Seeking Alpha
Profile| Send Message| ()  

As part of the world's top six gold producers series, the last article was discussing about Yamana Gold (AUY) ranked last. Today, we will look at the 5th-ranked gold producer in the gold market (GLD). Providing in-depth analysis of its assets, financial health and the future outlook of the company, the objective is to offer an insight for potential investors to guide them on wise investment decisions.

The senior gold producer we are about to see is bringing more than gold to the table. As a matter of fact, the company also produces silver, copper, lead and zinc besides gold. Moreover, its operations are located in politically stable jurisdictions throughout the Americas which allows the firm to regroup its assets on the same continent offering similar attributes.

Goldcorp (GG)

Goldcorp is a Canadian-based company owning eight assets in North America and 12 properties in Central and South America. In total, 12 mines are producing gold, eight projects are in development in which four are being studied for feasibility.

Source: January 2013 Investor Presentation

The strategy of the company is based on four elements: the first element is to rely on financial strength with one of the strongest balance sheet in the sector. Cash and cash equivalents accounted for $918 million by the end of 2012 and an undrawn credit facility of $2 billion is still available. The company forecasts an average annual operating cash flow of $3.7 billion over the next five years providing significant financial flexibility for new opportunities.

Estimated Cash flow Growth Per Share 2012-2015

Source: January 2013 Investor Presentation

The second element is to sustain very-low cost of production. In 2011, Goldcorp produced 2.51Moz (million ounces) of gold totaling cash cost by-product of $220/oz. Another element is to ensure a steady growth for the company from which they expect to increase the gold production by 70% in the upcoming five years.

Source: January 2013 Investor Presentation

Finally, the last element of GoldCorp's strategy is to keep adding value to its shares by funding growth internally. It is worth noting that its active dividend policy has delivered superior shareholder returns over the past seven years.

Top Producing Mines

Red Lake, Canada

Source: March 2013 Investor Presentation

Located about 143 miles northwest of Dryden in the province of Ontario, Red Lake produced 507,500oz of gold in 2012. According to the NRH research of the top 50 mines in the world listed by grade, the deposit ranked 10th for containing 8.01Moz of gold at 11.81 g/t. Needless to say, the underground mill mine is the top asset of the company not only for its production or grading but also for its renewal potential.

(click to enlarge)

Source: Cypress Development Projects

The company successfully drilled five times during 2012 and it resulted in the discovery of the NXT Zone next to the high-grade zone. Goldcorp reported that the construction is progressing on an exploration drift with expected completion by the end of the current quarter which will provide a platform to increase drill density for conversion of resources to reserves. The newly discovered deposit will keep all the attention in the short-term to develop the structure for production. The life expectancy of Red Lake is 12 years. Proved and probable reserves are estimated at 3.95Moz of gold.

Musselwhite, Canada

Source: March 2013 Investor Presentation

Located about 298 miles north of Thunder Bay, Ontario, the underground mill mine produced 239,200oz of gold in 2012. Musselwhite is ranked 37th on the same NRH list with 3.34Moz graded at 6.08 g/t. The 2010 discovered mine is also being explored with the focus on the northern extension of the Lynx Zone, drilling of the West Limb and the underground extension of the PQ deeps. Proved and probable reserves are estimated at 2.28Moz of gold. The mine has a life expectancy of 13 years.

Source: Goldcorp

Peñasquito, Mexico

Source: March 2013 Investor Presentation

The two open-pit mines are located in the state of Zacatecas, producing 411,300oz of gold last year. The Peñasquito mine achieved commercial production in 2010 and full production is expected this year. The deposit is ranked 13th on the NRH top 50 producing mines by global resources with 25.27Moz of gold graded at 0.35 g/t. The company will continue to bring more water wells into production within the Cedros Basin in addition to new de-watering wells within the Chile Colorado pit. The additional water wells in 2013 are expected to increase mill throughput to 105,000 tonnes per day compared to 98,800 tonnes per day achieved in Q4 2012.

Furthermore, completed in Q4 of 2012, the construction and commissioning of the Waste Rock Overland Conveyor System is expected to result in important operating cost savings compared to truck haulage. A water and tailings study to develop a comprehensive long-term water strategy for the Peñasquito district is under way and should be completed during the first half of 2013.

(click to enlarge)

Source: Google Earth

Goldcorp estimates the total reserves of gold between 0.89Moz to 0.97Moz. The mine has an estimated proved and probable reserves of 0.91Moz of silver, 5.81M lbs of lead and 13.96M lbs of zinc. Peñasquito has a life expectancy of 22 years.

Newest Gold Producing Mine

Pueblo Viejo, Dominican Republic

Source: March 2013 Investor Presentation

Located in the Dominican Republic about 62 miles northwest of the capital city of Santo Domingo, Pueblo Viejo is a joint venture. Goldcorp holds a 40% interest while Barrick Gold Corporation (ABX) owns the remaining 60% interest as well as being the mine operator.

