Why Goldcorp Could Crash
Goldcorp (GG) had a pretty bad second quarter this year. On 27th July, the company reported a Q2 2016 net loss of $78 million (i.e. $0.09 per share) compared to positive net earnings of $392 million (i.e. $0.47 per share) in 2015.
The loss was, to a large extent, attributed by the company to the negative effect of the lower production volume.
However, just a fall in production volumes alone can cause only the revenue and profits scale down. It alone can’t turn the profits negative. The actual reason was the high cost at which Goldcorp is operating right now. The all in sustaining cost (AISC) for the last quarter came in at an unacceptable high of $1067 per ounce compared to $853 per ounce for the same quarter of last year.
The negative impact of low production volumes on the revenue and high costs on the earnings was partially offset by the unexpected improvement in gold prices which has continued even in the running quarter till now.
And many industry analysts now believe that the on-going rally is not yet over by any chance. For instance, the French bank Natixis (which predicted last year's gold price down to the dollar) has predicted a price north of $ 1400 an ounce for the period toward the end of this year. Going into 2017 and 2018, the Toronto-based investment bank, RBC Capital Markets, has been reported to up its previous forecast of around $1300 per ounce to $1500 per ounce.
RBC goes on to say that “investors should look to gold equities for exposure to gold, especially given the increasing free cash flow generated in the current gold price environment” and that “any weakness is viewed as a buying opportunity.”
Prospects of Goldcorp stock:
The bright prospects for the gold market should not be mistaken as the prospects of each and every gold related company. It should be noted that while RBC made the above statement, it also said that it would recommend to the investors “operating companies with attractive margins, solid balance sheets, organic growth opportunities and a consistent operating strategy.”
Here, I would like to highlight the foremost condition set by RBC i.e. attractive margins. Are the margins of Goldcorp attractive? Certainly not after looking at its second quarter results. In fact it made a loss in a quarter in which it got the opportunity to realize $ 1277 per gold ounce on an average, all thanks to the high cost of production discussed above. Hence, Goldcorp is not a gold miner with an attractive margin.
Do the peers have a better margin than Goldcorp? Yes, the first one to be mentioned is Barrick Gold (ABX) which posted all-in sustaining costs of $782 an ounce for the last quarter. The other one is Yamana Gold (AUY) which had an AISC of $884 an ounce for the first six months of the year. And the third one is Kinross Gold Corporation (KGC) whose $988 an ounce AISC is quite high but that’s still much better than a one thousand odd dollars of Goldcorp. You can imagine the margins these peers would have enjoyed in Q2.
All in all, Goldcorp’s second quarter does not bode well for the company’s future prospects even though the prospects of gold market are looking great. Now, it would take the stripping campaign running at Peñasquito to succeed and a sustained high grade ore discovery at Cerro Negro for Goldcorp to bounce back.
One view is of course that the disappointing second quarter could be just a “one-off” quarter and the company might just be able to keep its promises regarding production costs in the following quarters. But even if Goldcorp meets the AISC target of keeping it below a maximum of $925 an ounce, there are much better options available for an investor eyeing the gold sector. That is precisely why I don’t expect as much upside in Goldcorp as I do in its high margin peers.