by Ramu Iyer
The results of gold mining companies for the second quarter of the year have not been particularly inspiring, and Goldcorp (GG) has followed suit. Among the company’s competitors are Newmont Mining (NEM) and Barrick Gold (ABX). The adjusted earnings of the company dropped to $.34 per share from $.45 per share on a year-over-year basis, failing to meet the consensus estimate of $.41 per share. Weak production from the Red Lake mine in the first half and reduced expectations from the Peñasquito mine for the second half of 2012 have compelled the company to slash its production targets. Revenues for the quarter dropped around 16% to $1.11 billion as sales of gold fell from 606,400 ounces in the previous year to 532,000 ounces in the same quarter this year. A 5% increase in realized prices of gold was wiped out by a 12% jump in the cash costs of gold on a by-product basis.
At the Canadian Red Lake Mine, gold production fell by almost one third to 104,000 ounces while costs jumped 62% to $568 per ounce. Unfavorable ground conditions in the high grade zones because of slow de-stressing activities delayed access to the high grade deposits, and lower grades in the footwall zones also dragged down gold production. While the company is evaluating the long-term production profile, it expects the mine to produce between 460,000 ounces and 510,000 ounces this year. At the Peñasquito Mine in Mexico, gold and silver production increased 78% and 43% to 103,800 ounces and 6,570,700 ounces, respectively, from the previous year. Drought conditions have led to water shortages and the company has addressed the problem by drilling more wells and stepping up water reclamation. The water problem is expected to persist for the rest of 2012.
As of the end of June 2012, cash and cash equivalents were at $1.2 billion against $1.4 billion in the previous year and the cash flow from operations increased to $554 million for the quarter as against $330 million on a year-on-year basis. The company has almost completed construction of the Pueblo Viejo project, where it has a 40% interest with the other 60% being held by Barrick. Production is expected to begin later this month. However, work has remained suspended at the El Morro project in Chile since April 30, 2012, as Goldcorp awaits action by the Chilean Environmental Permitting Authority in respect of certain deficiencies identified by a ruling of the Court of Appeals of Antofagasta. Goldcorp expects to produce 2.35 to 2.45 million ounces of gold this year revised downwards from the earlier expectation of 2.6 million ounces. The guidance of copper production remains unchanged at 110 million pounds.
It is a pity that the company has been hit simultaneously with problems in Canada and Mexico at a time when gold prices remained strong and rising and will continue to do so as long as economic uncertainty and loose monetary policy persist. But, in order to benefit from the prices, the gold has to be extracted from the ground and it is unlikely that there will be improvements in production till 2013. One bright spot amidst the gloom is the expected revenue stream from the Pueblo Viejo mine in the Dominican Republic where production will shortly start and the stock pile contains more than 16 million tons of ore, which represents about 1.9 million ounces of gold. This joint venture with Barrick Gold is going to be the largest mine in the Dominican and will create a large and steady flow of production for the company for a long time to come. The company urgently needs to fix its production problems in order to take advantage of the buoyancy in gold prices.
There are several things to be said in favor of Goldcorp. It is one of the lowest cost producers in the industry. At its indicated cost for 2012, it is almost 50% below the average indicated cost of the industry as a whole and thus remains extremely competitive. It is scheduled to have a new mine in production every year up to 2015 so that production is likely to grow by over 60% over the next three years. The most compelling reason to buy gold mining stocks is the expected trend in the prices of gold and this is a better alternative to trading in commodities of derivatives such as futures. Experienced gold traders expect the prices of gold to be between 2013 and 2015. Finally, there is good news for shareholders in that Goldcorp recently won a legal battle is Barrick Gold regarding ownership rights to the biggest copper and gold project in Latin America, the El Morro gold-copper project in Chile. Goldcorp acquired a 70% stake in the project owned by Xstrata (XTA) after Barrick’s bid was rejected by a minority stake holder New Gold (NGD).
The production problems have taken their toll of Goldcorp’s share price. But, I am confident that the company will fix its production problems and benefit from the coming boom in gold prices. I believe that the production problems are creating a buying opportunity. At around $37, I recommend Goldcorp as an investment if you are prepared to be patient.