Source: Goldcorp

The Pueblo Viejo gold, silver and copper mine is one of the largest gold assets in the world according to Goldcorp. However, there is some potential impacts of power availability at the mine although grid power has been reliable to date. As part of a longer-term optimized power solution, the construction of a 215 MW dual fuel power plant is expected to start operations in mid-2013. Upon commissioning, the new plant will provide dedicated long-term power to Pueblo Viejo.

The mine started in August 2012 with an anticipated slow production of 41,200oz of gold (40% basis). Then, commercial production started in January 2013 and the company estimates the production between 330,000oz to 435,000oz of gold. The proved and probable gold reserves are, as of 2012 about 25.3Moz which Goldcorp's interest represents 10.1Moz. The NRH research ranked the deposit 7th on the top 50 producing mines by global resources. As for other minerals, Goldcorp's interest proved and probable reserves of silver are about 62.53Moz and 232M lbs of copper. The Pueblo Viejo world-class asset has a projected production life of more than 25 years.

Top Development Projects

Cerro Negro Project, Argentina

Source: March 2013 Investor Presentation

The Cerro Negro Project in the province of Santa Cruz, Argentina remains on track to start production in late 2013 and should produce a low amount of gold. In the first full five years, expected production should be around 525,000oz per year and the cash costs per ounce are estimated at less than $350/oz. According to Goldcorp, Cerro Negro, acquired in 2010 has seen its gold reserves and resources nearly doubled. New discoveries in 2011 would support the company's expectation that Cerro Negro will have a long life expectancy as well as a high gold quality grade with low production costs. The NRH research confirmed the world-class asset of the mine by listing it 16th on the top 50 deposits by grade with approximately 6.13Moz of gold at 8.08 g/t.

Furthermore, the mine has several high-grade vein structures including the Mariana Central, Mariana Norte, San Marcos and Eureka. The Mariana Central and Mariana Norte veins will provide the first production of the mine. The underground ramp development of the Eureka vein has advanced to more than 1.3 miles of the total 4.2 miles planned. The Eureka stockpile now has about 40,300 tonnes at an estimated grade of 11.1 g/t of gold and 204 g/t of silver. The capital expenditure for the project is estimated at $1.35 billion.

Éléonore Project, Canada

Source: March 2013 Investor Presentation

Located in the northeast corner of the Opinaca Reservoir in the James Bay region of Québec, Canada. The Éléonore Project is one of the most significant development project for Goldcorp. According to the company, a 2011 pre-feasibility study update for Éléonore reports a low-cost gold production in the heart of one of the most attractive mining jurisdictions in the world. The first gold production remains on track for late 2014 and full annual production is estimated at 600,000oz of gold.

Work to date indicates an increase in initial capital expenditure to $1.75 billion. The mine is ranked 43rd on the top 50 deposits by global resources and 14th on the top 50 by grade with 7.68Moz of gold at 9.19 g/t according to the NRH.

Cochenour Project, Canada

Source: March 2013 Investor Presentation

The Cochenour Project is an important part of Goldcorp's future plans in the Red Lake district with the construction of the three miles haulage drift to connect the Cochenour shaft with the Red Lake mine. The project is expected to end at the latest Q1 2014.

Upon completion, the structure will provide high-quality gold production in the beginning of 1H of 2015. The drift will enable ore from the Cochenour/Bruce Channel deposit to be hauled directly to the Red Lake mine for processing at the existing mill facilities.

Following ramp-up to full production, forecast production is expected to be between 225,000 to 250,000oz of gold. Goldcorp reported that during 2013, the exploration drilling from the haulage drift will continue to test the unexplored ground at depth in the heart of the prolific Red Lake gold district. The Cochenour mine is ranked 12th on the NRH research of the top 50 mines in the world listed by grade, containing 3.21Moz of gold at 10.85 g/t.

Projects Delayed and On Exploration Phases

El Morro Project, Chile

Source: March 2013 Investor Presentation

Located in the Atacama Region in north-central Chile, El Morro is about 50 miles east of the city of Vallenar. Goldcorp holds 70% ownership in the joint venture and is the project's operator with the remaining 30% held by New Gold (NGD). The deposit is expected to be a major low-cost gold and copper producer with significant exploration potential. Estimated at 17 years, the life expectancy of the mine may be extended depending on future exploration efforts projected to test the potential bulk-mineable gold and copper production underneath the bottom of the current pit.

Initial production was expected for 2017 with full production in 2018. However, the project is suspended since April 2012 pending the resolution by the Chilean environmental permitting authority of certain permitting deficiencies specifically identified by a decision of the Antofogasta Court of Appeals. Goldcorp is working with the local authorities to rectify these deficiencies but no time frame has been determined for its resolution.

