A Look at Goldcorp's Tarnished Quarter

Shares of Goldcorp (NYSE: GG  ) are down after the company reported a $1.93 billion loss on the second quarter. A record drop in gold prices during the quarter was combined with a big asset write-down, leading to the loss. However, digging deeper into the numbers, it wasn't all bad.

Photo Credit: Flickr/Giorgio Monteforti

Digging into the quarter
Goldcorp reported revenue of $889 million and adjusted net earnings of $117 million, or $0.14 a share; however, note that those earnings adjust out the company's massive non-cash charge. Even after adjusting for that charge, earnings are down significantly from the second quarter of last year where the company delivered adjusted net earnings of $332 million, or $0.42 a share. The biggest news in the quarter was that the company took a non-cash impairment charge of $1.96 billion relating to the exploration potential of its Penasquito mine, which is why the company's headline number showed a $1.93 billion loss.

Before digging into the write-down, it is important to see that despite the record 23% plunge in gold prices last quarter, Goldcorp still made money. In fact, the company was able to produce adjusted operating cash flow of $388 million, or $0.48 per share. This was more than enough to cover the $121 million in dividends the company paid in the quarter, so don't let the headline loss scare you -- Goldcorp's payout is safe.

The outlier
The ugly headline loss the company reported has to do with its decision to take a $1.96 billion charge on Penasquito. Low metal prices have significantly decreased that asset's exploration potential. What's important to note, though, is that Penasquito does continue to have exploration upside, but the value of that upside is much lower now due to market conditions. It's quite possible that the value could be revised higher in the future if those market conditions improve.

Cutting capital
One other very important item to note on the quarter is that Goldcorp is deferring some of its capital spending over the next two years in light of lower metal prices. The company is cutting $200 million from its 2013 capital budget by pushing back some non-critical items at its three major growth projects.

Goldcorp isn't alone in cutting its capital budget amid falling metal prices. Freeport-McMoRan (NYSE: FCX  ) , for example, is slashing $1.9 billion from its capital budget over the next two years so that it can maintain balance sheet flexibility in light of falling copper and gold prices. It's the same story at Teck Resources (NYSE: TCK  ) , which is also reducing its capital expenditures over the next two years. Teck is cutting $150 million out of its original $2 billion capex budget. Meanwhile, the company is targeting to keep its sustaining capex to $500 million next year. These moves are to better align these companies with current market conditions, as well as to improve cash flow and strengthen balance sheets.

Final Foolish thoughts
This quarter was really one of the "kitchen sink" quarters where Goldcorp got out all its bad news at once. Despite the headline loss, the company still was profitable, and its moves to reduce spending will ensure that the company stays that way. Goldcorp still remains one of the fastest-growing, low-cost gold producers while still possessing a healthy balance sheet, making it a solid way to invest in the future of gold. 

In fact, Goldcorp might just be the best way to play gold right now. That's why the The Motley Fool is offering you this new free report, which dissects the metal's recent volatility and provides a guide for gold investing. Click here to read the full report today!


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