Goldcorp Earnings: Why to Buy on Weakness

Source: http://www.flickr.com/photos/ahorcado/

Source: http://www.flickr.com/photos/ahorcado/

Goldcorp (NYSE:GG) is the third largest gold mining company by ounces produced and the second largest based on market capitalization. It got to this point over the years through disciplined growth. The company has done an excellent job of growing its resource base, growing production, and keeping costs down. Looking at the company’s fourth-quarter numbers, it appears as though Goldcorp was able to achieve the latter two of these, although not the first. Thus, I am calling this most recent quarter a “mixed bag” for Goldcorp.

Before we look at these three categories, let us first look at the company’s basic financial data for the quarter. Goldcorp saw fourth-quarter revenue come in at $1.2 billion versus $1.4 billion for the fourth-quarter last year. While gold production rose, the company saw revenue declines relating to a lower gold price. Furthermore, net income collapsed to just $74 million for the quarter versus $505 million for the fourth-quarter of 2012. Again, the decline is due to a falling gold price, but also rising production costs.

However, I hinted that Goldcorp’s success is the result of things that it can control. While it cannot control the gold price it can control, to a meaningful extent, its resources, its production growth, and its production costs.

Let us look at the company’s resources first. The company started 2013 with 63.8 million ounces in proven and probable gold reserves, and it ended the year 54.4 million ounces of proven and probable gold reserves.  “Reserves,” as opposed to “resources,” have been deemed economically feasible to mine. There were two reasons why the company’s reserves fell in 2013. First, the company mined more gold than it found. Second, because the gold price fell the company had to declare that some of its gold reserves are no longer economical to mine, and so they were re-classified.

Going forward, the company needs to address this issue and either find or buy more gold. The company actually did something to this effect recently when it offered to buy Osisko Minink (MKTS:OSKFF.PK), although that company’s management recommended that shareholders vote against the deal saying that Goldcorp undervalued the company.

Other than resource depletion, the company performed extremely well.  First, we saw that Goldcorp increased its production from 2.4 million ounces in 2012 to 2.7 million ounces in 2013. This was primarily due to the fact that production commenced at its joint venture project Pueblo Viejo with Barrick Gold (NYSE:ABX) in the Dominican Republic. This is an enormous project that will produce several hundred thousand ounces of gold for decades and Goldcorp owns 40 percent of it. Goldcorp will continue to increase production in 2014 as it expects to reach 3 million ounces of gold production as production commences at two very large projects — Eleonore in Quebec, and Cerro Negro in Argentina.

Second, costs have begun to sink. While the company’s all-in production costs reached over $1,000/ounce last year they sunk down to jut $810/ounce in the fourth-quarter. This is especially impressive seeing that we saw the beginning of an expensive construction project (the North Well Field meant to increase water flow) at the company’s largest producing mine — Penasquito — that has resulted in rising costs. Going forward, costs should continue to fall. This is due to the fact that the two new producing mines will have low production costs. Furthermore, Penasquito’s production costs will come down once the construction of the north Well Field is completed.

While this quarter was a mixed bag for Goldcorp, keep in mind that the company’s history of executing has set the bar very high. Therefore, I still think that this is one of the better gold mining stocks to own and shares should be accumulated on weakness.

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