latest cibc reportfrom April 29 2010
2010 A Year Of Delivery
Goldcorp reported an in-line quarter operationally, although financial results
were somewhat hampered by delayed sales that will benefit the income
statement in Q2 as gold in inventory gets sold. Production for the quarter
matched our estimate of 600,000 ounces excluding Penasquito.
Penasquito continues to be advanced without major delays or cost over
runs. The mine is expected to be commercial in less than 6 months. Despite
its base metal component, next year firm-wide CFPS varies by less than 1%
for a 15% move in either zinc or lead pricing.
Red Lake exploration is likely to become a focus for the balance of the year.
An access drift between the Red Lake and Campbell mine is nearing
completion, opening up the area between the two former mines that
operated as separate entities for 50 years.
The market rewards growth more than other factors in the gold space.
Goldcorp's production increases of 10%-15%/year over the next five years
sets it apart from other major producers in the +2 million ounce range. High
multiples are justified for this stock.
Our Takeaway On What Is Important
Red Lake had a strong quarter where production increased by 16% and
costs decreased by 6% QoQ. This was offset by lost revenue on
approximately 12,000 ounces that were not sold during the quarter due
to build up of gold inventories at the mine. The improvement in
production was attributable to an increase in mill throughput while
maintaining the same grade over Q4 of last year. Costs were negatively
impacted by the stronger Canadian dollar, but were more than
compensated for by lower operating costs and higher gold production.
Red Lake represents 35% of the companies Q1 profits, and accounts for
31% of production during the same period.
The connecting drift between Campbell and Red Lake continues to
develop and is expected to be completed during this quarter. The drift
will enable the company to attain a number of efficiencies including
transportation of ore, equipment, workers and more importantly further
access to drilling the border area between the two former properties.
Initial results from this zone have been encouraging and better access to
drilling will allow for extensions to mineralization to be followed up.
Work on the Pueblo Viejo project is moving towards initial production in
the fourth quarter of 2011, with overall construction now 20% complete.
Long lead time items (autoclaves and oxygen plant) have been ordered
and due to arrive on schedule. Financing for the project was secured
with a loan of about $1.035 billion on a 100% basis (or $400 million to
Goldcorp’s (GG-SO) account). This asset is expected to provide the next
leg of growth after Penasquito when it hits production in early 2012.
Goldcorp is set to post one of the strongest earnings growth profiles in
2011 with the start-up of Penasquito. Below we show the
projected year over year growth that is anticipated in earnings for
Goldcorp against its North American peers. The next nearest earnings
growth among the major producers is Kinross (KGC-SU) and is about
one third that of Goldcorp under the same assumptions. Kinross’
percentage move comes from a much lower starting base that is about
half that of Goldcorp. Gold companies don’t typically trade based on
earnings metrics, but when generalists begin to re-consider this sector,
we believe earnings and earnings growth will be scrutinized quite
closely.
Despite the sensitivity of the Penasquito project to changes in lead and
zinc prices, the company’s CFPS as a whole does not fluctuate very
much on changes to those commodities alone. The company
is more sensitive to changes in gold prices, as one would expect,
followed by changes to the price of silver. A 15% change in the copper
price translates into less than 1% move in the 2011 CFPS.
Goldcorp reported Q1 earnings of
.22/sh in line with our estimate of
.23/sh but lower than a consensus estimate of
.26/sh. A headline
loss of
.07/sh needs to be adjusted for a foreign exchange loss on
translation of future income tax liabilities (
.29/sh) and a number of
other non core transactions. Production for the quarter came in at
625,000 ounces above our estimate of 600,000 ounces, while costs of
$433/oz were slightly below our forecast of $440/oz. This represents a
4% increase in production and 6% decrease in costs over last quarter.
The 625,000 ounces reported by the company is inclusive of 31,700
non-commercial production out of Penasquito, which we did not include
in our Q1 production forecast.
The beat in production comes from strong performance out of Red Lake
which was offset by weak performance at Porcupine. Despite the strong
production numbers, sales were about 25,000 ounces of gold and 6.3
million lbs of copper short of production due to a number of factors
including restricted shipments out of Alumbrera due to a port strike. The
strike has now ended and those ounces have been shipped which should
help earnings in Q2.
Annual production and cost guidance was maintained at 2.6 million
ounces of gold at total cash costs of $450 per ounce.
Price Target Calculation
Our $64 price target is derived using a cash flow multiple of 16x our 2011
estimate of $3.65/share. We use a 16x cash flow multiple to reflect Goldcorp’s
growth profile of 10%–15% per year over the next several years, plus lower
than- typical political risk. We have added to the cash flow multiple the NPV of
non-producing assets such as Éléonore, Bruce Channel, Cerro Blanco and Pueblo
Viejo, which are not expected to be in commercial production in 2011.
Collectively, these projects have an NPV ($1000/oz gold and 7%) of $2.68/share
to which we have used a 2x multiple. Our $64 price target implies a P/NAV of
3.7x on our $17.47 (down from $18.09/share) NAV estimate calculated using a
$1,000/oz. gold price and 5% discount rate.
Key Risks To Price Target
The greatest risk to our price target is our forecast for bullion prices to average
$1,400/oz. for 2011. Our price target is based on mine operations continuing
without interruptions. Mining is an inherently risky business, where technical,
political, and human issues can influence operations. In some cases, these can
be significant, such as ground condition failure, changes in foreign regulations,
or labor unrest. Goldcorp has exposure to the Canadian dollar, which affects
costs and our price target. Goldcorp also has exposure to the Mexican peso and
the Argentine peso. Further risks to the price target involve permitting and
execution risk at development projects. The Peñasquito project is both a large
and low-grade deposit with relatively complex metallurgy that could make
startup problematic.
Investment Thesis
Goldcorp offers investors a unique blend of growth, production diversity, trading liquidly, and low
costs, taking place in politically safe jurisdictions under a strong balance sheet. The company has a
good pipeline of development projects that are set to come on stream over the next few years as well
as several projects where the upside has yet to be fully evaluated. Goldcorp trades at higher
multiples than other senior producers reflecting the stronger near-term growth, and generally safer
jurisdictions in which is operates. We think that while Penasquito is a very large project and the
chances of issues arising are moderately high, the market has built in a reasonable amount of
patience that it will exercise over the ramp up period. Once up and running Penasquito is capable of
generating more than $1/sh in free cash flow at current commodity prices. We think that the
company will continue to command high multiples and of the three largest North American producers,
has assets where exploration results can still have an impact on the