Goldcorp (NYSE: GG) is set to release its third-quarter earnings on Oct. 26. Are you finding yourself interested but equally worried about drowning in a flood of facts and figures? It's not uncommon during earnings season. Let's prepare by keying in on three things we can expect management to address in its report.
Although Goldcorp reported lower than expected gold production in the second quarter, primarily because of a 10-day maintenance shutdown at its Penasquito mine, management reaffirmed guidance for the year: 2.8 million to 3.1 million ounces. Taking longer to ramp up than previously thought, normal operations at Penasquito have resumed, and management expects production to steadily increase throughout the rest of the year.
Despite its optimism for the mine's improving performance through the third and fourth quarters, the expected improvement is lower than what management had originally estimated. Planning to increase throughput to 117,000 tonnes a day, management reported that in some areas the ore is harder than expected; consequently, it is taking longer to grind. Management now expects production to fall to within 100,000 to 110,000 tonnes a day.
Penasquito -- the largest gold-producing mine in Mexico -- is vital to Goldcorp's success and important for investors to monitor. Producing 860,300 ounces of gold in 2015, Penasquito reported $1.65 in revenue on all-in sustaining costs (AISC) of $544 per gold ounce -- Goldcorp's best performing mine in all three categories last year.
Totaling $1,067 per gold ounce in the second quarter, AISC increased -- according to management -- because of lower sales volumes at Penasquito, Cerro Negro, and Red Lake. But management believes the increase in costs could have risen even more had it not been for "the strengthening U.S. dollar against the Argentine and Mexican pesos and the Canadian dollar."
Management has forecasted AISC to fall in the third quarter and affirmed its guidance for 2016 of between $850 and $925 per gold ounce.
Goldcorp reported AISC of $936 per ounce through the first half of 2016, so to meet the midpoint of its guidance for 2016 -- $888 per ounce -- it will have to report AISC of $841 in the second half of the year.
Besides operations resuming at Penasquito, management expects higher ore grades at its other mines to be contributing factors in AISC falling through the rest of the year.
Besides the rise in AISC, the suspension of operations at Penasquito -- and the Cerro Negro mine in Argentina -- heavily affected Goldcorp's cash flow in the second quarter. Whereas the company reported $528 in operating cash flow in Q2 2015, it reported only $234 million in Q2 2016. The disparity becomes even more apparent in the context of free cash flow. In Q2 2015, Goldcorp reported $211 million, but in Q2 2016, the company reported only $68 million, according to Morningstar. Should the company recognize production increases at Penasquito and Cerro Negro, investors should confirm that operating cash flow also increases.
Goldcorp's management identifies free cash flow growth as one of its most pressing long-term goals because it enables the company to execute its other long-term goals. For one, Goldcorp has a pipeline of projects -- in varying stages of development -- which hopes to advance without relying on debt.
By growing its free cash flow, not only will it be able to self-fund these projects, but it will also be able to reduce its debt. Further speaking to the company's responsible use of debt, management has set a target of a net debt-to-EBITDA ratio below 1 by 2018.
There will be plenty of information to dig through when the company releases earnings, but the most important nugget to unearth will be the amount of gold produced at Penasquito. Unlike larger miners, which are less dependent on individual projects, Goldcorp largely depends on Penasquito. Because it affects the company's AISC and cash flow so significantly, investors would be remiss to not heavily weigh the mine's performance and any insight management may provide about the mine's future.