Goldcorp (GG) has just released the financial results of its third quarter, and most investors will be pleased to see the company beat the analyst estimates by 15%. In this article I'll provide my opinion about the financial results and the balance sheet of the company and will already look forward to 2014.
My view on the financial results
Goldcorp announced a gold production of 637,000 ounces and sold 652,000 ounces in Q3 at an average price of $1,339/oz. As the company managed to keep its All-In Sustainable Costs (AISC) at $992/oz, Goldcorp still has a healthy operating margin.
Total revenues came in at $929M which resulted in earnings from mining operations of $235M. However, the net profit came in at just $5M or $0.01/share. As I explained earlier, it's more important to look at the cash flows than at the earnings statements, as there were several non-recurring items which have a big influence on the earnings numbers but not so much on the underlying business.
So when I look at the cash flow statement, I see the company generated an operating cash flow of $274M which is a 5.1% yield based on the current market cap. Unfortunately, the company had to spend almost half a billion dollars on capex, so Goldcorp was definitely free cash flow negative in Q3, as it saw a net cash outflow of approximately $290M if you exclude dividends.
This obviously doesn't mean Goldcorp is a sell, as the majority of the capex is spent on two projects which will have a huge impact on the gold production and profitability of the company in years to come, so I think the market is correctly assessing the impact of these numbers by sending Goldcorp in the green.
My view on the balance sheet
Goldcorp had working capital of $688M of which approximately $972M was held in cash. Its current ratio was a decent 1.35 (keep in mind a ratio higher than one indicates the company has sufficient current assets to cover its current liabilities). At the end of 2012, Goldcorp had a working capital of $1.12B and a current ratio of 2.05. GG had a book value of $25.54 at the end of Q3.
Investors might be negatively surprised by the drop in working capital, but I'd like to emphasize this was caused by the fact that a portion of the long-term debt has now been added to the current liabilities. As Goldcorp is a senior producer, it should have no problem at all to roll over this debt position. If we leave this short-term debt out of the equation, the working capital would actually have increased to $1.5B.
Goldcorp narrowed down its outlook to 2.6-2.7M ounces of gold at an AISC of $1050-1100/oz. This shows again how narrow the operating margins are in the gold sector, and Goldcorp will very likely have to tap into its cash position to fund ongoing capex. Fortunately the production rate should increase next year and I'm expecting at least a 10% bump in output to a number of in excess of 3 million ounces of gold.
As some of the lower-cost mines are ramping up production, I also think the AISC will fall to just 1000 which would mean Goldcorp will generate in excess of $1B in operational cash flow next year, and very likely even a bit more.
Goldcorp is one of the safer senior gold producers and definitely deserves a place in any diversified portfolio. The company has a current dividend yield of 2.28% and a shareholder will directly benefit from a higher gold price as well. Production growth should grow at a double-digit rate in 2014, and Goldcorp's balance sheet looks very clean as less than 1/3rd of the balance sheet consists of debt and liabilities.
It might be a good idea to get into Goldcorp by writing put options, and I'm particularly looking at a P25 for December at a premium of $1.02 for an annualized yield of 24%, and the April 2014 P20 at an option premium of $0.63 for an annualized yield of approximately 6%.