Goldcorp Inc. (NYSE:GG) engages in the acquisition, development, exploration, and operation of precious metal properties in Canada, the United States, Mexico, and Central and South America. It primarily explores for gold ores, as well as for silver, copper, lead, and zinc ores. With the market for gold rather speculative, Goldcorp will need its cash reserves to get it through some rather difficult times. I agree that Goldcorp is an attractive long-term investment and now let's take a look at the gold producer's liquidity.
When a firm has strong liquidity ratios, it portrays to an investor that it has the cash reserves to fund growth in the future. For a gold miner like GG that is looking to stay ahead of industry giants like Newmont Mining Corp (NYSE:NEM) and Barrick Gold Corporation USA (NYSE:ABX), this is absolutely essential. The good thing is that the liquidity numbers that I came across for GG were very encouraging. Keep in mind, however, that this is just one of the many ways to analyze a stock.
Over the last six months, Goldcorp had zero insiders buying and zero insiders selling. This is a lot better than NEM which has had eleven insider sales over the same time period. Analysts are also upgrading the stock to a buy since it has some great fundamentals.
Liquidity analysis of a company involves looking at a class of financial metrics to determine a firm's capacity to pay off its short-term debt obligations. Typically, higher ratio values translate to a larger margin of safety for the firm to meet its short-term debts.
Current assets divided by current liabilities give you the current ratio. Goldcorp's current ratio had a big jump from 2010 to 2011. It has since fallen and gone below the 2008 level. The liquidity ratios are closely tracking the price of gold with the meteoric rise in the precious metal's price from 2009 to 2011 being largely responsible for the high values.
Cash and cash equivalents plus receivables and marketable securities divided by current liabilities is the calculation used to obtain the quick ratio. The quick ratio is up from 2010, but it is still well below the 2008 level. The quick ratio has been above the industry average throughout the five-year period analyzed here and the gap has gotten wider over the last two years. This is nice to see since it also coincides with the period that gold prices started declining from their peak in the summer of 2011.
The cash ratio is obtained by dividing cash and cash equivalents plus marketable securities by current liabilities. Even though the cash ratio has improved from 2010, it is again still lower than the 2008 level. Additionally, the comparison with the industry averages for the cash ratio tells pretty much the same story as the current ratio and the quick ratio comparisons.
In 2012, there was feeble growth in Goldcorp's earnings and weak operating cash flow.
Goldcorp has a solid balance sheet, as is shown in the table below. In 2012, Goldcorp reported $0.92 billion in cash and cash equivalents; it has been growing at an average of 56% over the last five years despite the three negative growth rates that can be seen in the table. The current assets, cash and cash equivalents and accounts receivables have all seen steady growth.
Current liabilities have also increased considerably, but they are much less than current assets. The gold producer's strengths can be seen in several areas, such as its strong financial position with reasonable debt levels by most measures and growing profit margins.
The liquidity ratios give investors all the more reason to add Goldcorp to their portfolio as they are so far above the respective industry averages. The current low price of GG stock has not reflected this yet. According to the efficient market hypothesis, there should be an appreciation in the stock price soon given the relatively low risk involved. The current ratio is much higher than 1 and therefore there shouldn't be a problem meeting pressing debt obligations.
It is true that Goldcorp pushed the Metals & Mining industry lower on Friday making it the industry laggard. By the end of Friday's trading, GG fell 2.6% to $27.74 on average volume. Moreover, the Metals & Mining industry closed Friday down 1.7%. I actually view this pullback as a great time to buy GG stock.
Gold and gold companies are always going to be in demand as long as the shiny metal is used as a hedge against inflation. Gold may be lower on the utility scale than silver as it relates to industry use (although Goldcorp does produce a lot of silver as well), but there are developing economies that continue to look at the yellow metal as an asset. I am talking specifically about India which is the largest consumer of gold.
In the wake of expansionary monetary policy, there is always going to be a lot of value in owning gold and gold producing firms.
Disclosure: I am long GG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.