Goldcorp: There Are Better Ways To Play the Gold Boom

Goldcorp (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

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.

Comments

[dwot:]

I'd agree with you on this one. I just did a graph of fully diluted market cap of Goldcorp over the past 10 years, just taking the last share price of each year, so only 10 points on the graph. It looks like the Zimbabwe exchange.

It is the biggest oxymoron to me that people put their money into gold stocks because of their economic fears over government printing paper money, yet Goldcorp prints stocks way faster than government prints money.

2007 May 16 10:27 AM

[ottorock:]

In the CC mgmt commented on cash at bank, saying that the $1.5bn or so is the 'kind of liquidity expected by the market for a company of this size', or something similar (memory does not serve exactly, i'm afraid). They also mentioned they didn't expect it to reduce by much this FY (again, my memory slightly shaky on the exact wording)

I didn't buy their reasoning. 1.5bn is a lot for GG to be carrying, both historically and strategically imho.

Do you have a take on the subject?

2007 May 16 11:15 AM

[Arjun Rudra:]

Re: mturner
The $1.5 billion you are talking about is their debt facility. This is not what they have in the bank ...it is the amount of debt/credit they can take on. Regarding company cash flows and debt, goldcorp said: "We think that our cash flows, like I say, we have about $700 million, $800 million coming into the treasury as we speak, we have about $700 million of odd debt, so I’m starting from a point today of net debt and we have a strong cash flow, so depending on commodity prices, we probably don’t have any debt outstanding at year-end. "

2007 May 16 02:33 PM

[DALE 10,1:]

A company holds that much cash to take advantage of a potential buying opportunity. This comtradicts management's statement about digesting Glamis in the near future.

2007 May 17 11:06 AM

[Marol:]

So what do you recommend instead?

2007 Nov 10 09:26 PM

[Marol:]

So what do you recommend instead?

2007 Nov 10 09:26 PM