Disclosure: The author is long GG.
Disclosure: The author is long GG.
Summary
- Gold and silver have been under tremendous pressure for two years in a row and especially of late driving the share price of some gold miners to attractive entry points.
- Goldcorp continues to improve operational efficiencies, explore and develop new projects and increase production.
- Paying a 2.6% yield and maintaining profitability, I discuss why now may be the time to start accumulating shares while waiting for a turnaround in precious metal prices.
Look, there is no denying that gold and silver have been under tremendous pressure for two years in a row. In fact, in the last 30 days alone gold is down 6% to $1213 per ounce (figure 1) and silver has been decimated, down 12.8% to $17.00 per ounce (figure 2). In turn, there has been immense pressure once again on the miners. However, this pressure does create opportunities to get long some of the quality names in the sector as we wait for a turnaround in precious metals. Right now, I think Goldcorp (NYSE:GG) is looking very compelling. In the last 30 days, Goldcorp has also dropped 12.5% (figure 3). While the selloff in metals may not yet be complete, in this article I will discuss why I think it is time to consider Goldcorp at current levels.
Figure 1. Price of Spot Gold Last 30 Days
Source: Kitco.com
Figure 2. Price of Spot Silver Last 30 Days
Source: Kitco.com
Figure 3. Share Price of Goldcorp Last 30 Days
(click to enlarge)
Source: Google Finance
Why Even Consider Goldcorp?
Anyone who follows this industry knows that GG is a top dog in the precious metal mining sector. The company has managed to continue to efficiently cope with the terrible action in gold and silver here in 2014. What is more, GG has been ramping up production at several mines in 2014 and has started new production at several mines this year. But with gold and silver and other byproduct prices having performed terribly all year, the company must be bleeding money every day, right? Well not exactly.
GG finished the second quarter with over $1.3 billion in cash on hand. While it is true that capital expenditures outpaced cash flow from operations in last year, things have been improving in 2014. GG's efficiency stems from being on the conservative side of things. It is open with its shareholders, even claiming that 2014 production could come in at the low end of guidance. But that's ok. With the idea that peak gold may be coming in the next year or so, it makes sense not to overproduce in a low price environment. Although, some of the production cut came from the closure of El Sauzal in Mexico and the divestiture of Marigold mine. Even with the losses, Mexican output alone is expected to be over 1 million ounces for 2014, surpassing total production of many miners' annual production as a whole. Further, the company just announced first production from Eleonore mine. Also, the company continues to pay a nice monthly dividend of $0.05 per share. This translates to a forward annual 2.6% yield at its current price of $23.08 per share. This is a decent dividend to be paid while waiting for a turnaround in gold prices. But not all gold miners are equal. The reason I am recommending picking at Goldcorp shares now is that in addition to its dividend it is also a top performer.
Recent performance
In its most recent quarter, GG saw gold production and sales increase over the comparable last year's second quarter. The reason there wasn't an increase was due in part to the Marigold divestiture and lower production at its Los Filos mine. Sales were still impressive. Gold sales were 639,500 ounces on production of 648,700 ounces compared to sales of 624,300 ounces on production of 646,000 ounces in the comparable 2013 quarter. Silver production ramped up and totaled 9.0 million ounces in the quarter, up 25% year-over-year compared to the 7.2 million ounces produced last year. But one of the biggest key pieces of data was that increased production efficiencies and lower sustaining capital led to a decrease in all-in sustaining costs to $852 per ounce of gold compared to $1,227 per ounce last year, a reduction of 31%. Metals sales led to revenues of $1.1 billion. With reduced costs, despite the weak metal prices, GG was one of the few gold miners to turn a profit, with net earnings of $181 million, or $0.22 per share, compared to a huge loss last year of $2.38 per share, in the second quarter. Factoring in some adjustments we see that earnings in the second quarter increased 40% to $164 million, or $0.20 per share, compared to $117 million, or $0.14 per share, last year. The only downside was a slightly reduced adjusted operating cash flow of $376 million, or $0.46 per share, compared to $388 million, or $0.48 per share last year.
Mine development/progress
Goldcorp has an exciting exploration project ongoing at its Mexican site Peñasquito. What is happening here is a project that is focused on defining the size and scope of the copper-gold sulphide rich deposit at the site. Current exploration activities include drilling to establish the vertical and horizontal size and extent of the deposit. Further, pre-feasibility studies for the concentrate enrichment process project and the pyrite leach project are advancing and are expected to be completed later this year and into next year. This is key as the successful completion of one or both of these projects has the potential to significantly improve the reserves and resources of Peñasquito.
