Goldcorp (GG) is the world's second largest producer of gold in terms of market capitalization. Goldcorp's cost effective exploration strategy has helped it attain a low exploration cost of $14 per ounce of gold for the year 2011. Things are looking even better for Goldcorp in 2013. Below, I will discuss three reasons investors should consider Goldcorp now.
Volatile But Trending Higher
Prices for gold have been highly volatile. In June 2012, the price of gold was somewhere around $1,685 per ounce whereas in November 2012, it was about $1,730. Then, in December 2012 it was $1,650 per ounce, suggesting lack of stability in the market. Based on current trends and analyst predictions, I believe that the price will not move much further beyond $1,668 per ounce of gold, that too at a pace much slower than in past years.
Although returns from gold have been positive (+9.5% for 2012), they haven't been nearly as exciting as in the past. Again, there is a mixed feeling among the analysts about the prices. Some feel that they may go up, but some (Bloomberg for example) feel they might crash to 10% by 2015. I am confident that the gold price will maintain its upward movement. By 2016, Goldcorp expects to increase its production capacity by 70% to 4.2 million ounces of gold from the current level of 2.47 million ounces. With gold prices moving slowly but surely upward, I am encouraged by Goldcorp's progress and am optimistic about its financial health.
What I like most about Goldcorp is its low cash production cost per ounce. In addition, a few key resources provide adequate if not excellent long-term stability. A few are listed here.
Red Lake mine, located in Ontario, is the biggest gold producer for Goldcorp currently, having yielded 620,000 ounces of gold in 2011 at just $360 per ounce. Future plans for its Cochenour project in Red Lake are expected to produce about 250,000 to 275,000 ounces of gold annually by the end of year 2014 at a cash cost of $360 per ounce. At the end of September 30, 2012, the company announced that it is working on the development and changes in the design of the mine.
Goldcorp's next big gold-producing mine, Penasquito in Mexico, is expected to produce approximately 400,000 ounces of gold in the year 2012. It produced about 250,000 ounces of gold in the year 2011 and about 126,000 ounces of gold in the third quarter of 2012, an increase of about 126%. The production estimates of the company related to future production appear to be on track.
Another significant input in production is expected from its Cerro Negro mine in Argentina, which is expected to produce about 500,000 ounces of gold annually at a cash cost of $300 per ounce in the late 2013. Goldcorp. owns a 40% stake in the Pueblo Viejo mine, located in the Dominican Republic, which is expected to produce about 415,000 to 450,000 ounces of gold annually for an initial period of five years at a cash cost of $350 per ounce.
The significance of these resources lies in the fact that they support the company's USP- low cash cost of production, leading to higher margins and profitability. Coupled with a higher production volume, the company appears to be set to maintain its leadership position even if gold prices move downward as some analysts claim.
Goldcorp's total cash cost of per gold ounce has fallen to $220 per ounce, which is a net of by-product copper, silver, lead and zinc credits, down from $258 per ounce in the same quarter last year. Goldcorp's net earnings attributable to shareholders has increased to about $500 million in 2012, up from $336 million in the same last year. I cannot say that this kind of ongoing efficiency accrues to many other companies around the world, especially for a product that retails for so much more.
Goldcorp's operating margin for the trailing twelve months is 41%, much higher than peers such as Barrick Gold (ABX) and Newmont Mining (NEM) with 35% each, Kinross Gold (KGC) with nearly 30% and the lagging industry average of 4%.
Goldcorp's free cash flows have increased to $243 million in the third quarter of 2012, up from $224 million in the same quarter last year and $76 million in the second quarter of 2012, which clearly indicates it has substantial funds for expansion. I always maintain that cash is king - the company is paying dividends out of the right pockets, which are higher in the third quarter of 2012 at about $110 million, up from about $80 million in the same quarter of 2011.
Robust non-cash returns
There has been an increase of about 7% in the stock price of Goldcorp since August 17, 2012, from $41.11 to $44.17. When compared with the industry leader Barrick, Goldcorp's stock performance in the last three months has been far better.
At 23.5 times price to earnings, it may look a bit more expensive than its peers such as Freeport-McMoRan Copper & Gold (FCX) at 12.4 times, Barrick with 10.75 times and an industry average of around 15 times. However, it is still far more affordable than many others such as Newmont with 221.5 times or Yamana gold (AUY) with 42 times, and with far better fundamentals.
Interestingly, Goldcorp's forward price-to-earnings growth multiple for the next five years is just 1.2 times, which clearly beats out other players such as Barrick with 54 times, Yamana with 2 times and Freeport with 3 times. Overall, the low cash production cost strategy and partnership strategy of Goldcorp clearly shows its potential in terms of its sustained and consistent growth, which makes it a great buy.