Goldcorp (GG) is the largest gold mining company in the world measured by market cap and, as gold prices have declined approximately 20% this year, the company's stock has fallen by nearly 30%. The company's earnings for the first quarter of 2013 were not particularly attractive and the reported EPS of $0.31 per share was less than the consensus estimate of $0.39 per share. When you consider that revenues were down 16% year over year despite a growth in production of 17%, it is clear that the company was significantly affected by the decline in gold prices. Its future performance will depend on gold prices and there is nothing the company can do other than try to reduce costs while managing liquidity. It has not done as well as its competitors Barrick Gold Corporation (ABX) and Newmont Mining Corp (NEM) when it comes to controlling costs but the all-in sustaining cost of $1135 per ounce was considerably below the current price of gold. It is solid on the liquidity front with cash and cash equivalents of $1.46 billion as of March 31, 2013, and its debt/equity ratio at 0.10 is superior to the 0.59 reported by Barrick and the 0.37 by Newmont. Goldcorp has new mines going into production in the next few years and several of these are in politically stable geographies.
The outlook for gold
Gold prices have now dropped by 15% since March when the sharp decline commenced and 20% since the beginning of the year. This is in contrast to the strong rise in gold prices in recent years, which were quoted as evidence that investors were seriously worried about inflation and the strength of currencies at a time when central banks throughout the world struggled to cope with the global economy. One of the most bullish gold investors, John Paulson, is now trying to deemphasize gold in his hedge funds and has informed investors that he is segregating gold from his other investments so that they can judge the progress in investments other than gold. Gold is in no danger of losing its importance as an asset class for investors but clearly some of the sheen is now gone.
Other gold stocks
Despite the decline in the indices, stocks like Goldcorp and Barrick continue to stand out as good value and dividend yield plays. The performance of Barrick stock would appear to indicate that investors understand that the concerns about the Pascua Lama mine are exaggerated and the dividend yield of 4.2% and the copper reserves are being correctly factored into the price. Newmont has also held up well and the median price estimate of analysts at over $41 against the current price of $33.90 indicates that there is still some upside remaining. In addition to this, the dividend yield is attractive at over 4%. Among the medium-sized gold mining companies, Kinross Gold (KGC) is rated "Buy" and its mean target price is $8.41 compared to the current market price of around $6.32 and there is a modest dividend yield of around 2.6%. Among the smaller mining companies is McEwen Mining (MUX) which is also rated a Buy with a target price of $3.05 against the current market price of approximately $2.49.
Because there has been a significant sell-off this year in gold stocks, it has to be said that the present valuations look very attractive especially since gold mining companies are working on improving cash flow generation from operations through the use of cost savings and reductions in capital expenditure. The use of historical comparisons shows that gold equities are trading at well below the average five-year multiples such as EV/EBITDA. South African gold mining stocks have all performed well with the exception of Sibanye Gold (SBGL), however, which has posted a decline in stock price.
The bottom line
The mean target price of analysts on Goldcorp stock is $39.07 and the median price is $37.50 against the current price of approximately $28.64. Combined with the dividend yield of around 2%, Goldcorp looks like an attractive investment. It is also the opinion of many analysts that Goldcorp is the best of the North American gold miners because it has an excellent growth profile as well as the top cost savings in operations and capital expenditures for 2014. This makes a compelling case for investment in light of the recent decrease in gold prices.