The second quarter 2018 was disappointing for investors in senior gold miner Goldcorp Inc. (TSX:G)(NYSE:GG). The miner missed expectations and reported lower production, cost blowouts and heightened foreign currency costs. And this, along with gold’s latest weakness, has sparked speculation that Goldcorp will struggle to unlock value for investors and sees its stock down by 22% over the last year.
Now what?
Goldcorp’s second quarter 2018 results were particularly disappointing with the miner reporting a net loss of US$131 million compared to a profit of US$135 million for the same period in 2017. This can be blamed on substantial and unanticipated currency devaluations, notably in Argentina, which saw Goldcorp to incur a US$178 million non-cash charge for foreign exchange losses.
Disappointingly, Goldcorp’s production declined sharply for the quarter, plunging by 10% year over year to 571,000 gold ounces. This noticeable decrease can be attributed to a considerable decline in the ore grades mined at the Peñasquito mine in Mexico and the Pueblo Viejo mine in the Dominican Republic, where head grades plunged by 42% and 21%, respectively.
Second quarter all-in sustaining costs (AISCs) rose by 6% year over year to US$850 per gold ounce produced. This noticeable increase was a result of lower gold output and a sharp reduction in by-product credits because of a marked decline in the volume of silver, zinc and copper mined.
Despite the poor second quarter operational performance, Goldcorp reaffirmed its 2018 guidance, where it has forecast annual gold output of 2.5 million ounces and AISCs of US$800 per gold equivalent ounce produced. This guidance is 3% less than the 646,000 ounces produced during 2017, although AISCs are expected to improve and be 8% lower.
In an environment where gold remains weak and is trading at US$1,188 per ounce, which is 6% lower than the average realized price per gold ounce sold in 2017, Goldcorp’s earnings could soften further.
As part of its strategy aimed at improving its operational performance and boosting production, Goldcorp has committed considerable capital to establishing a large project pipeline. These include the Peñasquito pyrite leach project, which will enhance the ability of the mine to process ore that was previously considered uneconomic to mine.
This project is expected to begin production in the fourth quarter of 2018. Goldcorp also has the Coffee project under development in the Yukon, which, along with the Borden development in Ontario is expected to be a major contributor to the miner’s plans to lift production by 20% by 2021.
So what?
Despite possessing considerable promise, Goldcorp has failed to live up to expectations. It is for this reason that its stock has been heavily marked down to see its value decline by a whopping 23% over the last year, which is almost triple the 8% drop in the price of gold.
While some pundits believe that this has created a buying opportunity, it is increasingly clear that Goldcorp is struggling to grow production and rein in costs, which means that there are more attractive opportunities available for investors seeking to bolster their exposure to gold.
