Goldcorp Inc. (GG, Financial) informed the market through a news release published on its Web site June 29 that it will sell its 21% minority interest stake in the San Nicolas project to Teck Resources Ltd. (TSX:TECK.A, Financial)(TSX:TECK.B, Financial)(TECK, Financial) on the basis of a binding contract.
The interest stake that the Canadian gold producer has in San Nicolas – a Mexican copper and zinc project that is located in the Zacatecas province – has been valued at $50 million.
According to Goldcorp‘s news release the closing of this deal should occur sometime between July and September of fiscal 2017 following the satisfaction of customary conditions.
Further cash that Goldcorp will use to proceed with the metallic projects it is advancing and are deemed to upgrade the Canadian miner’s portfolio of assets in terms of both the total amount of gold that can be produced and the average grade of its mineral reserves.
Concerning the following two parameters of total ounces of gold reserves held and the average grade of the mineral resources held, Barrick Gold Corp. (ABX, Financial) – the biggest gold producer in the world – and Newmont Mining Corp. (NEM, Financial) – the biggest gold producer in the U.S. – are superior to Goldcorp.
Goldcorp has gold reserves of 41.8 million averaging 1.05 grams of gold per ton of mineral versus averaging 1.33 g/t 85.9 million ounces of gold reserves held by Barrick Gold and versus averaging 1.2 g/t 68.5 million ounces of gold reserves held by Newmont as of Dec. 31, 2016. Barrick Gold has estimated its gold reserves at an assumed gold price of $1,000 per ounce while Newmont and Goldcorp have estimated their reserves at an assumed price of $1,200 per ounce.
This basic mineral information tells us that Goldcorp is inferior to Barrick Gold and Newmont concerning the total annual gold production that can be made and the operating cost that is sustained to extract and process one ounce of the yellow metal from the ore body. This delay from the other two gold producers makes Goldcorp look more expensive than its peers according to EVO (the enterprise value per ounce of gold reserves) metric according to the current market valuation, as shown by the picture below.
This is not good for investors of Goldcorp who, when the yellow metal is set to soar, are looking for maximizing the value accretion exposing their portfolios to changes in the precious metal through shares of the Canadian gold producer.
Goldcorp is finally moving on the right path in having its assets base in line with those of its peers, Barrick and Newmont.
In perceiving its target of 20% increase in annual gold production and cash flow, plus 20% decrease in operating costs by the end of 2021, Goldcorp entered into a 50-50 joint venture agreement with Barrick last March for the development of the Caspiche project in Chile. This gold and copper porphyry system mineral deposit is in one of the most prolific areas of ore deposits in Chile, the Maricunga ore belt, that has been inherited by Goldcorp thanks to the acquisition of the Canadian junior explorer Exeter Resource Corp. (XRA).
This acquisition is just one baby step to be considered concluded since Goldcorp took over approximately 83.2% of Exeter Resource and now it aims to acquire the remaining 16.8% through a “Subsequent Acquisition Transaction,” which is subject to Exeter shareholders' approval. The Caspiche project, in which preliminary economic assessment visualizes three economic viable options for the development of the Chilean ore deposit, is not so far from the Cerro Casale project, another prominent gold and copper deposit to be developed and one of the largest in the world. The latter is also part of the Goldcorp-Barrick joint venture agreement.
The sale of its minority interest in San Nicolas is not the only outbound transaction that Goldcorp – once completed – has made to unload its portfolio of noncore assets. In line with this company’s strategy, the Canadian mining company has recently been engaged in other divestitures: the Camino Rojo oxide project to Orla Mining Ltd. (TSXV:OLA); the Guatemalan Cerro Blanco gold and silver project to Bluestone Resources Inc. (TSXV:BSR); the Mexican Los Filos mine to the Canadian former gold exploration company, Leagold Mining Corp. (TSXV:LMC).
Goldcorp is currently trading at $12.97 per share with a market capitalization of $10.526 billion, an enterprise value of $13.82 billion, a price-book (P/B) ratio of 0.82 and a price-sales (P/S) ratio of 3.05.
The gold stock is downtrending on the New York Stock Exchange and has lost 4.71% year to date, underperforming the VanEck Vectors Gold Miners ETF (GDX) that in the same span has gained 4.92%.
Before buying shares of Goldcorp, I would wait until the stock fills in the gap toward its most direct peers in terms of EVO metric. The chances to maximize the value accretion through holdings in Goldcorp will be higher when the yellow metal is uptrending. Of course, the investment decision cannot be taken regardless of thorough homework on the Canadian gold producer. Investors should also keep beta gold in mind. This parameter measures the exposure of Goldcorp’s returns on the stock market toward changes in the price of the underlying metal.
Disclosure: I have no positions in any stock mentioned in this article.
