On May 5th /08 Goldcorp Inc. (G: TSX, GG: NYSE) reported its Q1/08 results.
Company Profile (from Reuters)
Goldcorp Inc. (Goldcorp) is a gold producer engaged in gold mining and related activities, including exploration, extraction, processing and reclamation. The Company's assets are comprised of the Red Lake, Porcupine and Musselwhite gold mines in Canada, the Alumbrera gold/copper mine (37.5% interest) in Argentina, the El Sauzal gold mine and Luismin gold/silver mines in Mexico, the Marlin gold/silver mine in Guatemala, the San Martin gold mine in Honduras, the Marigold gold mine (67% interest) and the Wharf gold mine in the United States. On July 24, 2007, Goldcorp sold 25% of the silver produced from its Penasquito project to Silver Wheaton for the life of mine. On January 31, 2007, Goldcorp completed the sale of the San Martin mine in Mexico to Starcore International Ventures Ltd. (Starcore).
Takeaways From The Event
For Q1/08, Goldcorp reported earnings of $229.5 million, ($0.32 cents a share), compared to $124.9 million, (0.18 cents a share), from a year earlier. The company also reported a gain of $136.5-million from the sale of its $1.6-billion stake in Silver Wheaton. Goldcorp realized an average gold price of $932/oz during the quarter which helped drive its revenue to $626.7-million (from the sale of 521,900 ounces of gold), compared with $474.2-million in Q1/07. However, costs at a number of Goldcorp’s mines rose substantially. At Red Lake (Goldcorp’s largest mine) costs rose to $369/oz from $228/oz a year earlier. At Goldcorp’s Porcupine mine costs rose to $634/oz from $410/oz a year earlier. Additionally, at the Musselwhite mine costs rose to $746/oz from $458/oz a year earlier. To add further insult to injury, the rising Canadian dollar, increased labour and fuel costs curtailed production at Red Lake (to 128,500 ounces from 179,400 last year), Porcupine (down 7% to 66,8000 ounces) and Musselwhite (down 27% to 38,800 ounces). Lastly, Goldcorp indicated that their Penasquito project remains on schedule for the first gold pour from oxide ore in 2008.
Responding to Goldcorp’s Q1/08 results, TD Newcrest analyst Greg Barnes writes “Despite adjusted EPS meeting our expectations at US$0.23, we believe that this occurred largely due to a lower than expected effective tax rate for the quarter. Normalizing taxes would result in EPS of US$0.20, or a slight miss vs. consensus and a bigger miss relative to our estimate. The real evidence of the weak quarter was operating cash flow – reported at US$0.33/share, operating cash flow was well below our forecast of US$0.47 and consensus of US$0.43. H1/08 is expected to be the weaker half of the year, particularly at the Red Lake Mine. We are forecasting gold production in H2/08 of 1.4 million ounces at a cash operating cost of US$230/oz, which compares to H1/08 production of 1.1 million ounces at a cash cost of US$240/oz. Despite the weak start to the year, our positive view remains tilted towards the second half of the year. We are maintaining our Action List BUY recommendation and US$49 target price.”
Another analyst who covers Goldcorp is P. Mark Smith of Dundee Securities and he writes “During the quarter, following the sale of Wheaton Silver, Goldcorp retired all of its debt, maintaining $1.3B in cash. Peñasquito is on track, with mine and plant 44% complete as of the end of Q1 (first gold pour expected this year) - CAPEX guidance remains $1.5B with $638MM spent to date. A pre-feasibility study at Éléonore is currently under review and the feasibility is no longer expected by year-end. The project may be delayed further, as the company understandably wants to get more drill data on the higher grade zones including the newly discovered ones. Goldcorp sees an opportunity for a stronger project by concentrating on the high-grade zones and needs additional time to better understand the orebody. This may involve sinking an exploration shaft with lateral development to drill and examine the ore deposit in more detail.”
Smith reduces his target price from C$49.50 to C$48.50 after introducing “slightly higher future cash costs at the Canadian operations” into his 5% DCF model. However, he adds “Goldcorp has the best growth profile of the senior gold stocks. The company has plenty of cash to complete its planned development pipeline, is generating plenty more, and the C$ FX is finally going its way.”
In response to Goldcorp’s Q1/08 numbers RBC Capital Markets analyst Michael Curran writes “Goldcorp has maintained its 2008 full-year production guidance of 2.6MMoz. With the Q1 production miss, the company will have to outperform in the remaining quarters to meet this target, leading us to believe the shortfall risk has increased. As a result, we have lowered our production estimate to 2.4MMoz.”
Regarding Goldcorp’s valuation Curran writes “We continue to view favorably the strategic positioning of Goldcorp among the Tier I gold producers, as a Growth and Quality play in the group, with above average production growth potential and a portfolio of lower average cost operations. In our view, Goldcorp should be able to maintain premium trading multiples over its Tier I peer group. Goldcorp shares are currently trading at a premium to the North American Tier I gold producers, at 1.7x NAV (versus peer group average of 1.3x) and 23.2x 2008E CFPS (versus peers averaging 14.3x). Potential catalysts for Goldcorp shares over the next year include: ramping up production at the Los Filos mine and later this year at Peñasquito (both Mexico), the start of production from the new shaft at Red Lake (Ontario), as well as updates for Goldcorp’s major development assets (Eleonore in Quebec and Pueblo Viejo in the Dominican Republic).” Curran reduces his target price to $50.00/sh from $51.00.
Lastly, Richard Gray of Blackmont Capital writes “Goldcorp's adjusted EPS of $0.23
was ahead of our $0.21 and consensus of $0.20. Production was lower (521,900 oz vs our 585,100 oz), but so was cash costs ($240/oz vs our $257/oz). On a co-product basis, the average cash cost of $396/oz was higher than our $364/oz estimate, highlighting the impact of the copper production at Alumbrera. The overall mine performance was carried by good quarters at Alumbrera (-$1,610/oz), Marlin ($55/oz) and El Sauzal ($158/oz), three mines that comprise 34% of production. Los Filos appears on track after a shaky start-up in 2007 with production of 48,300 oz at $314/oz, ahead of our estimate of 39,000 oz at $409/oz. The Canadian mines (45% of production) struggled as Red Lake ($369/oz), Porcupine ($634/oz) and Musselwhite ($746/oz) suffered due to the strong C$ and operational issues that are expected to be resolved for Q2/08. Overall, while the financial results were impressive, total production was below our expectation and will need improvement at Red Lake and further progress at Los Filo for the company to reach the 2008 target of 2.6mm oz.” Gray maintains his Buy rating and C52.00/sh target price, “which is based on 2x NAV and 20x 2009 CFPS”.
My Take: Goldcorp is not going anywhere until the price of Gold starts it's next up-leg. As we enter a seasonally slow period for gold and gold equities, I reckon the stock will either drift sideways or lower (I'm leaning towards lower). On a seasonal basis, the time to enter Goldcorp is around the end of August. On a relative strength basis, Goldcorp seems to be the preferred GoTo gold stock (compared to either Barrick Gold or Newmont Mining) for institutional investors. So, if I were on the lookout for a large cap gold stock with decent growth going forward, I would wait till perhaps the end of August to enter the stock.
Investment Risks
Without limitations, some of the risks include reserves and resource risk, development risks, permitting risks, off-take agreements, commodity price risks, geo-political risks, exchange rates, weather related impacts etc.
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