With the price of gold falling 2.4% through June, some investors may recognize the drop as an opportunity to pick up a gold stock. And more than likely, they'll turn to some of the industry's leaders: Kinross Gold (NYSE:KGC) and Goldcorp (NYSE:GG), for example. But which to choose? Kinross is up 36% year to date, while Goldcorp is only up 0.5%. Where does the opportunity lie?
First, let's get to know the companies. Operating solely in the Americas, Goldcorp produces gold from four mines in Canada, two in Mexico, and four in Central and South America. Also, it recently formed a joint venture with Barrick Gold to develop two projects in Chile. Kinross' operations, however, extend a bit farther. In addition to five mines in the Americas, Kinross has two mines each in West Africa and Russia.
Now that we have a sense of how the two companies' portfolios stack up against each other, let's see how they compare on some common metrics.
|Company||Market Cap||Fiscal 2016 Revenue||Fiscal 2016 Earnings Per Share||Fiscal 2016 Operating Margin||Fiscal 2016 Return on Equity|
|Goldcorp||$11.7 billion||$3.51 billion||$0.19||10.5%||1.23%|
|Kinross Gold||$5.2 billion||$3.47 billion||($0.08)||1.3%||(2.59%)|
From this brief glance, it seems as if there will hardly be a contest between these two; Goldcorp will win in a landslide. But let's do our due diligence before jumping to any conclusions.
Digging into revenue
In fiscal 2016, largely because of unforeseen decreased production at Penasquito and Cerro Negro, Goldcorp reported gold production of 2.873 million ounces -- a year-over-year decline of nearly 21%. Kinross, on the other hand, recognized a 7.5% rise in gold production, leading to a record amount of 2.79 million ounces. Increased production at Fort Knox and Paracatu notwithstanding, major contributors to Kinross' record production were the acquisition of Bald Mountain and a 50% stake in Round Mountain.
Though it struggled in terms of gold production, Goldcorp excelled at controlling expenses. The company reported all-in sustaining costs (AISC) of $856 per gold ounce in fiscal 2016, whereas Kinross reported AISC of $984 per gold ounce. The importance of a company's AISC can't be overstated. Gold production may waver from year to year for a variety of reasons, but maintaining low AISC ensures profitability.
Looking ahead, Goldcorp foresees growing gold production and reducing its AISC even further. According to its five-year outlook, expansionary projects at several sites -- Penasquito, Musselwhite, Porcupine, and Coffee -- will help the company to achieve gold production of 3 million ounces and AISC of $700 per gold ounce in fiscal 2021. Although Kinross hasn't guided that far into the future, it does expect Tasiast to emerge as the company's largest gold producer once expansionary projects are completed; moreover, it's expected to have some of the lowest costs among all of its assets. When it begins full production after the phase 1 expansion in Q2 2018, Tasiast is expected to have AISC of $760 per ounce. As of now, though, Goldcorp maintains the better margin, and it will likely continue in fiscal 2017. It estimates AISC of $850 for the year while Kinross expects AISC between $925 and $1,000.
Hanging in the balance
Based on a stronger margin, Goldcorp seems more attractive than Kinross, but how do the companies compare in terms of their balance sheets? After all, a great margin means little if the company is perpetually trying to dig itself out of debt, so let's evaluate the companies based on where they stood at the end of fiscal 2016.
|Company||Debt-to-Equity Ratio||Debt to Capital||Net Debt to EBITDA||Quick Ratio|
On one hand, Goldcorp should earn investors' confidence in that the company has taken a more circumspect approach to debt than Kinross. Whereas debt comprises only about 16% of Goldcorp's capital structure, it represents nearly 30% for Kinross. Is this, in and of itself, a red flag? Not necessarily. Though it's certainly not desirable, investors should be willing to accept a company's higher debt level if they're confident that management can service it adequately. To this end, Kinross succeeds.
With a net debt-to-EBITDA ratio of 1.02, Kinross should allay some of their investors' concerns, since it's not highly levered. In fact, it has an investment-grade credit rating from Fitch Ratings and Standard & Poor's. Like Kinross, Goldcorp isn't highly levered, and it also maintains an investment-grade balance sheet. And with a quick ratio of 1.64, Kinross has more than enough liquidity to service its short-term obligations, should there be a rapid drop in the price of gold.
Turning gold into green
Finally, we'll assess the companies in terms of cash flow.
Due to depreciation, asset impairments, and other non-cash charges, earnings figures can often be misleading. Cash flow figures, however, are not. The fact that Goldcorp has failed to improve its operational cash flow over the past five years while Kinross has succeeded puts the companies' EPS figures into better context. Moreover, Kinross has achieved better free cash flow. According to Morningstar, Kinross reported $465 million in free cash flow for fiscal 2016-- nearly 110% growth year over year. Goldcorp, conversely, saw its free cash flow get cut in half -- dropping from $235 million in fiscal 2015 to $109 million in fiscal 2016. According to management's comments in its 10-K, the decline in cash flow was "mainly due to lower production and sales volumes, primarily at Cerro Negro and Peñasquito."
Winner: Kinross Gold.
And the winner is...
So where does the better opportunity lie? It's awfully close to call. In fact, there are compelling arguments for both companies. But if I had to make an investment now in either one of these, I'd choose Goldcorp. For one, I find Goldcorp's well-articulated five-year growth strategy more encouraging than the lesser clarity which Kinross has provided. Moreover, Goldcorp's lower AISC ensure that it can continue to achieve better profitability. Lastly, Goldcorp seems less risky since its future success isn't so largely based on the execution of one project. Unlike Kinross, which is counting heavily on Tasiast, Goldcorp has several expansionary projects close to completion and long-term projects like the joint venture with Barrick in Chile from which it can prosper.