El Morro is expected to produce an average of over 210,000oz of gold and 200M lbs of copper per year according to Goldcorp. By the end of 2011, proved and probable reserves totaled 5.8Moz of gold (70% basis) but the estimations increased in 2012 by 16% to 6.73Moz. As for copper, estimates have increased as well from 4.4 billion lbs of copper (70% basis) in 2011 to 4.88 billion lbs in 2012. The capital expenditure for the project (100% basis) is estimated at $3.9 billion over a five-year period.

Camino Rojo Project, Mexico

Source: March 2013 Investor Presentation

Located 31 miles southeast of the Peñasquito mine in the state of Zacatecas in north-central Mexico, Camino Rojo gold and silver mine is an advanced-stage project. Acquired in 2010, the area includes the Represa deposit which contains measured and indicated resources of 2.8Moz of gold and 52.6Moz of silver.

A recent study reported that a heap leach facility would process near-surface oxide and transition mineralization. However, even if the study has demonstrated strong financial returns, it appears for now that it does not reflect recent positive exploration results in the sulfide portions of the deposit. More studies are thereby required to ensure its viability.

Financial Highlights And Future Outlook

This year, Goldcorp committed capital expenditures totaling about $2.8 billion compared to $2.6 billion last year for its projects including $775 million at Cerro Negro, $650 million at Éléonore, $100 million at Cochenour and $50 million at Camino Rojo. Exploration expenditures should increase as well from $207 million to $225 million this year.

Production totaled 700,400oz of gold for Q4 2012 and 2,396,200oz for the entire year compared to 687,900oz and 2,514,700oz respectively in 2011, a 1.8% growth for Q4 2012 but a drop of 4.7% from last year. However, an important rise in production is expected in 2013.

Regarding the by-product basis cash cost, a total of $300/oz was achieved for 2012 compared to $223/oz in 2011, a 34.5% increase. Although the cost per ounce are low, the company is expecting a significant increase this year for cash cost by-product between $525 to $575. The rise should be closely monitored to prevent costs escalating too much. Operating cash flows totaled $787 million for the Q4 2012 and $2.09 billion for 2012 compared to $727 million and $2.36 billion respectively in 2011, a 8.25% increase for Q4 2012 but a drop of 11.4% from last year.

Goldcorp's 2012 mineral proved and probable reserves are about 67.08Moz of gold, 1.16Moz of silver, 5.76M lbs of copper, 5.81M lbs of lead, 13.96M lbs of zinc. This is the 9th consecutive year of reserves growth as you can see on the chart below.

(click to enlarge)

Source: March 2013 Investor Presentation

Revenue is growing from year to year with $3.74 billion in 2010, $5.36 billion in 2011 to $5,44 billion last year. Cash and cash equivalents were $918 million last year, a net decrease of 38.9% over 2011. This could be explained by the 34.5% increase in cash costs over the same period. The company expects to see its cash costs rising again this year due to various aspects depicted in the following chart.

(click to enlarge)

Source: March 2013 Investor Presentation

Let's see if the company's total capex is affecting its long-term debt. As we will note, it increased moderately from $695 million in 2010, $737 million in 2011 to $783 million last year. Goldcorp has a PE ratio of 18.29 and while Yamana compared some metrics with its peers, it is interesting to see that the latter has a PE ratio of 29 which suggests that Yamana is using far more heavily its debt to finance the development of its projects than Goldcorp.

Its ratio is also higher than the 20.21 PE ratio of the gold sector. Moreover, my last article was exactly saying that Yamana was using much of its finance for investments and the comparison gives us some perspective.

GG PE Ratio TTM Chart

Furthermore, keeping the comparison between the two producers allows us to appreciate another important value, the profit a producer makes when producing gold. The chart above shows which company is more profitable by comparing the net income.

GG Net Income Quarterly Chart

The net income comes in handy, therefore we will use it to look at the earnings per share for both producers. Depicted below, the EPS diluted comparison suggests what we were expecting but the gap between the two is nonetheless quite telling.

GG EPS Diluted Quarterly Chart

Bottom Line

Goldcorp has an impressive portfolio of assets producing gold. Considering the new projects under way, these mines will make significant contributions to the overall production growth with first gold production expected as follows: Cerro Negro, late 2013; Éléonore, late 2014; Cochenour, first half 2015; Camino Rojo, 2016. Adding the world-class asset of Pueblo Viejo that just started commercial production this year, the future bodes well for the company and its shareholders.

Source: March 2013 Investor Presentation

Goldcorp's dividend yield offers 1.85% and it has steadily increased over the years, up 233% since 2009 reflecting the strong financials of the company. The dividend yields almost the same compared to Yamana's 1.82%.

Finally, I recommend Goldcorp for all the intangibles explained as well as its strong balance sheet. The firm's stewardship is managing with poise and vision following the strategy guidelines to ensure growth value of its shares while keeping the production cash costs low.

Within the next few days, my next article will reveal the major player in the gold sector which holds the 4th place out of the top six gold producers around the globe with mining operations spreaded on four continents.

Source: World's Top 6 Gold Producers: 5th Place, Goldcorp