than half the industry average of 1.11 and finally, the CFO-to-total debt ratio of 2.64 is more than three times the industry average of 0.81.

In a recent press release the company noted it ended the year with $900 million in cash and has access to an undrawn $2 billion credit facility. Moody's has a Baa2 rating with a stable outlook on GG's debt, Standard & Poor's has a rating of BBB+ with a stable outlook, and the third big rating agency Fitch has a BBB rating.

Goldcorp is trading at a significant discount to its historical and industry average price-to-earnings (P/E) ratio. It has a current P/E ratio of 18.9 compared to the industry average of 31.3 and the company's own five years average of 39.6. It has a forward P/E of 11.2 and PEG ratio of only 0.6. GG has price-to-book ratio of 1.3 compared to the industry average of 1.6. It has price-to-sales ratio of 5.6 compared to historical average of 8.2, and price-to-cash flow ratio of 15.3 compared to the historical average of 16.4.

GG has a dividend yield of 1.7%. It first started paying a dividend in 2001. Since then, the company has progressively increased both the dividend amount per share and frequency of dividend payment. The company first started with semi-annual dividends in 2001 and switched to quarterly payments in 2002. In 2013 the company changed its dividend frequency to bi-monthly and finally to a monthly dividend, which the company utilizes to this day. Most recently, the company increased its annual dividend to $0.60 per share. GG's dividend is up 233% since 2009.

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GG has a mean sell side recommendation of 2.1. It has a mean target price of 52.2 and high target price of 70.99; at the current price of $36.9 it represents an upside of 41% and 92%, respectively.

Conclusion

We have a buy rating on GG. As mentioned in the start of the article the factors we consider most important when analyzing a gold company include: growth profile, cash flow generation, political risk profile, and asset quality. Goldcorp scores high on all those areas. It offers one of the best growth profiles of any senior gold producers. Over the next five years the company is expected to increase production by ~70% to 4.0-4.2 million ounces. Cerro Negro (2013), Eleonore (2014), Cochenour (2015) and Camino Rojo (2016) are expected to be the major drivers of this growth. With Pueblo Viejo in production now and most of the capital expenditure behind it now, the company is expected to generate significant cash flow in 2013.

Goldcorp has a profile of high quality, low cost assets. The company has operations in relatively safe jurisdictions with low political risk and the company plans to continue operating in such safe jurisdictions. The company has a strong balance sheet with an investment grade rating. It has an attractive dividend yield of 1.7% and has increased its dividend progressively since it first started paying dividends in 2011.

Goldcorp is headquartered in Vancouver, Canada and is listed on both the Toronto Stock Exchange (TSX: G) and the New York Stock Exchange . Additionally, GG is also part of several indices such as the S&P/TSX Composite Gold Sub Industry Index, S&P/TSX Global Gold Index, and the AMEX Gold Miners Index to name a few. The company has total of 811 million outstanding shares. Almost three-fourths of the float is held by institutions and approximately 80% of the shares are held by American and Canadian investors.

Risks to Our Analysis

Gold prices can be volatile and are highly sensitive to macroeconomic factors including central bank policy, government fiscal policy, growth rates, and economic confidence. Moreover, any unexpected delay or issue related to GG's growth projects can also put a downward pressure on the stock price. Variability in ore quality and structural issues related to the company's mining operations can reduce production volume and can have a negative impact on earnings. Since GG has operations in many countries, a volatile exchange rate also presents a risk to GG's earnings.

Note: Other than our own research and company documents, data in our reports is also sourced from Yahoo Finance, Google Finance, Y-Charts, Morningstar, Reuters, and Bloomberg.

*Difference may be due to rounding.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.