Goldcorp: Why I Like This Best In Breed Gold Miner

| About: Goldcorp Inc. (GG)

Executive summary:

  • Goldcorp is a "best in breed" gold miner that deserves to trade at a premium to its peers and belongs in a retirement portfolio.
  • Goldcorp has amassed a large and diverse portfolio of gold mines.
  • On a project-by-project basis we can see exactly how valuable Goldcorp is and where the risks lie.
  • Ultimately Goldcorp is overvalued but its unique market positioning and history of execution justifies this.


In this article I look at Goldcorp (NYSE:GG) on a micro level on a property-by-property basis.

Goldcorp is the second largest gold mining company by market capitalization behind Barrick Gold (NYSE:ABX). It operates 10 gold mines, all of which are in the Western Hemisphere. It also owns several large development projects, two of which will be going into production later this year. Finally it owns several exploration properties.

Goldcorp has done an outstanding job of creating shareholder value over the years. Since it was incorporated in 1994 its shares are up 1,600% versus the Dow Jones which is up just 340% and the gold price which is up 240%.

The company had grown its reserves for nine consecutive years having its streak broken this year due to reserves loss resulting from a lower gold price. Furthermore the company pays a monthly dividend that is higher than that of the S&P 500 (2.2% vs. 1.9%) and it did not have to cut its dividend in the face of lower gold prices unlike many of its peers including:

  1. Barrick Gold, which cut its dividend 75%
  2. IAMGOLD (NYSE:IAG), which eliminated its dividend
  3. Agnico Eagle (NYSE:AEM), which cut its dividend by 73%
  4. Gold Resource Corp. (NYSEMKT:GORO), which cut its dividend by 83%

Finally the company has more production growth and a stronger financial position than many of its peers.

As a result of this stellar performance Goldcorp shares are considered the "best of breed" among the gold majors. It is for this reason that the shares are not cheap. In fact based on my calculations the shares trade at about 3-times their book value at $1,250/ounce gold. They also trade at 20-times 2015 cash-flow. While this isn't cheap for investors who are bullish on the price of gold, Goldcorp is one of the better ways to get low-risk exposure along with a dividend. Investors can count on management to continue to execute by finding quality projects and bringing them into production, and it has the means to carry this out. Therefore I think investors who are looking for a good gold stock for their retirement portfolios should include Goldcorp. This should become apparent as we look at the company's individual properties and the potential cash-flow that they can generate over the years as the secular bull market in gold continues.

Risks To Owning Goldcorp

There are two primary risks to owning Goldcorp shares. The first and most obvious is that the price of gold may fall further. Given rising production costs many of Goldcorp's mines are not economical to operate below $900-$1,000/ounce. Should the price of gold fall to these levels without a parallel fall in the cost of production Goldcorp shares have substantial downside risk.

Second, Goldcorp does have some geopolitical risk in its portfolio. While it has generally invested in operations in low-risk jurisdictions such as Canada and Mexico, it does have a couple of properties in Argentina -- the producing Alumbrera joint venture project with Glencore Xstrata and the soon to be producing Cerro Negro mine. the Argentinean government has been known to devalue its currency and to confiscate property. Given this added risk I have used a steeper discount rate in valuing these two projects.

Goldcorp has generally been a low-risk gold miner relative to its peers. While gold mining is a very difficult business, especially with prices down, Goldcorp has been able to execute relatively well with generally low production costs and limited exposure to geopolitical risk. In other words the company has done a good job of controlling those factors of its business that it can control.

With that being said let us look at Goldcorp's projects.

Producing Projects

1: Penasquito

The Penasquito poly-metallic mine in Zacatecas, Mexico is Goldcorp's largest project.

(Source: 2014 Penasquito Resource Update)

While it is primarily a gold mine with over 500,000 ounces of anticipated annual production there is also a significant amount of silver, lead and zinc production that the company uses as by-products to reduce the cost of gold mining. This has resulted in negative cash-costs in the past. However recently costs have been significantly higher due to lower silver prices and the fact that the company is spending a lot of money in order to prepare for a construction project--the North Well Field, which will increase water availability to the mine. In the first three quarters of 2012 costs were over $800/ounce. In the fourth quarter we saw costs come below $500/ounce, and once the North Well Field project is complete the company will be able to produce gold more efficiently.

