It has been a rocky ride for Goldcorp's (GG +0.00%) shareholders over the past three years as shares have plummeted nearly 45%. Since the start of 2017, however, the stock has been successfully digging itself out of its hole, climbing almost 13%. Surely this is attributable in part to the approximate 7% rise in the price of gold during the same period, but there are several reasons to believe Goldcorp's rebound is poised to continue.
Management has identified a three-pronged approach to help the company reach its five-year goal of growing shareholder value. Aspiring to grow both production and reserves by 20% while reducing all-in sustained costs (AISC) by 20%, management hopes to achieve its goal of increasing net asset value per share, suggesting its best days lie ahead of it.
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Growing the gold pile
Reporting 2.873 million ounces of gold production in fiscal 2016, Goldcorp aspires to reach gold production between three million and four million ounces from six to eight large-scale projects by 2021. With several projects under way, management believes it is well-poised to achieve this goal.
In Canada, for example, the company expects the ramp-up of production at its Eleonore mine to result in 315,000 ounces of gold in fiscal 2017 -- approximately 15% higher than the 274,000 ounces produced in 2016. A ramp-up in production at the Cerro Negro mine is also expected this year, resulting in gold production about 13% higher than the 363,000 ounces reported in 2016.
An increase in gold production at the Penasquito mine in Mexico also figures prominently in the company's vision. Besides the significant stripping phase over the next three years, the company expects production to increase by 100,000 to 140,000 gold ounces per year following the execution of the Pyrite Leach Project.
Serving up growth in the reserves
Besides increasing the amount of yellow stuff it digs out of the ground, the company expects to increase net asset value per share by replenishing its reserves. Whereas the company's reserves totaled 42.3 million ounces at the end of fiscal 2016, it expects success in its exploration projects to result in gold reserves of 50 million ounces by 2021.
Working to keep costs to a minimum, Goldcorp anticipates achieving its target by growing reserves organically. Although the company has numerous brownfield exploration opportunities throughout its portfolio which it plans to develop, management expects the conversion of existing resources at Penasquito, Pueblo Viejo, Cerro Negro, and the Century project at the Porcupine camp to figure prominently in the reserves growth.
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Further illustrating Goldcorp's commitment to growing the reserves, management revealed it has budgeted $100 million for exploration activities in fiscal 2017 -- a significant increase over the $32 million which it spent during fiscal 2016.
Commenting on costs
Reporting AISC of $856 per gold ounce in fiscal 2016, Goldcorp is targeting AISC of approximately $700 per gold ounce by 2021. One strategy that the company is implementing to help realize this goal is the optimization of its portfolio. According to management, the optimization of the company's portfolio -- resulting in gold production from six to eight large-scale camps -- will help the company achieve economies of scale and help drive down AISC. Furthermore, by divesting non-core assets, management expects to strengthen its balance sheet and increase shareholder value. For example, the company recently announced its entrance into an agreement to sell each of its Los Filos mines in Mexico for an estimated consideration of $438 million. Additionally, the company recently announced its intention to sell its interest in the Cerro Blanco project in Guatemala for potential consideration of up to $50 million.
Another contributor to the company's planned reduction in AISC is an initiative begun in 2016 to recognize $250 million in annual sustained efficiencies by 2018. The company is well on its way to achieving this as it identified 60% of its target last year alone: approximately $50 million in general and administrative expenses and $65 million from workforce reductions and improvement initiatives at Cerro Negro. In addition to Penasquito recognizing about $50 million in cash flow improvements in 2017, management expects other Canadian projects to identify between $30 million and $50 million in cost reductions and Porcupine to identify between $30 million and $40 million.
Investor takeaway
Although the company is in the nascent stages of its five-year plan to grow net asset value per share, there are numerous indications that the company is on the right track. Besides the divestment of Los Filos and Cerro Blanco, the successful implementation of its productivity and cost optimization program have the company well-positioned to shore up the balance sheet and reduce AISC. These steps, in addition to the planned growth in gold production and reserves, suggest that the company has a yellow brick road ahead of it -- one upon which the company's better days can be found.
