Northern American gold producers have been feeling the heat for some time now because of significant capital cost increases, a drop in gold prices and delays in ongoing growth projects. Lower gold prices have pushed gold companies to undertake cost-cutting initiatives to strengthen their bottom line results. Also, North American gold companies are working to lower capital costs, are opting for prudent capital allocation, and are working to improve returns.
In this article, Goldcorp (GG) will be my subject company. GG is a senior gold producer company, with an impressive growth profile, low cost structure and solid balance sheet. Also, the company operates in stable political jurisdictions and has a good track record of reserve growth through internal explorations. The company has been undertaking significant capital spending to fund its ongoing growth projects. GG is expected to increase its gold production by almost 55% by 2016. Once the planned incremental production is brought online and capital spending needs are lowered, the company is expected to experience a drop in all sustaining costs (AISC) and an increase in free cash flows.
GG has the most attractive growth profile among other senior gold companies in North America; GG expects its gold production to increase by almost 55% to 4 million ounces by 2016. GG has been working aggressively towards its growth projects to increase its production. I believe GG has an achievable and realistic growth profile. The three main growth projects on which the company is currently working are Cerro Negro, Eleonore and Cochenour. All three projects are expected to have lower costs, which will further improve the company's cost structure.
The Cerro Negro project is located in Argentina and is 100% owned by the company. The mine is expected to have a life of 12 years, with an annualized production capacity of 525,000 ounces. During the recent third quarter's earnings release, the company disclosed that initial production was set to start in mid-2014, a delay from the prior expected timeline of 1Q2014. Also, GG revised the CAPEX guidance to $1.6-$1.8 billion, up from the prior guidance of $1.35 billion. The mine is also expected to have a lower cost profile, as cash costs are expected to be less than $350/oz.
The Eleonore project has an annual production capacity of 600,000 ounces, located in Quebec, with a life of 15 years and is 100% owned by the company. The project is expected to start production by late 2014 and is expected to have a planned project cost of $1.75 billion. Eleonore is another low cost project of GG, as cash costs are expected to be less than $400/oz.
Another important and low cost ongoing project for GG is Cochenour, based in Ontario. The project is expected to have an annual capacity of 225,000-250,000 ounces, a total project cost of $540 million and cash costs of less than $350/oz. Cochenour is expected to start initial production in the first half of 2015.
As the abovementioned projects start their production, GG's total annual production will receive a boost and its AISC will be lowered. The two graphs below reflect the expected total production increase and decreasing AISC trend for GG in the upcoming years.
(click to enlarge)
Source: Company Reports and Horizon's Estimates
Despite the fact that the cost of production has increased notably for gold producers in recent times, GG still has a low cost profile in contrast to its peers in the industry. The graph below displays a cash cost (based on reported 3Q2013 numbers) comparison between GG, IAMGOLD Corp (IAG), Kinross Gold Corp. (KGC), Newmont Mining (NEM), Agnico Eagles (AEM), Barrick Gold (ABX) and Yamana Gold (AUY).
(click to enlarge)
Source: Companies Quarterly Reports
Also, the company has undertaken a significant amount of CAPEX in recent years, and the investment cycle is expected to be significantly lowered by the second half of 2015, therefore, GG's free cash flows are expected to improve significantly in upcoming years, as displayed in the chart below.
(click to enlarge)
Source: Horizon's Estimates
The company has been delivering healthy performance in recent times. GG reported an operating EPS of $0.23 for 3Q'13, beating analyst expectations of $0.20. Total production for the quarter stood at 637,000 ounces, down 1% QoQ, at an AISC of $992/oz. Also, during the 3Q conference call, GG narrowed its gold production guidance from 2.55-2.8 million ounces to 2.6-2.7 million ounces at an AISC of $1,050-$1,100/oz. The table below displays production and co-product cash costs for GG's North American operations.
Co-Product Cash Costs ($/oz)
Production (in thousands of ounces)
Source: Quarterly Report
Balance Sheet and Valuations
A strong balance sheet is another positive for GG. As, in recent times, operational costs increased and gold prices decreased, GG managed to maintain a solid balance sheet and a healthy credit outlook in comparison to its peers. GG has a lower debt-to-equity of 12%, in contrast to its peers' average of 35%, as shown below.
Debt to Equity
Source: Yahoo Finance
GG is trading at premium valuations, which I believe is justified given its attractive growth profile, solid balance sheet, lower production costs and prudent capital allocation. Therefore, I believe GG's premium valuations are justified and the stock is currently fairly valued. GG currently has a higher forward P/E of 20x, a higher EV/EBITDA of 10.5x and a higher P/S of 3.7x, in contrast to its competitors' averages, as shown below in the table.
Source: Yahoo finance
The company is a high quality senior gold producer in North America. I believe the company is well positioned to deliver a solid financial performance in upcoming years, as it has an attractive growth profile, solid balance sheet and its costs of production are expected to decrease as low cost projects start production in the future. Therefore, I remain optimistic on GG's future financial performance. Moreover, GG is fairly valued at current valuations and its premium valuations are justified. I will advise investors to track GG's ongoing growth projects, as delays and any increase in estimated costs could adversely impact the stock price.