Goldcorp Inc. (GG, Financial) announced the dividend for the first quarter of 2017 on March 6. The Canadian gold producer headquartered in Vancouver will pay two cents per ordinary share on March 24 to shareholders of record as of March 16.
The quarterly payment of two cents brings the annual dividend to eight cents. Based on the last closing price of $14.73 per share, the dividend yield is 0.54%.
The annual dividend represents only a small percentage of Goldcorp’s 2016 EPS. The gold producer closed fiscal year 2016 with EPS of 31 cents. For fiscal year 2017, analysts forecast EPS of 36 cents, up 16% from the same figure in 2016. For fiscal year 2018, analysts forecast EPS of 49 cents, which represents a 36.1% increase from 2017.
Source: Yahoo Finance
Goldcorp closed at $14.73 per share on March 8, down 27 cents or -1.8% from the previous trading day, with a volume of 7,725,949 shares traded on the New York Stock Exchange.
Analysts set a target price per share of $18.07. This price represents a 22.7% upside from the current share price.
This leads me to wonder how much Goldcorp may be worth today and whether this gold producer is the best investment decision compared to its peers, namely Barrick Gold Corp. (ABX, Financial) and Newmont Mining Corp. (NEM, Financial).
I will use different methods to assess the value of Goldcorp.
The first method employs the forward price-earnings (P/E) ratio, which is a measure of the P/E ratio adopting the projected earnings for the estimation of the P/E.
For Goldcorp, analysts estimate a forward P/E ratio of 30.06. Assuming the projected earnings employed in the formula are for fiscal year 2017 (36 cents per share as an average from 19 analysts surveyed), the stock would be worth $10.82 per share versus the current price of $14.73 per share. Therefore, Goldcorp is overvalued by the stock market based on this method.
When the method it applied to its peers, we find Barrick and Newmont are overvalued as well. Barrick, however, looks more appealing than its peers since the market is pricing the world’s largest gold producer close to the value generated from multiplying the forward P/E ratio with the EPS estimate that analysts forecast for full-year 2017. Barrick is overpriced by 5.02% while Goldcorp is overpriced by 36.12% and Newmont by 27.64%, as shown in the chart below.
Source of data: Yahoo Finance
Of course, this method has its limits since it is based on forecasted values for the forward P/E ratio and EPS for fiscal 2017.
The second method employs the analysts’ average target price. Since the target price per share is, according to TheStreet.com, “a price set by analysts predicting where the stock will head in the next 52 weeks,” it can be assumed as the terminal value of Goldcorp in one year, calculated as a projection of its EPS in 12 months divided by the difference between the discount rate and the stable growth rate.
Therefore, the present value of Goldcorp is calculated as follows:
Goldcorp’s PV = 36 cents / (1+0.0221) + 18.06 / (1+0.0221) = $18.02 per share, where 2.21% is the company’s weighted average cost of capital as of today and considered as the discount rate.
To calculate the company’s fair equity value, we need to subtract the value per share of Goldcorp’s net debt from its present value as calculated before.
Goldcorp’s net debt per share is equal to total debt minus cash on hand and securities and then divided by the number of shares outstanding: (2.76 billion - 0.2 billion) / 853.81 million = $3 per share.
Therefore, Goldcorp’s fair equity value is $15.02 per share (=18.06 - 3). According to this method, Goldcorp is slightly undervalued.
Applying the same method to the company's peers results in the following:
Source of data: Yahoo Finance, GuruFocus.com and Google Finance
Another way to assess Goldcorp and compare it to its peers is the method that takes the EVO metric into consideration, which is the value the stock market gives to Goldcorp’s proven and probable gold reserves on an ounce-to-ounce basis. The value is obtained by dividing the current enterprise value of Goldcorp, which is $15.14 billion, by 41.83 million ounces of gold reserves.
As shown in the table below, Goldcorp is not the cheapest when the EVO metric is considered:
Source of data: Goldcorp, Barrick Gold Corp. and Newmont Mining Corp. 2016 financial reports
In assessing the value of Goldcorp and its peers to determine if it is overvalued or undervalued by the stock market and cheaper or more expensive than other gold mining stocks, I have used analysts’ forecasts on EPS for 2017 and the estimated target prices.
There is one simple, very important factor to take into consideration however. For full-year 2017, analysts forecast Goldcorp will generate EPS of 36 cents, which is a 16.13% increase from 2016 EPS when the cumulative average price of gold per ounce was $1,250.74.
If the precious metal trades around $1,244 per ounce on average in 2017, as estimated by analysts and broadly in line with the actual average price in 2016, the chances of the Canadian miner achieving such an improvement in the bottom line is low. Thus, it is likely Goldcorp will generate approximately the same EPS in 2017 as well. Therefore, analyst estimates on EPS for 2017 and the average target price per share may be revised lower. If analysts employ the methods I used, the gold stock's valuation is sure to be lowered.
Disclosure: I have no positions in any stock mentioned in this article.
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