Despite being one of the largest gold producers, Goldcorp Inc. (NYSE:GG) has hugely underperformed rivals Barrick Gold Corp (NYSE:ABX) and Agnico-Eagle Mines (NYSE:AEM) in recent years, and with good reason. Goldcorp was mired in all kinds of problems, right from declining production to rising all-in-sustaining-costs (AISC) to tumbling cash flows and dividend cuts.
That's enough to spook any investor, but here's the thing: Goldcorp's problems are pretty much in the past now, and the company is in better shape than ever. If you don't believe me, check out the following three areas it is progressing in. After learning about them, I bet you wouldn't argue that Goldcorp is looking at better days ahead.
Costs matter, and Goldcorp knows this well
When dealing in a volatile commodity like gold, the key to a miner's margins depends largely on how efficiently and cost effectively it can operate and maintain mines. Goldcorp was plagued by high costs and was lagging behind peers until last year when it cut down its AISC by roughly 4% to $856 an ounce, driven by a mix of factors including restructuring and improvement of grades at key mine Penasquito in Mexico. Though still higher than Barrick's and Agnico Eagle's AISC -- which came in at $730 and $824 per ounce of gold, respectively, in fiscal year 2016 -- Goldcorp is now among the lowest-cost gold producers in the industry.
What's important is that management knows it needs to keep AISC in control going forward, which is why bringing down AISC by 20% between 2016 and 2021 is one of Goldcorp's key goals per its recently unveiled five-year growth plan. Of course, cost reduction is just one part of the equation, and Goldcorp will also have to boost production to enjoy the economies of scale. Thankfully, the company is making progress.
Ambitious growth plans in place
Goldcorp's five-year plan is an interesting 20-20-20 approach to growth, whereby it aims to increase its reserves and production by 20% each to 50 million ounces and 3 million ounces, respectively, while reducing AISC by 20% through 2021.
Goldcorp has several plans up its sleeve to achieve its production goals, including:
- Ramp-up of Cerro Negro, Argentina and Eleonore, Canada mines
- Ore grade improvement at Penasquito
- Advance Coffee Gold project, Canada to commercial production
That aside, Goldcorp also recently struck a 50-50 joint venture with Barrick Gold to operate the latter's Cerro Casale and Caspiche deposits in Chile. Cerro Casale is among the world's largest gold mines that will give Goldcorp exposure to nearly 11.6 million ounces of gold. Going by the success of Goldcorp's previous alliance with Barrick -- the two companies jointly operate the Pueblo Viejo mine, which is also Goldcorp's largest and lowest-cost mine today -- I'd be excited about Goldcorp's latest venture with Barrick if I were a Goldcorp shareholder.
If these moves reflect Goldcorp's focus on growth, there's another key area management isn't overlooking: its balance sheet.
A stronger and leaner company in the making
Goldcorp already has one of the strongest balance sheets in the industry with a debt-to-equity ratio of only about 0.2 times.
As of March 31, 2017, Goldcorp had long-term debt worth $2 billion, which was nearly 17% lower from its debt levels as at the end of December 2016. The company's next debt payment worth $500 million is due March 2018 and the rest isn't due for maturity until 2020. That not only means that Goldcorp doesn't have to worry about debt, but it also has enough wiggle room to take on more debt to fund growth.
That may not be required, though, at least in the near term, given the company's efforts to raise cash by divesting non-core assets. So far this year, Goldcorp has offloaded stake in at least three mines, including Cerro Blanco in Gautemala, Los Filos in Mexico, and Camino Rojo in Mexico. These divestitures should further improve Goldcorp's liquidity, which should come in handy as the company advances its projects.
Here's another point to ponder: Goldcorp is not only free-cash-flow positive but has consistently generated greater FCF than net income in each of the past five years.
Having looked up Goldcorp's growth prospects and catalysts in detail, it's pretty surprising to see the stock languishing -- it's down 15% in the past three months. The worst is behind it, which means Goldcorp stock is a reasonable bargain at its current price to cash flow of 12 times and price-to-book value of 0.8 times.