Goldcorp's Terrific Execution Makes It A Solid Long-Term Pick

Apr.10.14 | About: Goldcorp Inc. (GG)

Summary

Goldcorp's cost profile is declining, while production profile is getting better.

The forecast for relatively better gold pricing this year should help Goldcorp deliver strong earnings growth.

Goldcorp's strong balance sheet and cash flow should help the company sustain its dividend.

Gold miner Goldcorp (NYSE:GG) has been a strong performer this year, as its shares are up more than 20%. Gold prices have been relatively strong in 2014, and Goldcorp has made the most of this opportunity by controlling costs and sustaining strong production. As the gold price forecast for 2014 is relatively better than last year, I think Goldcorp presents an excellent opportunity for investors. Let's see why.

Solid so far

Goldcorp has been beating its own cost guidance on an all-in sustaining and co-product basis, and has successfully delivered on its gold production guidance as a result of a very strong quarter reported in January. The gold mines at Peñasquito, Red Lake, and Pueblo Viejo delivered higher throughput in Q4, with gold production at a record 769,000 ounces at an all-in sustaining cost of $810 per ounce. This strong performance was driven by strong operational execution to bring down the overall cost and optimize productivity.

Goldcorp is expecting further positive contributions to its cost profile in 2014 and beyond. This cost discipline, combined with record production is helping the company put up some solid numbers. For example, in the last reported fourth quarter, these moves drove its adjusted quarterly revenue to $1.2 billion, leading to adjusted earnings of $74 million and strong adjusted operating cash flow of $439 million.

In 2013, gold production at Goldcorp increased 11% to 2.7 million ounces at an all-in sustaining cost of $1,031 per ounce. This was lower than the cost guidance of $1,050 to $1,100 per ounce. Due to a continued focus on execution, nearly every mine in its portfolio either met or exceeded production guidance.

Getting better

Goldcorp is focusing on optimizing its portfolio, and it announced two transactions recently as a part of this initiative. On Jan. 13, Goldcorp made an offer to acquire Sysco Mining Corporation, and recently, it announced an agreement to divest the Marigold mine in Nevada. The successful completion of both transactions will result in significant enhancements to Goldcorp's high-quality gold mine portfolio.

Goldcorp's financial results demonstrate the impact of lower metal prices on its overall performance, and also reflect the swift response by its operating teams to the changes seen in the business last year. Moreover, Goldcorp significantly reduced its spending forecast in mid-2013, and reiterated this fact in the year-end forecast.

These changes have not adversely affected its growth profile that includes contributions from two important new gold mines in 2014. Goldcorp's strong economics in the current metals market are demonstrated by 54.4 million ounces of proven and probable gold reserves, an increase of 18%.

Goldcorp is committed to being a gold-focused company, and intends to give investors a profitable gold exposure. So, it plans to deliver two new outstanding gold mines in 2014. Its Cochenour project is expected to be completed and integrated by 2015, bringing a new source of gold production to Red Lake.

Goldcorp's strong prospects, along with growth in cash flow and a strong balance sheet helped it maintain its dividend at $0.60 per share in 2013. With increasing cash flows over time, Goldcorp plans to evaluate its capital allocation alternatives to maximize shareholder returns while pursuing growth opportunities. Production is expected to increase significantly in 2014 to between 3 million and 3.15 million ounces with all-in sustaining costs decreasing to between $950 and $1,000 per ounce.

The launch of three new projects this year is expected to strengthen Goldcorp's gold profile for the next five years, with a forecasted increase of approximately 50% in production. The ramp-up of production at Pueblo Viejo and continued increases in production at Peñasquito will be drivers behind this growth. So, Goldcorp's strong production growth, combined with continued decreases in all-in sustaining costs is expected to generate increasing cash flows, even in a flat gold price environment.

Final words

Goldcorp has been a strong performer over the past few years, with average earnings growth of 7.27% a year. But what's more impressive is the fact that Goldcorp's earnings are expected to grow at double the rate in the next five years. Analysts are looking at an earnings growth CAGR of 15.6% for the next five years, which doesn't come as a surprise given Goldcorp's solid production and cost profile.

So, investors should definitely consider buying Goldcorp, as the stock looks well-positioned for the long run.

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.