Goldcorp will release 2016 first quarter results after the market close on Wednesday, April 27, 2016.
LAST QUARTER: Goldcorp Inc. (NYSE: USA) (NYSE: GG) reported Q4 EPS of -$0.15, missing the consensus estimate of $0.01. Revenue came in at $1.07B, the same of the consensus projection.
A difference of $-0.16 with a surprise of -1,600.00%.
I will examine the impact of the earnings announcement on the value of GG. The Vancouver, British Columbia-based company had a loss of 1.30 per share (Diluted Normalized EPS).
Event of interest: GG's earnings announcement on February 25, 2016.
Event window (from January 27, 2016 to March 24, 2016): 20 days prior to the event day plus the event day plus 20 days post the event day.
This was 'Bad News' since EPS actual was more than 2.5% less than expected. It was -1,600% than expected.
I use the 250-trading-day period prior to the event window as the estimation window (from January 28, 2015 to January 26, 2016) for this announcement ('Bad News'). So I will estimate the two-factor model parameters over the 250 days prior to the event period.
The two-factor model is as follow:
R_{GG}= alfa + Beta1 x R_{MKT}+ Beta2 x Changes in the Comex
The COMEX is used as a proxy for changes in the price of gold.
SUMMARY OUTPUT | |||||
Regression Statistics | |||||
Multiple R | 0,676986794 | ||||
R Square | 0,458311119 | ||||
Adjusted R Square | 0,453942661 | ||||
Standard Error | 0,022998833 | ||||
Observations | 251 | ||||
ANOVA | |||||
df | SS | MS | F | Significance F | |
Regression | 2 | 0,110987424 | 0,055494 | 104,9137 | 9,66029E-34 |
Residual | 248 | 0,131178692 | 0,000529 | ||
Total | 250 | 0,242166116 | |||
Coefficients | Standard Error | t Stat | P-value | Lower 95% | |
Intercept | -0,001428764 | 0,001454386 | -0,98238 | 0,326868 | -0,004293287 |
S&P 500 | 0,626407784 | 0,143979353 | 4,350678 | 1,98E-05 | 0,342829563 |
Comex | 2,217281292 | 0,157261474 | 14,09933 | 1,5E-33 | 1,90754293 |
I run the regression tool in excel to estimate the betas which represent the exposure of NYSE:GG returns to the changes in the stock market price (S&P 500) and in the COMEX:
Goldcorp's daily return is less volatile than daily S&P 500's return and more volatile than the COMEX over the estimation window (from January 28, 2015 to January 26, 2016).
P-value and t- Stat value for Rmkt and COMEX tell us that the two factors are statistically significant.
Rgg* = -0,0014 + 0,626 x Rmkt + 2.217 x Comex is the mathematical expression that roughly summarizes the normal return of Goldcorp Inc.
Now that I have the parameters of the two-factors model, I can calculate the expected return, E(r), the abnormal return (NYSE:AR), the abnormal cumulative return (NASDAQ:CAR) and the abnormal return t-test (AR t-test).
To calculate the expected return, E(r), I will substitute Rmkt and changes in the COMEX with the daily returns on S&P 500 and the daily changes in the COMEX in the two-factors model over the event window, 41 days, from January 27, 2016 to March 24, 2016.
To calculate the abnormal return , we need to subtract from the daily return on Goldcorp Inc. (which is the actual return) the expected return (E(r)) over the event window.
Then I calculate the cumulative abnormal return. The t-test is calculated as the abnormal return divided by the standard error. The standard error is 0,022998833.
The table represents the abnormal returns of Goldcorp Inc. as well as the cumulative abnormal returns for earnings announcement of February 25, 2016, categorized as 'Bad News' since GG's actual EPS was minus 1,600% than expected:
For this 'Bad News', the negative abnormal return 1 day later the event day is -0,0922 (-9.22%), with a standard error of 0,022998833 leading to an AR t-test value of -4.009 (more than - 1.96). There is strong evidence against the null-hypothesis, H0, that the event has no impact on the value of GG.
Below graphic refers to the table shown above.
As you can see, the green spike, which represents abnormal return, is negative and statistically significant on February 26, 2016: it is the highest (downward) over the whole event window investigated.
Is there another big surprise coming for short sellers?
I think that Goldcorp will likely continue in missing analysts' expectations on EPS. Goldcorp will release 2016 first quarter on April 27 th and the average estimate on EPS by analysts is $0.02:
In my opinion the company is not well positioned because as I previously wrote, Goldcorp Inc. has a lower average grade of gold proven reserves (Au g/t), which involves more effort (more operating costs) to extract the metal. Moreover the company has problems at Cochenour and at Éléonore. These operating issues may result in a further deterioration of the business of the company and in the generation of negative EPS.
Disclosure: I/we 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.