Goldcorp recently revised its mine plan for Penasquito. It reduced the amount of gold reserves from about 15 million ounces to 10 million ounces. It also shortened the mine's expected life to 13 years with the intention of mining more per year but with an emphasis on higher grade ore. This is largely a result of the recent drop in gold prices. Should the gold price rise we can expect that the company will re-classify some of its mineral resources as mineral reserves (reserves have been deemed economical to mine).

Ultimately Penasquito will be producing at least 525,000 ounces of gold per year on average for 13 years. It should do so at about $400/ounce going forward, although it could and has been cheaper due to the large number of offsetting secondary metals produced at the mine.

Given these estimates the following table estimates the project's NPV at various gold prices using 8% and 12% discount rates. Keep in mind that the company is responsible for approximately 35% in Mexican corporate taxes, which I take into consideration in my calculations. All figures are in millions of dollars.

Discount Rate/Gold Price $1,000 $1,250 $1,500 $1,750 $2,000
8% $1,748 $2,476 $3,205 $3,932 $4,661
12% $1,473 $2,086 $2,701 $3,315 $3,928

2: Los Filos

The Los Filos project in Guerrero, Mexico is a lesser known project in Goldcorp's portfolio but it is a significant contributor to production and cash-flow. It is expected to produce over 250,000 ounces of gold for 14 years, and over 350,000 ounces for many of the earlier years. Furthermore the company had a mine plan published that has the mine producing for a longer period of time although I will be conservative and stick with 14 years. Costs have risen year over year, having reached over $1,000/ounce earlier in 2013. However costs began to fall again so that all in sustaining costs were a hair under $900/ounce in the third quarter. Presuming $900/ounce production costs and 350,000 ounces of production for 6 years and then 250,000 ounces of production for 8 years the following matrix gives the array of values for Los Filos.

Discount Rate/Gold Price $1,000 $1,250 $1,500 $1,750 $2,000
8% $178 $620 $1,063 $1,506 $1,947
12% $151 $528 $904 $1,280 $1,655

3: Pueblo Viejo

The Pueblo Viejo JV project in the Dominican Republic is an enormous mine that will produce for more than 30 years.

(Source: Pueblo Viejo Feasibility Study)

Goldcorp owns 40% of the project while Barrick owns the remaining 60%. In all the project has 25 million ounces of gold reserves as well as some silver and copper that will be used to offset the cost of gold mining.

For the next 7 years the project will generate slightly more than 400,000 ounces of gold for Goldcorp at about $800/ounce. For the following 27 years the project will generate about 210,000 ounces of gold for Goldcorp on average at a cost of $900/ounce. The following matrix calculates the value of Goldcorp's share of Pueblo Viejo. Note that I am taking the Dominican Republic's 29% corporate tax rate into account in calculating my figures. All amounts are in millions of dollars.

Discount Rate/Gold Price $1,000 $1,250 $1,500 $1,750 $2,000
8% $422 $1,079 $1,735 $2,390 $3,046
12% $350 $863 $1,376 $1,889 $2,402

4: Red Lake

The Red Lake mine is in the Red Lake gold mining district in Ontario.

(Source: Red Lake Feasibility Study)

(*Note that the Cochenour project is located near the Red Lake project. The Cochenour project will be discussed in a latter section when I discuss the company's development properties.)

It has been a huge producer for Goldcorp having topped 700,000 ounces in 2011. However production has been declining at a rapid clip. It fell to just under 500,000 ounces for 2013 and it is expected to continue to fall to 440,000-480,000 ounces in 2014. However counting measured and indicated resources the mine can operate for the expected 12 years mining at the low end of this range, and while I won't assume so here for the sake of being conservative, it can produce more if we include "inferred" resources (the lowest level of certainty in mining jargon).

The following matrix gives an array of the mine's value at various gold prices. The tax rate should be about 38.6%. Figures are in millions of dollars.

