Goldcorp: There Are Better Ways To Play the Gold Boom

May.16.07 | About: Goldcorp Inc. (GG)

Goldcorp (NYSE:GG) reported net earnings of $125 million ($0.18 per share) in Q1, up from $92 million earned in Q1/06. Stripping out the non-cash items for Q1/07 Goldcorp earned $0.12 per share with its operating cash flow hitting $0.26 per share.

Its revenues were boosted to $506 million from $286 million a year ago mainly due to the amalgamation of the now combined entity of Glamis Gold & Goldcorp, some assets Goldcorp acquired from Placer Dome, and the combined increase in production. For the first quarter of 2007 Goldcorp reported 558,000 ounces of gold production compared to the 295,000 that it produced in Q1/06.

Management reported its cash costs to be $181 per ounce for the quarter, but forecast cash costs of $150 for the full year due to increased production. Goldcorp also paid down $185 million of debt in the quarter, bringing its total debt balance to $740 million and its cash and cash equivalents to $404 million as of March 31st 2007. The company expects to produce about 2.5 million ounces of gold for the year.

Its Red Lake mine just underwent an expansion at the number 3 shaft and this led to higher production (179,000 ounces at $228per per ounce) that was mainly due to the increased grades of 32 grams of gold per ton. At its El Sauzal mine in Mexico, production increased by 7% to 66,600 ounces at cash costs of under $94 per ounce. And, at its Marlin mine in Guatemala, production included 46,800 ounces of gold and 592,000 ounces of silver with cash costs coming in at $144 per ounce.

Notable Facts

Marigold Mine: Production decreased to 14,300 ounces compared with 27,200 ounces produced in the first quarter of 2006. Gold production was impacted by lower-than-expected grades and higher waste mining than expected. Cash
costs also moved dramatically higher to $546 per ounce from the mid $300’s last year.
Alumbrera Mine: Due to lower mill feed grades and lower recovery rates (due to high gypsum content ore), gold and copper production for the quarter declined to 43,200 ounces of gold and 33 million pounds of copper.

Growth Profile

With production at Los Filos in Mexico being delayed and only expected to begin late in the second quarter, and Penasquito (Glamis’s crown jewel) only coming online in 2010, Goldcorp doesn’t seem to have much of a growth profile for the next couple of quarters. However, by 2012 it expects to be able to produce 3.75 million ounces of gold per annum at costs of around $230 per ounce.

GG 1-yr chart
GG 1-yr chart

Summary

Goldcorp remains one of the lowest cost gold producers in the world but is still noticeably smaller than most of its peers thereby giving it room to grow. However, since it just purchased Glamis Gold, I suspect that it may wait a while before undertaking another major purchase to allow itself and investors some time to fully digest the acquired assets and the massive share dilution that took place to purchase those assets.

As gold continues to move higher, Goldcorp will benefit as it does have some short term catalysts like the successful start up of the Los Filos mine, reserve updates at its Penasquito and Eleonore projects, and a ramp up in production at the Red Lake mine. However, since nothing major like production at Penasquito occurs till 2010, I see nothing that would make me go out and purchase shares of Goldcorp other than gaining leverage to the gold price which can be done through better alternatives.

Goldcorp (GG)
Price: $23.73
Shares Outstanding (Fully Diluted): 709 Million
Market Cap: 16,824 Billion
Dividend: $0.18

Price Targets
Analysts at UBS maintain their "buy" rating on Goldcorp, and their target price is set to $37.
Analysts at RBC Capital Markets maintain their “Outperform” rating, and have a price target of $31.

Disclosure: The author of this research report has no position in Goldcorp.