Goldcorp Inc. (GG) is one of the few senior gold producers, which is looking at a production growth year-over-over and in the next five years is expected to grow production by 70%. The company scores high on all four important factors for gold companies including growth profile, cash flow generation, political risk profile, and asset quality. We have a buy rating on GG.
Canada's second largest gold producer reported better than expected 4Q and complete year 2012 results. The drop in quarterly profit was lower-than-expected as the improved performance at two key mines positioned GG for a strong year.
The Canadian gold miner, which last month increased development costs at growth projects and reduced its 2013 production forecast, said 4Q12 production benefited from a strong performance at its Penasquito gold mine in Mexico and its Red Lake gold mine in Canada. Both mines had struggled with operational issues earlier in 2012.
"Excellent quarterly performances at our two largest mines resulted in a strong finish to 2012 and position Goldcorp for a much improved 2013," CEO, Charles Jeannes, said in the statement. "Red Lake in Canada benefited from full access to higher grade gold zones while Penasquito in Mexico performed well despite commencing mining in a new, lower-grade phase of the pit during the quarter."
The Vancouver-based miner is one of few senior producers to expect production growth Y/Y. The company is pushing ahead with three major growth projects, a different approach to that of its main rival and the biggest Canadian gold producer, Barrick Gold (ABX). Barrick Gold last week booked a multi-billion dollar charge on a growth project and said it has no immediate plans to build any more mines.
Goldcorp reported adjusted 4Q12 EPS of $0.57, beating consensus estimates of $0.54 by 5.6%. The Vancouver based gold miner produced 700,400 ounces of gold in Q4 at a by-product cash cost of $360 per ounce, bringing total 2012 production to 2.39 million ounces at a by-product cash cost of $300 per ounce. The yearly by-product cash costs came $15 less than the revised January guidance of $315 per ounce.
2013 Production Expected to Increase By ~12%
Goldcorp reiterated its 2013 gold production guidance of 2.55-2.8 million ounces, an increase of ~12% at the midpoint of guidance. Pueblo Viejo achieved commercial production in January and is expected to contribute ~10% to total production growth in 2013.
The by-product cash costs are also expected to increase to $525-$575 per ounce. The impacts of lower grades and by-product production at Penasquito and industry-wide costs inflation are driving higher forecasted cash costs. However, five year by-product cash costs are expected to remain below $500 per ounce. All-in sustaining costs per ounce at expected to increase to $1,000-$1,100 in 2013 from $874 in 2012.
Reserve and Resources Continue To Grow
Total proven and probable gold reserves increased by ~4% to 67.1 million ounces, representing a ninth consecutive year of increase in reserves. On a per share basis, gold reserves increased 3.5%. Gold reserve growth at Cerro Negro, Camino Rojo, Marigold and Porcupine more than offset decreases at Penasquito, Los Filos and Red Lake, which decreased primarily as a result of the removal of marginally economic gold ounces.
Source: Company Documents
Cerro Negro saw a decent increase in reserves Y/Y; however, total Cerro Negro proven and probable reserves have now increased by 177% to 5.7 million ounces from the initial proven and probable gold reserve estimate of 2.1 million ounces at acquisition in December, 2010. Similarly Marigold saw a decent increase in reserves Y/Y. Total proven and probable reserves at Marigold increased to 3.3 million ounces, extending mine life by an additional five years. The biggest boost to the overall reserve increase was attributed to Camino Rojo, which contributed an increase of 1.6 million ounces to the total reserves portfolio.
Measured and indicated gold resources in 2012 declined to 25.9 million ounces in 2012 from 28.2 million ounces in 2011. The decrease in resources mainly came from El Morro, Camino Rojo and Musselwhite, partially offset by increases at Marigold and Wharf. Total Inferred resources increased to 25.9 million ounces in 2012 compared to 23.1 million ounces the year before.
Approximately 24% increase in reserves was due to increase in reserve price, which the company increased to $1,350 per ounce from $1,200 per ounce. The company also increased its resource price up to $1,500 per ounce from $1,350 per ounce. Its worth mentioning here that compared to GG, Kinross Gold (KGC) maintained a flat price assumption of $1200 per ounce, which we think is conservative.
Goldcorp's Chief Executive Officer Charles Jeannes recently said in an interview that gold will end 2013 at a higher price than where it was at the start of the year. "I do definitely believe that the macroeconomic factors that have supported the move in the gold price in the last 10 years are even more in place today than they have been," he said. "I expect the bull market for gold to continue."
Source: Company Documents
In the last quarter of 2012 the company generated $721 million in operating cash flow before working capital changes. The company ended the year in a strong financial position with approximately $900 million in cash, an undrawn $2 billion credit facility, and long-term debt of only $783 million. The current working capital together with future cash flows and available credit facilities is sufficient to fund the company's peer-leading growth profile.
2013 capital expenditure is expected to be approximately $2.8 billion, an increase of ~$1.0 billion from 2012. Cerro Negro project largely drove the increase, with Cochenour and Eleonore also contributing an increase in capital expenditure. Of the total capital expenditure, approximately 60% is allocated to projects and 40% to operations. Major project capital expenditures in 2013 include approximately $775 million at Cerro Negro, $650 million at Eleonore, $100 million at Cochenour, and $50 million at Camino Rojo.
Valuation & Ratios
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 17.2 compared to the industry average of 27.2 and company's own five years average of 39.6. It has a forward P/E of 11.1 and PEG ratio of only 0.6. GG has price-to-book ratio of 1.2 compared to the industry average of 1.4. It has price-to-sales ratio of 5.2 compared to historical average of 8.2, and price-to-cash flow ratio of 14.0 compared to the historical average of 16.4.
GG is boasting a strong balance sheet. It has debt-to-equity ratio of only 3.4% compared to 18% of industry. Similarly debt-to-total capital ratio is only 3%. GG has interest coverage ratio of 93.3x, which the company has increased from 17x in 2009. Goldcorp also has a strong current ratio of 2.2x.
We have a buy rating on GG. The company ended the year on a positive note. As we said in the introduction, Goldcorp scores high on all four important factors for gold companies including growth profile, cash flow generation, political risk profile, and asset quality. 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 4.2 million ounces. Pueblo Viejo (in production), 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. Cerro Negro also remains on track for first gold production in late 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 strong balance sheet with investment grade rating. It has an attractive dividend yield of 1.8% and has increased its dividend progressively since it first started paying dividend in 2011.
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