Discount Rate/Gold Price $1,000 $1,250 $1,500 $1,750 $2,000












5: Porcupine

The Porcupine mine in Timmins, Ontario is a lesser known Goldcorp project but it is a valuable one, especially at higher gold prices. This underground project will produce 300,000 ounces a year for 13 years, and it can produce for longer given its resource base. Costs have been high coming in at $1,035/ounce in 2013, although this is down from over $1,100/ounce in 2012. Presuming $1,050/ounce and a 38% tax rate the following matrix gives the range of valuations at various gold prices.

Discount Rate/Gold Price $1,000 $1,250 $1,500 $1,750 $2,000
8% ($79) $318 $714 $1,111 $1,508
12% ($67) $268 $602 $937 $1,271

6: Musclewhite

The Musclewhite project is similar to the Porcupine project in that it is an underground mine in Ontario. It will produce 240,000 ounces annually for 13 years, although it has had relatively high AISC at $1,100/ounce so it won't be profitable at lower gold prices but it should offer excellent leverage for gold bulls. The following matrix gives the array of values at various gold prices.

Discount Rate/Gold Price $1,000 $1,250 $1,500 $1,750 $2,000
8% ($128) $190 $508 $825 $1,144
12% ($108) $160 $428 $696 $964

7: Marlin

The Marlin gold mine in Guatemala is one of Goldcorp's less valuable producing mines. While it produces 200,000 ounces per year with AISC at just $630/ounce it only has enough reserves for five more years of production. The corporate tax rate in Guatemala is 31%. All figures are in millions of dollars.

Discount Rate/Gold Price $1,000 $1,250 $1,500 $1,750 $2,000
8% $220 $369 $517 $667 $815
12% $206 $346 $484 $624 $763

8: Alumbrera

The Alumbrera project is a JV gold and copper mine in Argentina. Goldcorp owns 37.5%, Glencore Xstrata owns 50% and Northern Orion Resources owns the remaining 12.5%. This is a difficult project to value. On the one hand it has been a long-term producer with extremely low production costs due to copper offsets. On the other hand the mine only has enough defined reserves to produce for another 5-6 years, and while production costs have been low they have also been erratic.

With this being the case, and given that production is likely to decline, I think it is fair and prudent to assume 10 years of additional production but with lower average production--100,000 ounces of attributable production rather than 120,000-130,000 ounces which is what we have seen recently. I will also assume 2013's production costs of $565/ounce as my cost assumption, although this has been at the high end, and costs could end up being much lower, again due to copper offsets.

Since the mine is in Argentina we need to worry about capital controls, property usurpation, and currency devaluation, and so I am adding a percentage point to my discount rates (9% vs. 8% and 13% vs. 12%). Argentina has 40% in taxes which includes a 5% tax on exporting gold dore bars.

With that being said the following matrix gives the array of valuations given these assumptions at various gold prices.

Discount Rate/Gold Price $1,000 $1,250 $1,500 $1,750 $2,000
9% $183 $288 $392 $497 $602
13% $160 $252 $344 $436 $528

9: Wharf

This small mine in South Dakota is Goldcorp's second least valuable producing mine. It produces 65,000 ounces annually and has a life of roughly 7 years. Further, it had high AISC costs in 2013 at $1,165 although it should be able to bring this figure down to $1,000 going forward. The following matrix shows the property's range of values in millions of dollars.

Discount Rate/Gold Price $1,000 $1,250 $1,500 $1,750 $2,000
8% $0 $60 $119 $179 $238
12% $0 $54 $108 $163 $217

10: El Sauzal

The El Sauzal mine in Chihuahua, Mexico is approaching the end of its life. It only has enough reserves to produce for two more years at about 100,000 ounces per year at about $900/ounce. The following matrix gives the array of values for this remaining production. Keep in mind that Goldcorp continues to explore around its producing pit and that it may find more gold so that it can continue producing.

Discount Rate/Gold Price $1,000 $1,250 $1,500 $1,750 $2,000
8% $13 $44 $75 $106 $138
12% $12 $43 $74 $105 $135

Goldcorp's Producing Projects: Conclusion

The following matrix sums up the value of these 10 projects. All amounts are in millions.

