According to news reported by Bloomberg yesterday, the Bank of Nova Scotia has been appointed by Goldcorp Inc. (GG, Financial) to look into selling the Canadian gold producer’s operations of the Camino Rojo gold and silver project in Mexico.
The sale of this asset can be added to the sale of its Los Filos operation in Mexico, which is reportedly at an advanced stage.
It is not clear how much the gold producer will make selling these operations, but Los Filos could sell for around $300 million and another $200 million could be added from the sale of Camino Rojo, according to Andrew Kaip, an analyst at BMO Capital Markets.
As of the third quarter, Goldcorp had approximately $400 million in cash on hand and securities that can be readily converted into cash, plus a line of credit of $3 billion for a total liquidity of approximately $3.4 billion. The Canadian gold miner will use the proceeds of these sales to reduce debt and invest in the development of projects that David Garofalo, the president and CEO of Goldcorp, indicated as ones that have higher potential to expand the company’s business:
"We will seek more efficiency in our operations and will reinvest into a robust pipeline of existing organic growth opportunities. We believe this strategic renewal offers the best potential returns with the lowest risk profile". (Goldcorp’s NR).
Los Filos is located in the territory of Mezcala in the Mexican state of Guerrero. There, Goldcorp extracts the precious metal from two open pits. Operations started at the beginning of 2008 and the company is also undertaking underground mining. At the mine, the gold producer is currently grinding approximately 70,000 tonnes of mineral per day.
As of the second quarter, Los Filos had 1,430,000 ounces of proven and probable gold reserves and 7,830,000 ounces of proven and probable silver reserves.
In 2015, Goldcorp produced a total of 272,900 ounces of gold at an all-in sustaining cost (AISC) of $1,488 per ounce. The 2015 production at Los Filos represents approximately 8% of the company’s total gold production with 3,464,400 ounces.
The AISC per ounce of gold at Los Filos is 75% higher than the total AISC of $852 per ounce of gold the miner reported in 2015.
In the first nine months of 2016, Goldcorp produced 194,000 ounces of gold (-2% on a year over year basis) at an average AISC of $866.34 per ounce (-29.3% on a year over year basis). The first nine months’ production at Los Filos represents 9.2% of the company’s total gold production for the same period.
Following its program of enhancing the quality of the asset base, Goldcorp began studying and evaluating some alternatives at Los Filos’ operations in 2015. The first study’s data “resulted in a reduction of the estimated recoverable value of Los Filos and a shortened mine life,” the company said in its Third Quarter 2016 Report.
As a matter of fact, less gold produced and sold at Los Filos, together with decreased quantities reported at Peñasquito, Cerro Negro and Éléonore, cancelled out, to a certain extent, the improvement in the overall AISC reported by the miner in the first nine months and third quarter of 2016, compared to the same periods last year.
The improvement in the overall AISC per ounce of gold was positively impacted by reduced operating costs and weaker Argentinian and Mexican currencies versus the U.S. dollar.
Within the framework of Goldcorp's program of enhancing the quality of its asset base, Los Filos led the 13% increase in the average estimated reserves’ metal content, which is 1.06 g/t, through a rearrangement of 5.3 million ounces of reserves characterized by a low margin that were moved back to the category of resource. Therefore, proven and probable gold reserves decreased 18% to 41 million ounces, however, the miner's overall gold equivalent reserves increased over 2% to 85.6 million ounces, the company posted in its report.
Concerning the Camino Rojo gold and silver project, the gold producer is developing in an area located approximately 31 miles away from the Peñasquito mine. Goldcorp will release a pre-feasibility study by the end of 2016.
According to the company’s website, “road transportation and power are convenient, skilled labor and smelters are readily available and the host formation contains world-class Au-Ag-Zn-Pb deposits.”
Goldcorp is undertaking other projects in Canada, the U.S. and Latin America that should add considerably to the company’s total production once completed.
Yesterday, Goldcorp closed at $13.25 per share, up 11 cents (or 0.84%) from the previous trading day, with 8,717,158 shares traded on the New York Stock Exchange.
The 52-week range is between $9.46 and $20.38. The stock gained 12% year to date on the New York Stock Exchange, but was outperformed by its peers. Barrick Gold Corp. (ABX, Financial) outperfomed by 91% and Newmont Mining Corp. (NEM, Financial) outperformed by 72%. The Market Vectors Gold Miners ETF (GDX, Financial) also outperformed Goldcorp by 41%.
Currently, Goldcorp looks cheaper than its peers when the price-book ratio is considered. It is trading at 0.85 times its book value. However, the stock is trading at 10.19 times its Ebitda, making it look more expensive than Barrick Gold Corp. at 6.01 times and Newmont Mining Corp. at 6.55 times.
Goldcorp has a beta gold of 1.68, which is computed through a multiple regression model of 253 daily observations of gold stock returns and changes in the gold price from Nov. 30, 2015 to Nov. 30, 2016.
The beta gold measures the exposure of Goldcorp's return on the New York Stock Exchange to changes in the price of gold. The Comex has been considered as a proxy for the price of gold variable.
According to the data of the above chart, Goldcorp is more volatile than gold. But since it has a beta gold lower than that of Barrick, the stock may rise less than Barrick if gold starts to uptrend again, reflecting the latest preferences of gold investors.
During the third quarter, First Eagle Investment (Trades, Portfolio) and David Dreman (Trades, Portfolio) reduced their positions in Goldcorp Inc. by 15.44% and 6.01%, while Mario Gabelli (Trades, Portfolio) increased his position by 0.06%.
As of today, 12 out of 25 analysts recommend to buy Goldcorp Inc. and the recommendation rating is 2.3. The recommendation rating ranges between 1 (Strong Buy) and 5 (Sell).
The average target price is $19.37 and ranges between a low of $15 per share and a high of $28 per share.
Disclosure: I have no positions in any stock mentioned in this article.
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