Goldcorp’s Disappointing Results Hide Solid Potential

Don’t let a bad quarter scare you away from this well-positioned golden giant.

The Motley Fool

The plunge in the price of gold – to a low of $1,192 per ounce in June this year – has sent ripples across the gold mining industry. Impacting the profitability of gold miners and forcing them to slash costs in order to maintain profitability. One such company is Canada’s second largest gold miner Goldcorp (TSX:G) (NYSE:GG), which reported a disappointing second quarter 2013. But with gold potentially poised to move higher, it’s worthwhile taking a closer look at Goldcorp.

Second quarter results: in one word disastrous

Goldcorp is Canada’s largest gold miner after Barrick Gold (TSX:ABX) (NYSE:ABX) and has a diverse range of projects throughout North, Central and South America. For the second quarter 2013 Goldcorp reported a net loss of almost $2 billion compared to a net profit of $268 million for the same quarter in 2012. The key driver of the net loss was Goldcorp booking an impairment charge of almost $2 billion in respect of exploration potential at its Peñasquito mine in Mexico.

More troubling is that for the second quarter 2013, all in sustaining costs grew by 22% to $1,279 per ounce of gold produced. Operating cash flows also fell by over 80% year-over-year to $80 million, which saw free cash flow plunge six-fold to negative $565 million. All of which indicates that Goldcorp is struggling to operate profitably in a low metals price environment.

On a positive note, despite slashing capital expenditure for exploration and mine development, gold production increased for the same period by 11% year-over-year to 646,000 ounces of gold. This increase in production positions Goldcorp to take advantage of the recent spike in gold prices and should assist profitability.

Outlook is optimistic

According to Goldcorp, its 2013 production and cost guidance remains unaffected. This leaves it on track to produce 2.5 to 2.8 million ounces of gold at an all in sustaining cost of $1,000 to $1,100 per ounce. When this is considered in conjunction with the recent spike in the gold price to $1,376 per ounce, Goldcorp’s profitability is expected to improve significantly.

Cost reduction remains key

In order to continue reducing costs, Goldcorp has deferred capital expenditures at three projects that are currently under construction; Cerro Negro in Argentina and Eleonore and Cochenour in Canada.

Goldcorp has also targeted a 10% reduction in general and administrative expenses and an 11% cut in exploration expenses for the remainder of 2013. To achieve the desired reduction in exploration expenditure, Goldcorp has delayed early-stage development projects at Camino Rojo in Mexico, El Morro in Chile and Cerro Blanco in Guatemala.

These cost reduction initiatives are key to Goldcorp maintaining its profitability and will allow it to achieve its stated full-year 2013 guidance for all in sustaining costs of $1,000 to $1,100 per ounce.

The majority of production comes from low risk jurisdictions

Another positive aspect of Goldcorp’s operations is that the majority of its production comes from stable, low risk jurisdictions, with 44% being derived from Canada and the U.S. as the chart below shows. This helps minimize the risk of the production disruptions caused by political and economic uncertainty.

goldcorp jurisdictions

Source: Goldcorp Corporate Update July 2013.

Such risk is emphasized by the ongoing problems that Goldcorp is experiencing with the development of its El Morro mine in Chile and Barrick is experiencing with constructing its nearby Pascua-Lama project.

Goldcorp lost its environmental permit for the El Morro project in early 2012 and has yet to receive any concrete news indicating when it will be reinstated. While Barrick has had its massive Pascua-Lama project also stalled on environmental grounds, forcing it to take a write-down of around $5 billion against the project in the second quarter 2013.

Balance sheet remains strong

Goldcorp stands out among its peers because of its strong balance sheet. At the end of the second quarter 2013, Goldcorp held $899 million of cash and cash equivalents, $491 million of money market investments and an undrawn $2 billion revolving credit facility.

This leaves Goldcorp with a particularly low debt-to-equity ratio of 0.1, which is significantly lower than the industry average of 0.4 and many of its peers as the table below illustrates.

Company Debt-to-Equity   Ratio


Barrick Gold


Yamana Gold












Source data: Fidelity

This emphasizes Goldcorp’s ability to weather any prolonged downturn in the gold price. It also underscores the company’s readiness to bounce back and continue mine development and exploration should there be a sustained spike in the gold price.

Foolish final thoughts

Goldcorp’s second quarter 2013 results indicate that the company is struggling to operate in a low metals price environment. But with the ongoing implementation of cost reduction initiatives, a strong balance sheet and the recent spike in the gold price, Goldcorp’s profitability is set to improve.

Another golden opportunity

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The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool Canada’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.

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Fool contributor Matt Smith does not own shares of any companies mentioned at this time.  The Motley Fool doesn’t own shares of any of the companies mentioned at this time.


This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

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