Discount Rate/Gold Price $1,000 $1,250 $1,500 $1,750 $2,000
8%/9% $2,777 $6,210 $9,647 $13,082 $16,518
12%/13% $2,364 $5,256 $8,146 $11,038 $13,925

With gold trading at $1,320/ounce and an average AISC of roughly $900/ounce Goldcorp's producing properties are worth about $7 billion using an 8% discount rate.

Development Projects

1: Eleonore

The Eleonore mine in Quebec should go into production at the end of 2014. The company predicts that it will be able to produce 600,000 ounces of gold per year at Eleonore although its most recent mine plan has this figure at about 300,000 ounces. Also, while the company believes that it will be able to produce at this level for 15 years it only has enough resources in its latest resource estimate for 12 years of production at this level. However an updated resource estimate is expected shortly.

While the new mine plan will certainly change these figures the company has an estimated AISC estimate of $610/ounce. Additionally the company has an additional $570 million in expenditures tied to bringing the mine into production. Since we don't know the specifics of the new mine plan let us assume $650/ounce costs and 12 years of production at 550,000 ounces per year. I am also assuming 50,000 ounces of production in 2014. Given these figures the following matrix gives the various valuations at various gold prices. Note that I am assuming a total of 38.6% in taxes along with the company. All amounts are in millions.

Discount Rate/Gold Price $1,000 $1,250 $1,500 $1,750 $2,000
8% $332 $975 $1,619 $2,264 $2,947
12% $173 $703 $1,234 $1,765 $2,305

2: Cerro Negro

The Cerro Negro project is an enormous development stage gold mine in Argentina.

(Source: Cerro Negro Pre-Feasibility Study)

Production is expected to begin later this year. Going forward the mine should produce 525,000 ounces of gold for the first 5 years, and it should produce about 250,000 ounces for the following 4 years.

Cerro Negro is going to be an extremely efficient mine. According to the pre-feasibility study from 2011 cash-costs will come in at just $200/ounce. With sustaining costs this should conservatively come to $600/ounce. Note that in addition to production costs the company still has roughly $350 million left in initial development costs before the mine goes into production later this year.

Unfortunately the mine is in Argentina and this comes with added risks such as a 35% tax rate in addition to a 5% tax on taking gold dore bars out of the country for a total tax rate of 40%. Argentina has also been considered a high-risk investing jurisdiction with ongoing fears of capital controls, property confiscation, and currency devaluation. Consequently in my valuation estimates I am increasing the discount rates by 1% each so that my less conservative estimate will use a 9% discount rate and my more conservative estimate will use a 13% discount rate. Note that I am also assuming 150,000 ounces of production in 2014. All amounts are in millions of dollars.

Discount Rate/Gold Price $1,000 $1,250 $1,500 $1,750 $2,000
9% $652 $1,060 $1,468 $1,876 $2,283
13% $576 $936 $1,296 $1,656 $2,016

3: El Morro

The El Morro mine in Chile is a copper-gold joint venture project with New Gold (NYSEMKT:NGD)(Goldcorp owns 70%). The mine will not begin production until 2018 although it will have a long mine life of 18 years with 210,000 attributable ounces produced annually at ($1,600)/ounce with copper offsets. Note that this figure is so low because El Morrow is primarily a copper mine. Also keep in mind that the company needs $2.8 billion in order to bring the project into production.

The following valuation matrix incorporates Chile's 17% tax rate. Amounts are in millions. Note that the bulk of the initial capex will occur in 2017 and so I am discounting the capex expense by 3 years.

Discount Rate/Gold Price $1,000 $1,250 $1,500 $1,750 $2,000
8% $1,172 $1,498 $1,820 $2,145 $2,468
12% $338 $565 $788 $1,013 $1,238

4: Cochenour

The Cochenour project is located in the Red Lake mining district in Ontario, Canada. It is nearby Goldcorp's Red Lake mine and the company hopes to integrate the two.

The mine is going to produce its first development ore by the end of the year although it will likely not see commercial production until 2016. Pre-production capex will be about $500 million.

