Political uncertainty in Washington and strained relations abroad are just two explanations for gold's more than 13% rise year to date. There's little to suggest that these two concerns will be eased anytime soon, suggesting that the price of gold is bound to rise even more in the months to come. Now, therefore, seems like an ideal time to focus on gold stocks, especially two popular miners, Goldcorp (GG)and IAMGOLD (IAG -2.96%).
A cursory glance at the two stocks' price tags suggests that IAMGOLD is currently the better opportunity for investors. According to Morningstar, the stock is trading at 5.7 times trailing earnings -- well below its five-year average P/E of 12.6. Shares of Goldcorp, on the other hand, appear expensive, sporting a 23.9 multiple compared to its five-year average of 20. But this comparison is merely scratching the surface, so let's grab our pickaxes and dig in even deeper.
Image source: Getty Images.
A brief who's who
In laying the groundwork for a comparison between the two companies, it's important to note the basic difference between the two: size. Goldcorp is one of the big dogs in the industry while IAMGOLD is a bit smaller. Operating 10 gold-producing mines in the Americas, Goldcorp has a market cap of $11.3 billion; conversely, IAMGOLD has three gold-producing assets in addition to a joint venture and has a market cap of $2.8 billion. While Goldcorp is recognized as a senior producer, IAMGOLD is considered an intermediate producer, suggesting that Goldcorp and IAMGOLD would be more attractive to conservative and aggressive investors, respectively. Let's take a look at some common metrics to gain further insight into how these two companies stack up against each other.
| Company | Market Cap | Fiscal 2016 Revenue | Fiscal 2016 Free Cash Flow | Fiscal 2016 All-In Sustaining Costs | Dividend Yield |
|---|---|---|---|---|---|
| IAMGOLD | $2.8 billion | $987 million | $14 million | $856 per gold ounce | N/A |
| Goldcorp | $11.3 billion | $3.51 billion | $109 million | $1,057 per gold ounce | 0.61% |
Data source: Morningstar, Goldcorp 10-K, and IAMGOLD 10-K.
There are some notable differences between the two companies. It bears repeating that the two businesses, a major gold producer, and a mid-tier producer, aren't exactly on the same playing field. Each business offers a slightly different approach to investing in the gold mining industry.
The case for Goldcorp
Producing 2.87 million gold ounces, Goldcorp was the fourth-largest gold-producing mining company in 2016 according to mining.com. Although the company has growth prospects on the horizon, Goldcorp, a senior producer, is not likely to recognize sharp gold production growth in the years ahead. Instead, the bull case for Goldcorp is predicated on its ability to execute its five-year strategy: growing both gold production and reserves by 20% while reducing all-in sustaining costs (AISC) by 20%. It may be early, but there are signs that the company is moving in the right direction. For one, gold production has increased at Eleonore and Cerro Negro, and the Pyrite Leach Project -- it is expected to increase annual gold production by 100,000 to 140,000 ounces -- remains on schedule to commence operations in the first quarter of 2019. Moreover, the company has identified 100% of targeted efficiencies that will result in sustained annual cash flow improvement of about $250 million.
Another feather in Goldcorp's cap is a longer-term prospect: a joint venture with Barrick Gold (GOLD -1.02%) located in the Maricunga Gold Belt in Chile. According to management's calculations, Cerro Casale -- one of the projects -- holds approximately 23 million ounces of gold in proven and probable reserves.
Image source: Getty Images.
At the second site, Caspiche, proven and probable gold reserves haven't been identified, but Goldcorp reports the deposit has measured and indicated gold reserves of approximately 23 million ounces.
Although its dividend yield of 0.61% may not seem like anything to write home about, Goldcorp's dividend -- one of the better dividend opportunities among gold-mining companies -- is another reason to favor the company over IAMGOLD, which does not currently offer a dividend. In fact, IAMGOLD suspended its dividend back in 2013, and there's little to suggest that the dividend will be reinstituted anytime soon.
The case for IAMGOLD
Choosing to invest in an intermediate producer, like IAMGOLD, is grounded in the belief that the company is a growth opportunity. And it's clear that management recognizes a path toward this potentially lustrous future. In fiscal 2016, the company produced 813,000 gold ounces. Management, however, has identified a goal of 20% to 25% organic growth by 2020, resulting in the production of more than 1 million ounces. Additionally, the company aspires to reduce AISC 10% to 15% from the $1,057 per gold ounce it reported in fiscal 2016 to approximately $925 per gold ounce in 2020.
Substantiating the claim that IAMGOLD is well-positioned to achieve this growth is the company's success in its exploration program. IAMGOLD reported a 69% increase in attributable resources from December 2016 to the end of the second quarter of 2017. This was largely driven by 3.8 million and 1.6 million ounces of gold reserves recently identified at Cote Gold and Rosebel, respectively.
Management's belief that IAMGOLD is on a yellow brick road to growth is encouraging, but it means little if the company is buried under mountains of debt. In this case, though, we find the opposite. IAMGOLD -- with zero net debt -- maintains a strong balance sheet. This will serve the company well as it executes its growth strategy. In fact, according to a recent presentation from June, the company has reduced long-term debt by 32% in 2017, and it maintains a total debt-to-EBITDA ratio below 2 moving forward.
And the winner is...
Although Goldcorp is more richly valued in terms of trailing earnings, I believe it offers the better opportunity at the moment. Trading at 2.7 times trailing sales, IAMGOLD, apparently has growth baked into its share price; the stock's five-year average sales multiple is 1.5. Goldcorp, on the other hand, appears to be a bargain. Currently, it trades at 3.3 times trailing sales -- a discount to its five-year average of 4.6. And price tags aside, I'd be more content to collect Goldcorp's dividend while the company executes its five-year growth strategy instead of waiting -- with no dividend -- for IAMGOLD to achieve its targets.
IAMGOLD, a mid-tier producer, may be considered a growth opportunity, but Goldcorp has a clearly articulated growth strategy as well -- one that glitters with potential value -- that seems much more compelling.
