What It Still Takes to Take Share Price Higher

Analysts see investing in Goldcorp Inc. (GG, Financial) as an opportunity because the gold stock is trading 7.2 times next year’s forecast cash flow versus the peer average of 9.8x.

Analysts rely on what Goldcorp CEO David Garofalo recently said with regard to operational improvements that will likely lead the miner to deliver $2 billion in NAV accretion over the next two years.

However, I have some doubts that Goldcorp will be able to generate cash flow over the coming years to the point that the stock looks like a good buy opportunity today. The following factors may affect the future gold margin (average realized gold price – AISC):

• The portfolio is composed of assets with mineral reserve grade (g/t) lower than that one of the industry, as you can see from the picture below:

• The company extracts gold mainly by underground mining techniques that involve higher operating costs than surface mining techniques:

Let’s compare, for example, Goldcorp’s mining technique with those of Newmont Mining Corp. (NEM, Financial), one of its peers.

At the majority of the mineral deposits from which Goldcorp extracts gold, underground mining techniques are used; these mineral deposits are Porcupine, Musselwhite, Éléonore, Los Filos (open pit operations ceased in early 2012 as the final, higher-grade portion of the open pit was mined, and the mine is now an underground operation only) and Cerro Negro.

Goldcorp is facing some issues at the Alumbrera gold/copper mine (37.5% interest) in Argentina that is entering care and maintenance in 2017 and at Penasquito gold mine where the miner has been facing problems of selenium contamination since October 2014.

At Newmont gold is mainly extracted by surface mining techniques instead. Newmont extracts gold from multiple locations in Nevada from surface and underground, from two open pits in Colorado, from two surface mines in Africa, from two surface mines and one underground in Australia and from one surface in South America.

What also should concern the investor is the impact of the capital that the miner is going to spend in the coming quarters to develop the existing assets and increase the quality of its portfolio. This will affect the AISC per ounce of gold produced, and Goldcorp already expects to sustain a high AISC per ounce for the full year but on the basis of a lower production of gold when compared to its peers (see below table):

"There’s a value gap that should narrow without needing the gold price to take it there,” says Ryan McIntyre, senior investment analyst at Tocqueville Asset Management (Barrons.com), but Goldcorp has to work hard to be able to generate a level of cash flow in 2017 that today would be traded 7.2x at current prices.

Goldcorp gained 33.65% on the New York Stock Exchange year to date, and it has been downtrending since the beginning of August.

Source: Yahoo! Finance

The stock is trading only 1.01 times its book value, but it is more expensive than its peers in terms of EV/EBITDA.

Disclosure: I have no positions in any stock mentioned in this article.

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