Goldcorp (NYSE: GG)
- Shares in early phase of rebound if gold prices continue to rally
- Strong fiscal policies have reduced outstanding debt and leverage compared to peers
- High book value and steady dividend present notable opportunities for all types of investors
After its spectacular fall from grace, Goldcorp (GG:NYSE) has managed to claw its way back and is looking towards a brighter future on the back of renewed momentum higher in precious metals. The mining company has largely languished under a low price environment, similar to pressure faced by other peers within the sector. Even though upcoming fourth quarter earnings are not expected to wow investors, it does nevertheless represent a company that has been coping extremely well in a challenging environment. However, several factors will contribute to sustained gains in share prices over time, most notably efforts to drive costs even lower through infrastructure initiatives, the company’s fairly conservative financial management alongside wind in the sales from improving precious metals prices.
A Port in the Storm
The exuberance in mining stocks that accompanied the spectacular rise in gold prices saw fortunes reverse sharply in 2011 after prices last peaked and slowly began to retreat. Goldcorp in particular was hard hit, losing approximately -67.00% in the last five years compared to just over -15.00% for gold during comparable period. Despite the losses for shareholders, Goldcorp has committed itself to strengthening its capital position and further optimizing its operation. Now that gold prices are in the process of rallying thanks in large part to worsening global financial conditions, Goldcorp is set to benefit. The degree of direct correlation between company shares and the price of spot gold in US dollar may not be 100.00%, but is nevertheless strong enough for Goldcorp stock to rally on the back of renewed aversion to riskier assets.
In the last 4-weeks alone, Goldcorp shares have charged back, rising just over 50.00% in a sign that the mining industry at large is set to benefit from the shift towards more defensive stocks. Even though conditions have been choppy in equity markets at best, the mining sector has substantially outperformed other sectors, and Goldcorp in particular is poised to see its own valuation rise on the back of these developments. Helping to drive value further is the uncertain outlook for monetary policy with growing calls across advanced economies to ease interest rates even further. While still too early to call the next bull market in gold prices, should this be a major turning point in sentiment, it will be a major driver in shareholder value for Goldcorp as extraction costs fall, production stays robust, and prices remain elevated.
Looking Past Earnings
Ignoring the recent rebound in share prices, the fact that earnings have been fairly steady over the last year while revenues have been grinding modestly higher during the same time period is testament to the company’s efficacy even in the most challenging of environments. Current consensus estimates for earnings to be delivered on February 25th of $0.01 are likely to be matched, largely a reflection of the losses in metals prices during the fourth quarter. The real importance of the announcement will be forward guidance which should be revised higher amid improving conditions. In dollar-denominated terms, costs of production have only fallen, especially with diesel prices plummeting and the newfound emphasis on developing the capability to use natural gas a primary fuel source.
A weak commodity environment has driven extraction costs lower over time as evidenced by the company’s all-in sustaining costs (AISC) fell by a -21.00% annualized pace through the end of the third quarter, mirroring the price deflation over the same period. According to 2015 guidance last updated in November, all in costs are expected to be between $850-900 over the period, but this figure will go even lower considering how conditions have evolved in the energy space over the last few months. With capital expenditures needs expected to wind down thanks to operational improvements implemented over the last few years, these costs will fall in-kind as recent mine expansions and efficiency gains benefit margins and the bottom line.
Strong Fundamentals Pave the Way
Conservative balance sheet management will be a key component of Goldcorp plans to continue delivering shareholder value. Thanks to prudent policies in paying down debt, Goldcorp is among the least levered of the global gold producing giants. If financial conditions start to freeze up one more, Goldcorp not only has cash flow from operations to count on, but an undrawn $3.00 billion line of revolving credit should conditions demand additional funding. Thanks to all-in costs gradually expected to fall further, pressure on margins will likely be alleviated further, aided by higher gold prices. For both income investors and value investors Goldcorp holds a lot of promise from a number of perspectives.
For one, even though the dividend yield has fallen sharply over the last month due to the large appreciation in Goldcorp shares, the history and trend of steady monthly dividends is not set to expire, adding to the value from a longer-term perspective. The dividend yield currently sits at 1.55%, but improving margins and cash flows should give Goldcorp room to expand incentives for shareholders down the road. From a value investor’s viewpoint, Goldcorp represents a tremendous bargain. Even with share prices bouncing over 50.00% in the past four weeks, at $15.45, shares are still priced below book value per share last calculated for the third quarter at $27.58. This discount should be case enough for investors to get back involved based on the room for a notable outperformance over the next three to six months.
Investors Take Note
With one of the most efficient operations globally, Goldcorp boasts the low leverage and quality assets needed to outperform not only its peers in the mining sector, but also the market at large as investors hunker down amid the tremendous volatility. With risk aversion assets picking up momentum, Goldcorp is more than likely to feel the benefits of the rising tide in gold prices. Even though the company has been operating on razor thin margins the last year, falling expenditures, a strengthening balance sheet, and the emergence of higher prices should drive prices back towards recent highs at $16.00 per share before retesting 52-week highs at $22.38 last seen in February of 2015. Beyond these levels, should gold prices continue to rally, $28.60 is the next upside target to watch in Goldcorp shares over the next six to twelve months.
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