Goldcorp Inc. (TSX:G)(NYSE:GG) is up more than 50% in 2016, and investors are wondering if the weakness over the past few days is a signal to buy.
Let’s take a look at the current situation to see if this stock should be in your portfolio.
Gold market status
Most analysts expected the Fed to raise rates four times this year, but weak global economic conditions and shaky U.S. data have changed the outlook. Now, the market is looking for just two hikes or even fewer.
Gold doesn’t offer any yield, so the prospect of lower interest rates reduces the opportunity cost of holding the precious metal. The U.S. is still expected to raise rates gradually in the coming years, but many other countries are moving in the opposite direction, and some now offer negative returns, which is driving people into the gold market.
Why would you pay the government or the bank to hold your money? You might as well buy gold.
Finally, gold is once again enjoying status as a safe-haven asset. Concerns about a potential financial meltdown in China are starting to resurface and geopolitical risks in the Middle East continue to weigh on the minds of investors.
Should you buy Goldcorp?
If you believe the gold rally has legs, Goldcorp will continue to rise with the rest of the sector, and the stock is a safer bet than some of the other names that are struggling with heavy debt loads.
Production is expected to be 2.8-3.1 million ounces this year, and management plans to cut US$500 million in mine site and corporate expenses over the next two years, so things are moving in the right direction.
Goldcorp put two new mines into commercial operation last year, and those facilities continue to ramp up toward target capacity. As output improves, all-in sustaining costs (AISC) should drop.
AISC for Q1 2016 came in at a decent $US835 per ounce, and the company confirmed expectations for 2016 AISC of $US850-925. The full-year cost guidance is higher than the AISC of Barrick Gold, but Barrick is also sitting on more than US$9 billion in debt.
Goldcorp’s appeal is its strong balance sheet. The company has US$3.2 billion in liquidity and is only carrying US$2.7 billion in debt, so there is less risk connected to this name than there is with its highly leveraged peers.
If you want a low-risk miner for your portfolio, Goldcorp is an attractive pick.