In this area, at the Camino Rojo project near Peñasquito, there have been very positive exploration results. Goldcorp believes that the findings thus far suggest it could develop into a major new gold operation. A pre-feasibility study is planned before year-end and should be completed by the first quarter of 2016. Metallurgical testing continues and waste rock characterization studies have commenced. Finally a drilling program started back in June.
In Canada exploration is ongoing from the surface on HG Young. This site is a new discovery northwest of the Campbell Complex. The company has reported more frequent high-grade intercepts and the company continues its exploration. Although the exploration is in its infancy, all early indicators are that this site has the potential to be extremely rewarding.
What is very exciting is that in South America the Cerro Negro project has led to its first production back in July. Cerro Negro is in Argentina where production mining is underway at one site in the mine, called Eureka, while production mining at Mariana Central site should be starting in the first quarter of 2015. Full-on commercial production continues to be expected in the fourth quarter of 2014 at the site. The cost of the project is coming in less than the anticipated $1.8 billion and should settle in between $1.6 and $1.7 billion. This site is key as once it is up and running it will produce around 525,000 ounces of gold at maximum production levels.
Outlook
I mentioned above that Goldcorp was open and honest about believing it will achieve production at the low end of its guidance of between 2.95 and 3.10 million gold ounces. This negative news is partially offset by the fact that the company expects lower-than-expected all-in sustaining costs between $950 and $1,000 per gold ounce. Further, less money is expected to be spent. GG narrowed its range of capital spending guidance to between $2.3 billion and $2.4 billion for 2014 compared to $2.3 billion to $2.5 billion.
You are buying a levered play on metal pricing and being paid to wait
It is not often that I recommend a stock as an income play when I am expecting growth, but at a 2.7% yield, you really are being paid to wait. The stock has come down heavily, and as such the yield has spiked. I think it offers compelling value. Worst case estimates for gold put the bottom target around $1100, while most opining in this sector believe that $1200 will hold. In either case, GG will remain profitable. Of course, this is a levered play. In the last 30 days gold dropped 6%, while GG dropped 13%. The reverse will also occur, that is, GG will move with greater beta compared to gold. A $200 move in gold to $1400 could send shares of GG back to the mid-$30 range, which is where a lot of analysts are targeting the price for GG, myself included.
Positive analysts
Analysts are right as often as they are wrong, but they need to be factored into the equation. Right now, analysts are positive on GG. And the stock has dropped even further since their recent bullish stances. Recently GG wasupgraded to outperform from neutral with a $33 price target at Credit Suisse. Credit Suisse considers GG its preferred senior gold stock and the best positioned to weather a lower gold price environment. It sees GG as a top pick because of its strong balance sheet, lower cost new mines, longer mine life and superior dividend yield. Further, Oppenheimer technical analysts like the miners over physical gold here. In particular they like and recommend GG, in addition to a few other senior producers. Analysts overall are positive on the stock and have a consensus median target of $32.00.
Be aware of risks
Gold and silver have dropped tremendously and most of the experts in the sector believe the bulk of the damage is done. There may be some downside left, but the largest gap down is likely over. That said, no one can predict with certainty the future. Gold and silver could drop by 50% next year, or any other arbitrary number. It is possible and would lead to significant investment loss in the mining sector. What is more of concern is company specific risk. With GG, they operate globally. With that comes geopolitical risks. Most holdings are in stable nations, but not all are. Operating globally, GG is exposed to the socioeconomic conditions and changes in each country. It is also exposed to the laws governing the mining industry in those countries. Inherent risks with conducting foreign operations include, but are not limited to, high rates of inflation, military repression, war or civil war, social and labor unrest and organized crime. Each could have a material adverse effect on the company's operations and profitability. Changes in government laws and regulations including taxation, royalties, the repatriation of profits, restrictions on production, export controls, among others, could adversely affect the company's exploration, development and production initiatives in these countries.
Conclusion
Overall, with gold and silver having made large moves to the downside, GG looks attractive here. Its costs are low enough to maintain a profit margin at current prices. It pays 2.6% to wait for a rebound. It has achieved new production at two sites this year. It has exciting ongoing projects globally that will potentially lead to large production gains in the years to come. The company is well managed. It operates primarily in stable nations. Finally, analysts are also bullish on the name, with the median price target of $32.00 representing 39% upside from current levels.
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