Reasons Why Goldcorp Could Be a Good Buy
Goldcorp (GG) is making good progress as far as its production and cost profile is concerned even though the stock is down more than 26% in 2015 on account of lower gold prices. In fact, despite weakness in gold pricing, Goldcorp's adjusted net earnings increased to $65 million last quarter as compared to $12 million in the year-ago quarter. So, what's the reason behind the impressive increase in Goldcorp's profit, and will the company be able to sustain this growth in the future?
Making the right moves
Goldcorp had posted 908,000 ounces of gold production last quarter with all-in sustaining costs of $846 per ounce and non-GAAP operational cash flows of $358 million, or $0.43 a share.
Goldcorp expects to meet the upper end of its gold production guidance in 3.3 million to 3.6 million ounces per ton range, primarily driven by a strong performance at Peñasquito. In addition, Goldcorp significantly improved its liquidity position through a $1 billion growth in its credit facility to $3 billion. The company also has a long-term track record of delivering significant shareholder value through strategic investments in its non-core assets by the planned divestment of its interest in the Cerro Negro project and then by the sale of 26% of its resources.
Going forward, Goldcorp is focused on optimizing its operations by reducing its non-core expenditure and enhancing the balance sheet through improvement in the free cash flow.
A closer look at the operational profile
Goldcorp's ongoing focus on minimizing costs, coupled with favorable currency translations in its Mexican and Canadian operations, will enable the company to successfully lower its all inclusive supporting costs for the fourth successive quarter. The improvement in gold production at Penasquito, supported by favorable currency translation at core operations in Canada and Mexico, will allow the company to partially offset a weak performance.
Although there have been certain concerns about decelerating growth rates and weaker capital markets in China, coupled with the appreciating U.S. dollar negatively impacting gold prices, Golcorp's operational improvements will allow it to get better in the long run.
For example, Goldcorp is successfully advancing its integration plan at Red Lake in Canada, with second quarter safe gold production coming in at 90,800 ounces at all-in sustaining costs of $879 per ounce. Moreover, gold production for the entire fiscal year 2015 is estimated to be in 400,000 to 425,000 ounce range.
Goldcorp will also benefit from the discovery of a new deposit at HG Young with underground drilling from rehabilitated Campbell headings. This deposit is expected to have significant high grade intercepts defining footprint dimensions. In addition, Goldcorp has launched a sophisticated exploration program focused on identifying the orientation of the mineralization. It has already started drilling from underground with thirteen key drills. Moving ahead, focused processing of mill feed from initial test stopes is estimated to begin in the fourth quarter of 2015.
Additionally, Goldcorp has optimized its highest cost Musselwhite mine, bringing the mine's cost structure to $761 per ounce during the quarter through focused implementation of its cost-cutting initiatives. Hence, Goldcorp has made impressive progress in lowering the cost profile, which will allow the company to do well in the long run as gold prices are expected to improve.
All in all, Goldcorp could improve in the long run as the company is making good progress to reduce costs and improve production. As a result, I think investors should continue holding the stock for long-term gains.