In a low gold price environment, the operational mettle of gold producers has been put to the test. And Goldcorp (GG) did not disappoint. Improvements in gold production and sales were modest, but good enough to help the gold producer beat earnings forecasts in the third quarter.
Goldcorp has eked out a strong enough performance in the third quarter to win back a number of analyst upgrades. It showed improvement in performance across most of its properties. Notably, gold production in the Penasquito mine skyrocketed by 125.8 percent to 126,000 ounces. The gold miner has adeptly played the high grade markets - increasing production at Penasquito and Red Lake - and low-cost production, realizing an 8.8 percent increase from the year ago period at its Mexican Los Filos mine, in addition to the Penasquito gains. Importantly, it has enough new production coming online to prove to the market that it can maintain a healthy production rate at reasonable costs going forward.
Despite its admirable operational performance, it still seems as though Goldcorp is just making the grade - doing just barely enough to keep investors and analysts happy. When gold prices are low, growing earnings while increasing productivity is commendable. Longer term, though, Goldcorp could improve its performance by loosening its purse strings and spending more on exploration.
While many analysts expect the price of gold to rise, Goldcorp should not wait for the price boost. It needs to extract more value from its assets. The company's operating performance has improved but it is not good enough? Goldcorp has financial strength. Debt levels are low and cash flow reasonable. The company may be hording cash and conserving on debt at the expense of exploration needed to drive future growth. In the third quarter, the company had operating cash flow of $687 million, up from $681 million in the year ago period. Its debt-to-equity ratio is .03, lower than major competitors Barrick Gold (ABX), Newmont Mining (NEM), and AngloGold Ashanti (AU).
Is Goldcorp being managed too conservatively? Barrick Gold enjoys one of the highest profit margins in the industry at 42.9 percent yet has one of the highest debt-to-equity ratios at 0.58. It has recently shelled out $7.3 million to acquire African copper producer Equinox Minerals. Barrick, however, may be overextended. Its profits declined in the third quarter and it has announced it is cutting $1 billion in capital expenditures. Costs for its Pascua Lama project have ballooned to over $8 billion.
More growth does not have to come at the expense of prudent operations management and planning. But Newmont mining provides a cautionary tale. Like Barrick, it manages with a higher debt-to-equity level of 0.47. This gold producer has just had a few bumpy quarters. It has invested aggressively in promising assets, but productive assets have not been operating at a high enough level to generate revenue growth. With its most recent acquisition, the large greenfield project Hope Bay, growth should soon return. All of these gold miners need to do a better job of managing costs.
Goldcorp needs to up its exploration and find more Guerreros - its Mexican gold properties. Mexico has the lowest cash costs at $325 versus the global average of $649, according to Thomson Reuters. Higher grade gold can be found near the surface. In 2011, Goldcorp extracted 336,500 ounces at $463 per ounce. In 2012, it expects to mine 345,000 ounces in Mexico. 2012 prices were higher. The Los Filos mine increased gold production 8.8 percent at a cash cost of $595 per ounce. Operational improvements in its Mexico properties, the Red Lake and Penasquito mines, helped to bolster revenues. Overall, gold sales increased 8.1 percent on a production increase of .07 percent. The Mexican properties can also help Goldcorp get its cash costs down from $660 per ounce. It expects cash costs to hover in the $625 to $650 range going forward. Barrick Gold, in contrast, has cash costs in the $575 to $585 an ounce range.
Goldcorp has room to maneuver. Its operating margin is 15.4 on a profit margin of 8.1, and return on equity of 7 percent. The company needs to lower cash costs, though. Third quarter revenues were up 38 percent year-over-year to $1.53 billion Gold sales were up at 617,800 from 571,500 a year ago. Cash costs, however, were $660 an ounce versus $551 in the year ago period. Increasing exploration and investment costs while cash costs are rising would put negative pressure on operating margins.
Goldcorp's strength is in its diversification and operational management. Production is increasing. In the third quarter, sequential gains in gold of 4 percent and 31 percent in silver were realized. Both gold and silver production were up at the Penasquito mine. Goldcorp is expecting production to flow from a number of assets going forward. Penasquito and Red Lake will continue to increase production, following record production last quarter from Penasquito. A new source of gold has been discovered adjacent to the high grade zone at Red Lake. The miner has started extracting gold from Pueblo Viejo and Cerro Negro is readying for production in the beginning of 2013. In 2014, Goldcorp is looking to attractive economics from its Eleanore project in Quebec and Cochenour project in Red Lake to deliver healthier profit margins.
Goldcorp has a good stream of production assets coming online with improved cost structures. As long as central banks continue to engage in a policy of monetary easing, Goldcorp will have some extra cash from gold sales as its new production assets come online. It may be an opportune time for Goldcorp to shop for more properties with low production costs. Either way, Goldcorp is a strong stock that investors should consider picking up now.