It's not unusual for a gold miner to delay a big project. As gold prices are down 20% this year, such news could be worrying for some investors. Goldcorp (GG +0.00%) recently announced that it is delaying its Cerro Negro project. Now, the first gold production from this Argentinean mine is expected mid-year 2014. The project was earlier expected to start production by the end of this year. However, I think that this revised schedule should not negatively impact Goldcorp's valuation.
What happened at Cerro Negro?
There are several problems that Goldcorp has to deal with. First, the Santa Cruz province where Cerro Negro is situated has imposed a 1% annual tax on mine resources in the province. As a result of this, Goldcorp has decided to stop all exploration activities in the area and focus on Cerro Negro.
Second, Goldcorp states that annual inflation of 25% to 30% puts pressure on costs. The problem is that Argentine peso isn't declining at the same rate. This led to an increase in the project's capital cost estimate. Currently, Goldcorp expects Cerro Negro to cost from $1.6 billion to $1.8 billion, up from the previous estimate of $1.35 billion.
Cerro Negro is expected to produce an average of 525,000 ounces of gold in the first five years of full production. Goldcorp is going to produce between 2.6 million and 2.7 million ounces of gold in 2013.If Cerro Negro numbers are added to current production, this would lead to a 20% increase in production, which is why Goldcorp is that focused on the project.
Problems look small when compared to other miners' delays
Newmont Mining's (NEM 5.32%) Conga project has been stalled since the end of 2011. The construction of this Peruvian mine has led to violent protests, which have continued ever since. This mine is expected to produce between 580,000 and 680,000 ounces of gold annually, but Newmont cannot proceed with the construction work until it builds sufficient water reservoirs. The first one was built in May. However, given current low gold prices, Newmont Mining is not hurrying to spend money on this mine.
Similar water management problems have caused Barrick Gold (ABX 3.69%) to delay the construction of its Pascua-Lama mine. Annual production at Pascua-Lama is expected to average 800,000 – 850,000 ounces of gold and 35 million ounces of silver in the first five years. Barrick has submitted a plan to build a water management system by the end of 2014 and expects to produce first gold by mid-2016.
Bottom line
Goldcorp has managed to preserve a clean balance sheet. With just $1.5 billion of debt and $972 million of cash on its balance sheet, the company has the best financial position among big miners. Goldcorp's all-in costs in the third quarter dipped below the $1,000 mark and ended at $992 per ounce. Given the uncertainty about gold prices in the near term, this level of costs brings enough confidence.
The fact that Goldcorp has managed to preserve its fiscal position and manage its projects without big delays is reflected in its stock price. Goldcorp is down 25% this year, while Newmont Mining has lost 39% and Barrick Gold is down 41%.
However, as gold prices stabilize and Cerro Negro starts production, Goldcorp's earnings will rise. In fact, Goldcorp's 2014 earnings are expected to be 23% higher than this year's earnings. In addition, the stock has a decent 2.25% yield.
All in all, if you want gold exposure, but you are not ready to take big risks, Goldcorp is the right bet.
