Goldcorp: Scripting A Comeback

| About: Goldcorp Inc. (GG)

Goldcorp (GG) ended 2013 by posting a fourth quarter loss of $1.1 billion, bringing its annual loss to $2.71 billion, primarily due to asset write-downs. As gold prices dropped by 28%, the company recorded asset impairments of $2.64 billion throughout 2013. Moreover, the company slashed its gold reserves by 15% after reducing its gold price assumption to $1,300 per ounce. The fall in reserves was expected since it would be unprofitable to mine lower ore grades considering gold's current price levels.

Goldcorp's peer Barrick Gold (ABX) also struggled with huge impairments and posted an annual loss of $10.4 billion in 2013. Barrick was forced to cut its gold reserves from 140 million ounces to 104 million ounces after reducing its gold price assumption from $1,500 per ounce to $1,100 per ounce. The company suspended developmental work at the Pascua Lama project due to project delays, higher expenditures, and lower gold prices. This was a huge blow to the company's future prospects as it had already spent $5.7 billion on the project, and Barrick is unlikely to resume work at the Pascua Lama project until gold prices improve.

Due to the slump in gold prices, gold miners are focusing on producing gold at lower costs. As a result, Goldcorp decided to sell its stake (66.7%) in the Marigold mine, a joint venture with Barrick Gold (33.3%). In the first nine months of 2013, the mine reported an all-in sustaining cost (AISC) of $1,604 per ounce compared to Goldcorp's AISC of $1,136 per ounce during the same period. Understandably, Goldcorp decided to sell its stake, and it will generate around $183 million from the mine sale. The transaction is expected to be completed by April this year and will help improve Goldcorp's cost structure to some extent. In the first nine months of 2013, the mine contributed 4% of the company's total production. Nevertheless, the company has taken a step towards optimizing its portfolio by focusing on low-cost assets. Moreover, Goldcorp has displayed improving efficiency since the second quarter of 2013, successfully reducing its production costs.


1Q 2013

2Q 2013

3Q 2013

4Q 2013

AISC ($ per ounce)





For 2013, Goldcorp's overall AISC came in at $1,031 per ounce, and the company expects the 2014 AISC to be in the range of $950 per ounce to $1,000 per ounce. Going forward, I expect the Pueblo Viejo mine to play an important part in reducing the company's overall production costs. Barrick Gold (60%) and Goldcorp (40%) jointly own the mine, and it accounted for 12% of Goldcorp's total production last year at an impressive cost structure.

2013 AISC ($ per ounce)

Pueblo Viejo




The Pueblo Viejo mine's AISC was considerably lower than the company's overall AISC, and the mine will be reaching 100% capacity by mid-2014, further reducing the per unit cost of producing gold. Once it reaches full capacity, the mine is expected to produce around one million ounces of gold annually in the first five years at an AISC of $650 per ounce-$750 per ounce. With total reserves of 25 million ounces and a mine life of more than 30 years, the Pueblo Viejo mine will make a significant contribution to Goldcorp's future growth. Also, the mine will help the company maintain a low cost structure, thus improving profit margins.

Is the financial position good?

Earlier this year, Goldcorp made a $2.6 billion cash plus stock offer to acquire its peer, Osisko Mining (OSKFF). Goldcorp offered a 28% premium to the average closing price of Osisko's stock over a 20-day period preceding the bid announcement. Osisko operates a low-cost mine called the Canadian Malartic in Quebec, and the deal would increase Goldcorp's reserves by 10 million ounces. However, the offer hit a roadblock after Osisko sought legal action against Goldcorp, and the legal hearing will take place later in March. Goldcorp is well positioned to fund the offer and may not require additional debt financing. The company reported total cash of $625 million at the end of 2013 and an undrawn credit facility of $2 billion. Goldcorp has also secured an additional credit facility of $1.25 billion, which will allow it to function with better financial flexibility in case of a successful acquisition of Osisko.

For the year ended 2013, Goldcorp reported total debt of $2.31 billion. I have compared Goldcorp's debt position with Barrick Gold based on the following ratios.




Total debt to equity



Total debt to assets



Cash flow to debt



On a relative basis, Goldcorp's debt position appears to be better than Barrick Gold. Although it is too early to comment on the Osisko takeover, I think the company's financial position would remain intact even if it does acquire Osisko.


Even though Goldcorp posted disappointing results in 2013, the company can turn around its performance this year. With the Pueblo Viejo mine achieving full production in 2014, I expect the company to report lower production costs. Moreover, the company is in a better position to fund acquisitions and other opportunities in the coming years. I recommend a long position in this stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.