Once production begins the mine should generate 225,000-250,000 ounces annually, which will help stymie the declining production coming out of the Red Lake mine. In my valuation I will use the low end of this range. Given that the ore grade is slightly higher than that of the Red Lake mine reserves (11 grams per tonne vs. 10 grams per tonne) production costs should be slightly lower than the $900/ounce we are seeing from Red Lake. Conservatively I will assume $850/ounce. The project has enough resources to produce for 13-15 years depending on how much gold is produced, although to be conservative I will use 11 years. Note also that the resources are all classified as "inferred" which is the lowest level of certainty in mining jargon. Recall that taxes should be 38.6%. Amounts are in millions of dollars.

Discount Rate/Gold Price $1,000 $1,250 $1,500 $1,750 $2,000
8% ($363) ($134) $94 $322 $550
12% ($390) ($207) ($24) $159 $342

5: Camino Rojo

The Cammino Rojo deposit is near Penasquito. It is on an enormous land mass topping 3,000 square kilometers.

As of the latest resource update the property has 11.65 million ounces of gold, including 1.63 million ounces of reserves at 0.76 grams per tonne. In addition the property has 130 million ounces of silver including 32 million ounces of reserves at 15 grams per tonne. It also has small amounts of lead (600 million pounds) and zinc (2.1 billion pounds). In all it contains roughly 15.76 million gold equivalent ounces.

While we don't yet know how expensive it will be to extract this metal we can ascribe some value to these resources. The following table values the metal at 4% of its spot value and at 6% at various gold prices. Note that the market already values Goldcorp's gold at about $400/ounce so my valuation is a sizeable discount to this. This discount is justified given that there hasn't been any economic assessment. All amounts are in millions.

Value-Rate/Gold Price $1,000 $1,250 $1,500 $1,750 $2,000
6% $945 $1,181 $1,418 $1,654 $1,890
4% $630 $788 $945 $1,103 $1,260

6: Noche Buena

The Noche Buena project is also located near Penasquito. It has a much smaller resource than Camino Rojo although they do have some value which I will ascribe in the same was as I ascribed value to Camino Rojo. In all the deposit contains 1.2 million ounces of gold and 40 million ounces of silver for a total of 1.87 million ounces of gold equivalents. All amounts are in millions of dollars.

Value Rate/Gold Price $1,000 $1,250 $1,500 $1,750 $2,000
6% $112 $140 $168 $196 $224
4% $75 $94 $112 $131 $150

7: Dee

The Dee JV project is a relatively small exploration project in Nevada. Goldcorp owns 40% and Barrick owns the remaining 60%. Right now the project has a small gold and silver deposit. It has 670,000 ounces of gold reserves at 1.53 g/t, 960,000 ounces of indicated resources at 1.37 g/t, and 150,000 ounces of inferred resources at 0.44 g/t. It also has 8.5 million ounces of silver for a total of just over 1.9 million gold equivalent ounces. This isn't enough to build a mine that would move the needle for these large companies but the resources have some value. The following matrix gives the array of preliminary values following the same model as Camino Rojo. All amounts are in millions of dollars.

Value-Rate/Gold Price $1,000 $1,250 $1,500 $1,750 $2,000
6% $114 $143 $171 $200 $228
4% $76 $95 $114 $133 $152

8: Cerro Blanco

The Cerro Blanco underground project in Guatemala contains about 1.9 million ounces of gold resources. While the resource is relatively high grade the company claims that it has suspended exploration here due to low metal prices. Nevertheless it is worth ascribing some value to these resources given the potential optionality should the gold price rise. I will assign this value as I have for the previous two projects.

Value-Rate/Gold Price $1,000 $1,250 $1,500 $1,750 $2,000
6% $114 $143 $171 $200 $228
4% $76 $95 $114 $133 $152

Valuing Goldcorp's Development/Exploration Properties

I value these properties the same way that I value the producing properties. Those properties that don't have cash-flow estimates will be valued according to a percentage of the value of their in-ground resources. In the more aggressive valuation I will use 6% of resources added to the figures using the 8/9% discount rates. For the more conservative valuation I will use 4% of resources added to the figures using a 12/13% discount rate. Note that the company doesn't have to go forward with its Cochenour mine if it has a negative value so where it does have a negative value I will use a valuation of $0. All amounts are in millions of dollars.

