Goldcorp: A Value Investment?

Jun. 4.13 | About: Goldcorp Inc. (GG)

This seems like a good time to buy calls on Goldcorp Inc. (NYSE:GG) stock at $29.93 a share. The EV/EBITDA offers further verification for investors. The EV/EBITDA is the enterprise multiple and it takes into account a company's debt and cash levels in addition to its stock price and relates that value to the firm's cash profitability. The enterprise multiple is seen as the most encompassing and is generally considered the most useful in analyzing the current valuation of a stock.

Earnings Before Interest, Taxes, Depreciation, and Amortization [EBITDA] is often more desirable than P/E because it is considered less docile than earnings and P/B because it is a better measure of cash profitability than book value. However, it is not without its flaws.

Taking out interest, taxes, depreciation and amortization can make even completely unprofitable companies appear to be financially healthy. A look back at the dotcoms offers numerous examples of firms that actually had no future, no hope and certainly no earnings, but became the darlings of the investment world. The use of EBITDA as a measure of fiscal health made these companies look attractive.

It is always best to look at several different multiples. Still, the EV/EBITDA gives a good picture about the value of a stock like GG.

Goldcorp has strong fundamentals

Before delving deeper into the EV/EBITDA, lets highlight some of the challenges that Goldcorp faces and the gold producer's performance in the recent past.

Goldcorp is the largest miner by market capitalization and it has seen its shares fall 29% year-to-date just as gold prices have declined 20% year-to-date. The Q1 earnings for Goldcorp were less than impressive with the reported earnings of $0.31 per share missing estimates of $0.39 per share. Additionally, the gold mining company's revenue is down 16% when compared to Q1 2012. Goldcorp did increase its production by 17% in comparison to Q1 2012. So it was really the fall in gold prices that was to blame for the missed earnings.

Goldcorp's performance will hinge on gold prices and there isn't much the precious metals mining firm can do except to control costs and increase liquidity. It hasn't been faring too well either in its ability to keep costs down when compared to its closest competitors Barrick Gold Corporation [USA] (NYSE:ABX) and Newmont Mining Corp (NYSE:NEM). But the good thing is that its reported all-in sustaining costs of $1135 is much less than the current gold price per ounce.

When it comes to liquidity, Goldcorp is the industry leader with $1.46B in cash and cash equivalents in Q1 2013. The debt-to-equity ratio of 0.10 beats out Barrick's 0.59 value and Newmont's 0.37 figure.

Goldcorp will have a lot of new mines ready to start production in the next few years. The solid liquidity position for Goldcorp is the key along with its strong management team. The earnings outlook for 2013 remains weak because Goldcorp hasn't been as efficient in reducing costs in addition to the falling gold prices. The great thing for Goldcorp is that several of its mines are in regions that are politically stable.

Now let's take a look at Goldcorp's EV/EBITDA.

EBITDA Calculation

To compute EBITDA, equity analysts start with net earnings. Interest expenses, taxes, depreciation and amortization are then added to that earnings number.

12 months ended

Dec 31, 2012

Dec 31, 2011

Dec 31, 2010

Dec 31, 2009

Dec 31, 2008

Net income

1,749

1,881

1,381

240

1,476

Interest Expense

30

23

99

59

7

Provision for Income Tax

503

686

346

207

295

Earnings before interest and tax (EBIT)1

2,282

2,590

1,826

486

1,778

Depreciation and amortization

675

694

623

526

499

Earnings before interest, tax, depreciation and amortization (EBITDA)

2,957

3,284

2,449

1,012

2,277

Click to enlarge

Source: Goldcorp's Annual Report

Goldcorp Inc.'s EBITDA rose from 2010 to 2011, but then declined slightly from 2011 to 2012.

Current EV/EBITDA

 

Goldcorp Inc.

Basic Materials

Selected Financial Data (USD $ in millions)

Enterprise value [EV]

24,096

 

Earnings before interest, tax, depreciation and amortization (EBITDA)

2,957

 

Ratio

EV/EBITDA

8.15

9.95

Click to enlarge

Goldcorp has a lower EV/EBITDA than the basic materials industry with a 8.15 value. Goldcorp is relatively undervalued. GG's EV/EBITDA has declined from 2011 to 2012 indicating the steep rise in price of gold during the early part of 2012. Additionally, Goldcorp has actually had an EV/EBITDA value much higher than the basic materials industry average 4 times in the last 5 years. So it does appear that Goldcorp is an attractive investment according to the enterprise multiple.

EV/EBITDA Historical Ratios

 

Dec 31, 2012

Dec 31, 2011

Dec 31, 2010

Dec 31, 2009

Dec 31, 2008

Selected Financial Data (USD $ in millions)

Enterprise value

29850

35,300

37,060

28,750

22,790

Earnings before interest, tax, depreciation and amortization (EBITDA)

2,957

3,284

2,449

1,012

2,277

EV/EBITDA, Comparison to Technology Industry

Goldcorp Inc.

10.09

10.75

15.13

28.41

10.01

Industry, Basic Materials

10.46

6.45

8.05

11.95

7.67

Click to enlarge

The EV/EBITDA is useful for transnational comparisons because it ignores the distorting effects of individual countries' taxation policies. Let's now look at how the Enterprise Value is obtained.

Current EV calculation

Current share price

$ 29.93

No. shares of common stock outstanding

812,092,065

Market Cap

24,030

Add: Minority interest

213

Add: Long-term debt

783

Less: Cash and cash equivalents

918

Less: Short-term investments

12

Enterprise value 1

24,096

(USD $ in millions)

Click to enlarge

1 Goldcorp has no short-term debt

EV is the market value of common equity, preferred equity and debt minus the cash and short-term investments value. Goldcorp's EV has been volatile over the last five years and it has declined back to 2008 levels.

Conclusion: Gold prices will be the key

The good thing for Goldcorp in the near term is that the technical indicators for gold are indicating that it is a strong buy. The same can be said when looking at Goldcorp's technical chart in multiple time frames.

Still, the price action indicates a downtrend over the long term. It is true that the Moving Average Convergence Divergence [MACD] indicator has entered into bullish territory, but it still signals downward momentum.

Nonetheless, after considering the relatively low EV/EBITDA value of 8.15, options traders might look to buy calls on Goldcorp with near to mid-term expirations. This is also be a good time for value investors to dollar cost average on GG stock. I think the share price will continue to soar in the next couple of weeks and Goldcorp is an attractive long-term investment.

Note: All material sourced from Morningstar and MSN Money.

Disclosure: I am long GG.

Business relationship disclosure: This article was written by a research analyst at Investor Aide. Investor Aide is not receiving compensation for it (other than from Seeking Alpha). Investor Aide has no business relationship with any company whose stock is mentioned in this article.