During Thursday's earnings call, Goldcorp Inc. (GG) CEO Charles (Chuck) Jeannes clearly stated that his company is, "not going to make major reactions to a short-term price move." Luckily for us value minded investors, the market already has. Goldcorp is trading just a hair above its book value.
Toronto-based Goldcorp hasn't posted an annual loss since 2000. Between 2001 and 2010, Goldcorp grew net income by an annual compounding rate of 42.9%, from just $52.8 million to $1.88 billion. Rather than using debt to finance its rapid expansion, the company diluted shares by about 350%, yet maintained a per share earnings compound annual growth rate of 22%. High enough to keep most investors from complaining about the dilution of their existing shares.
A champion among its peers
Currently, Goldcorp's liquidity is perhaps its greatest strength. Unlike another Toronto based miner, Barrick Gold (ABX), Goldcorp has been incredibly prudent about its expansion. In fact, it is hard to believe these two companies have headquarters in the same city. In an earlier article I explained why I find Barrick far too risky to warrant an investment despite its low valuation. Basically, Barrick over extended itself just as the price of gold began falling. If gold continues its descent, Barrick could be in big trouble.
Goldcorp, on the other hand, has the liquidity to continue operating and growing, even if gold remains near $1,400 per ounce or a bit lower. Goldcorp finished 2012 with about $783 million in long term debt. During Q1 2013 it completed an offering of $1.5 billion in five and ten year notes. During the latest call, Jeannes claimed that the company is sitting on about $2 billion in cash and over $4 billion in available liquidity.
Goldcorp has a five-year plan to increase production by 70% while lowering overall costs. There are a handful of reasons that I think Goldcorp will be able to execute and remain profitable going forward despite continued weakness in gold prices. I'll start with the hurdles it currently faces.
Investments that haven't begun producing
Goldcorp currently has three projects underway that have not begun producing. According to Jeannes, spending on the projects is about 60% complete. The most troubling one is the Cerro Negro in Argentina. A power permit is expected to delay the beginning of production from late 2013 to early 2014. As far as I can tell, with respect to gold miners, the Argentine government has been relatively easy to work with. For example, water contamination issues have stalled Barrick Gold's Pascua-Lama mine on the Chile-Argentina border. The court order is on the Chilean side. Meanwhile not a peep from Argentina.
As far as I can tell, Goldcorp's 70% stake in the similarly troubled Chilean project at El Morro isn't going anywhere fast. The difference is Goldcorp was able to suspend the entire project before spending billions developing the mine. This project was suspended about a year ago, Goldcorp management indicated that its modest budget of about $60 million for this year will be one of the first items on the chopping block if gold prices retreat further.
There shouldn't be any political risk for the other two projects as they are located in Goldcorp's home country. The Cochenour in Ontario should begin producing in late 2013. The Éléonore in Quebec is on track to produce in late 2014.
Resource nationalism in the Dominican Republic
Goldcorp has a 40% stake, Barrick the other 60%, in the Pueblo Viejo mine. The newly elected president Danilo Medina is making noise about raising taxes on the operation's profits.
Chile is just plain obstinate about allowing mines to damage local environments, but politicians around the world are beginning to ask for a larger cut of gold producers' profits. That's one of the things I like about Goldcorp. Because most of its mines are in North America, its exposure to political risk is limited.
Producing assets in low grade cycles
Several of Goldcorp's recently completed mines are just beginning to produce at a rate of less than one gram per ton. The good news is that the mines are operational and will get to the higher grade cycles late this year, and early next.
On target to meet guidance
In Q1 2013, Goldcorp produced just under 600,000 ounces. Hopefully the market will continue to assume that it won't be able to meet its target of 2.55-2.8 million for the year. The well positioned company is cheap now, but before taking on the risk, I'd like to see it get even cheaper. Another wave of panicked gold selling, and/or similar production numbers for Q2 2013 would make a long position on Goldcorp the sort of asymmetrical bet - much more potential gain than loss - that helps me sleep at night.