Gold Price $1,000 $1,250 $1,500 $1,750 $2,000
Aggressive Valuation $3,441 $5,140 $6,929 $8,857 $10,818
Conservative Valuation $1,944 $3,276 $4,603 $6,093 $7,615

Goldcorp's Other Assets

A: Additional Resources

Goldcorp has resources unaccounted for in its NI 43-101 compliant mine plans. This means that the company may be able to mine more metal than these plans account for, and consequently investors should ascribe some value to these resources.

  • Penasquito has an additional 3 million ounces of gold.
  • Cerro Negro has an additional 3.4 million ounces of gold.
  • Porcupine has an additional 7.5 million ounces of gold.
  • Pueblo Viejo has an additional 5.5 million ounces of gold.

This totals a whopping 19.4 million ounces of gold that the company might produce in the future that isn't accounted for in mine plans. Using the above model we get the following valuation matrix.

Valuation Rate/Gold Price $1,000 $1,250 $1,500 $1,750 $2,000
6% $1,164 $1,455 $1,746 $2,037 $2,326
4% $776 $970 $1,164 $1,358 $1,552

B: Goldcorp's Equity Investments

Goldcorp has investments in two publicly-traded companies worth $1.48 billion.

1: Tahoe Resources

Goldcorp owns 58,051,692 shares of Tahoe Resources (NYSE:TAHO) worth $1.27 billion. Tahoe Resources owns the enormous Escobal silver mine in Guatemala that is on the verge of production. It will produce over 20 million ounces of silver annually inexpensively, and it will do so for many years to come.

2: Primero Mining

Goldcorp owns 31,151,200 shares of Primero Mining (NYSE:PPP) worth $210 million. The company owns and operates the San Dimas gold mine in Mexico. It also owns the Cerro del Gallo development project, the last 30% of which was recently acquired from Goldcorp. Also the company recently bought Brigus Gold which owns the Black Fox mine in Canada. Primero Mining should do extremely well, especially if the price of gold rises as this will give the company the cash-flow it needs to develop the Cerro del Gallo mine.

C: Current Assets

Goldcorp has $2,374 million in current assets including cash, equivalents, inventory and receivables.

D: Marigold-Related Receivables

Silver Standard Resources (NASDAQ:SSRI) owes Goldcorp $181.5 million relating to the sale of its share of the Marigold gold mine in Nevada.

E: Liabilities

Goldcorp has $9.8 billion in liabilities.

Conclusion: Valuing Goldcorp

The following matrix adds up the valuations derived above that depend on gold prices and incorporates those fixed assets and liabilities to come up with a valuation estimate for Goldcorp shares.

Valuation Approach/Gold Price $1,000 $1,250 $1,500 $1,750 $2,000
Aggressive $1,618 $7,041 $12,558 $18,212 $23,898
Conservative ($680) $3,738 $8,149 $12,635 $17,328

Based on this valuation method we come to the conclusion that Goldcorp is overvalued. In fact using a similar method I have arrived at the conclusion that several other gold mining companies are extremely undervalued (e.g. Asanko Gold).

But this doesn't mean that investors should immediately avoid owning shares in Goldcorp. First, investors right now are paying over 4-times book value for the S&P 500, which over the past decade has grown at a slower pace than Goldcorp and which pays a smaller dividend than Goldcorp.

Second, Goldcorp has things going for it that many of the smaller mining companies that are undervalued on a DCF basis do not have. Most notably this includes near-term cash-flow and a strong financial position to grow its business.

Using the above data we can see that Goldcorp is going to generate a lot of cash-flow in the near future. 2014 is going to be a rough year for Goldcorp financially insofar as it has $350 million in expenditures relating to its Cerro Negro project, $570 million in expenditures relating to its Eleonore project, and $500 million relating to its Cochenour project. However in 2015 the company will generate an enormous amount of free cash-flow with an estimated 3.7 million ounces of gold production and costs of just $900/ounce. Assuming a tax rate of 35% the company should generate $1 billion in free cash-flow, or twice that assuming $1,750/ounce gold.

This cash-flow potential and the company's financial flexibility -- something that is lacking in the industry -- suggest that investors looking for a dividend correlated to gold, a solid history of growth, and minimal risk of failure should consider adding shares of Goldcorp to their portfolios.

Disclosure: I am long GG, SSRI, NGD, AEM. 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.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here