Goldcorp (GG) has a reputation for being a tightly run player. Unlike other major gold producers like Rio Tinto (RIO -0.53%) and BHP Billiton (BHP -3.43%), but similar to Eldorado Gold (EGO 3.07%), Goldcorp has a near-exclusive focus, which is reflected in its name.
In any other case, putting all your eggs in virtually one basket might be considered foolhardy. But when that one basket is gold, well, gold is – in more ways than one – the eternal metal.
At any time, a stock in a well-managed gold company is a safe haven because, unlike demand for iron, copper, or even silver, demand for gold is not much affected by reduced manufacturing activity or consumer goods slowdowns. The underlying precious metal will always be in demand.
With the constant market demand of the underlying product a given, an analysis must focus on factors like financials and the performance of mining assets.
Gold and Goldcorp
That said, this year's steady decline in gold prices must be noted. Given Goldcorp's strong linkage to gold, it should come as no surprise that its stock price – like that of competitors – has declined steadily this year, mirroring the price of gold.
This movement is also mirrored by Goldcorp's declining quarterly performance, which culminated in the second quarter with a few key indicators entering negative territory. For the third consecutive quarter, net income not only declined, the company took a loss of $2 billion; Earnings per share in the second quarter was well under analyst expectations, and also well below that of the previous quarter.
Healthy balance sheet, healthy news
Now let's come to the company's balance sheet. Assets of $31.2 billion are two-and-half times as much as liabilities. Total stockholders equity is $22.7 billion, but its market cap as of the end of the third quarter is only $20.8 billion, which gives a market-to-book ratio of less than 1. The lower market cap is due to the battering the stock price has taken. If a company's financials are unhealthy then a sub-one market-to-book ratio may well denote a sickly company. But when the underlying balance sheet conveys good health, such a ratio typically indicates an undervalued company.
On Thursday Reuters reported that "production at its Cerro Negro project in Argentina, one of its three key mine developments, would be delayed...by at least three months." However, the same report carried the good news that earnings beat analyst expectations. This report also ties the company's declining profits to gold's declining price.
So the P&L news has been mixed with a positive trend.
Third quarter performance
Last Thursday Goldcorp also announced and discussed its Q3 results in a live webcast. CEO Charles 'Chuck' Jeannes said, "Nearly every mine reported decreasing costs quarter-on-quarter" and that cash costs per ounce decreased significantly.
"Increased production at Penasquito," "significant progress at Eleonore and Cochenour," and good news from Porcupine positively outweigh the bad news from Cerro Negro, which includes increased costs estimates due to multiple factors. Average all-in sustaining costs are stable at $1,000-$1,100 per ounce. (These will surely rise in 2014 Q3 because of Cerro Negro's almost-certain higher costs per ounce for various reasons outlined in the conference call.)
The manner in which the company's executives provided in-depth and candid facts and figures surrounding Cerro Negro – though they don't make anyone jump for joy – does inspire confidence in the leadership.
Finally, net earnings of $5 million, though small, meant that Goldcorp turned the corner from the previous in-the-red quarter.
Net result
All this news has caused a dramatic surge Goldcorp from a depth to which it should never have been pushed down in the first place. What's that soft but distinct roar? I do believe that's Goldcorp pulling a Joe Montana – roaring to a comeback!
Goldcorp remains a company with exceptionally low costs-per-ounce, first rate assets, and strong financials, and on Thursday it scored a point for itself as well as those who had not lost faith in it.
