If you made a list of the best-performing gold stocks of 2017, it wouldn't include Goldcorp (GG). The gold miner lost 6% of its value with dividends included after production slumped, all-in sustaining costs (AISCs) per ounce rose, and investors sought out better near-term returns elsewhere in the industry and broader market.
But it wasn't all bad news. In the first nine months of 2017 net income stabilized and operating cash flow boomed. Besides, despite what Wall Street interpreted as a lousy year, declining production is the norm among gold mining companies. And the $11.8 billion company has an ambitious five-year plan that could leave it with some of the most enviable reserves and production growth in the industry.
If the business demonstrates steady progress on the long-term plan in the year ahead, would that make Goldcorp a buy in 2018?
Progress on 20/20/20
Management's five-year plan is called 20/20/20. The name comes from the goals of increasing gold production 20%, growing gold reserves 20%, and reducing AISC 20% by the end of 2021. Successful execution would result in Goldcorp boasting total gold reserves of 60 million ounces and production costs of just $700 per ounce in the beginning of the next decade.
The ambitious plan is more than a paper tiger. Goldcorp is already tantalizingly close to growing its gold reserves towards its strategic target based on reserve and resource estimates from the all-important Coffee, Pueblo Viejo, Cerro Negro, and Cerro Casale growth assets in which it owns a stake. At the end of June 2017 it boasted 53.5 million ounces of gold reserves, compared to 42.3 million ounces in the prior-year period.
Assuming selling prices cooperate -- or even if they don't -- everything could come together at just the right time. In 2017 the business proved it was capable of generating strong cash flows from current assets, or $720 million from operations through the first nine months of the year. For comparison, the gold miner achieved $779 million in operating cash flow in all of 2016.
That will provide ample capital for the company to develop its low-cost growth assets to boost production in the next five years. It will also help to boost EBITDA and therefore lower the company's leverage ratios, which are already healthy thanks to a relatively clean balance sheet. At the end of the third quarter of 2017 Goldcorp had a net debt to EBITDA ratio of 1.3x, almost half of the level reported at the beginning of 2015. It expects that to fall below 1.0x sometime in 2019.
What should investors be on the lookout for in 2018? Despite a falling stock price, the company made steady progress in the 2017 campaign, which could set the stage for better performance in the year and years ahead.
Management slashed $250 million in operational inefficiencies from the business last year, which will be fully realized for the first time this year. It sold off assets with higher-cost reserves, namely Los Filos and Camino Rojo, and acquired lower-cost assets such as the Cerro Casale / Caspiche project. That could help to lower AISC immediately, although investors will need to await preliminary guidance to be completely sure.
Investors may not see an overnight leap in share price in 2018, but Goldcorp is well-positioned to deliver above-average returns for a gold stock in the long haul. Management's 20/20/20 plan remains the driving force for the stock. Updates provided to date haven't moved the stock because the development-stage assets weren't contributing to commercial production volumes, but investors could receive more clarity on future production timelines in the second half of this year.
Long story short, if you're eyeing long-term opportunities in the gold mining industry, then Goldcorp should be near the top of the list of candidates.