On June 6, we downgraded our recommendation on gold mining giant Goldcorp (GG) to Underperform following its lackluster first-quarter 2013 results. We are concerned about the high cost outlook for 2013.
Why the Downgrade?
Both revenues and adjusted earnings for the first quarter, reported on May 2, missed Zacks Consensus Estimates. Profit slid roughly 35% on a double-digit decline in sales, hurt by lower gold price. Goldcorp also saw higher costs in the quarter with all-in sustaining cash costs climbing roughly 25% year over year. It retained its production and cost guidance for the full year.
Estimates for Goldcorp are declining following the release of the first quarter results. The Zacks Consensus Estimate for 2013 has gone down 33% to $1.38 per share. On a similar note, the Zacks Consensus Estimate for 2014 has declined around 30% to $2.09. With the Zacks Consensus Estimates for both 2013 and 2014 going down, Goldcorp now has a Zacks Rank #5 (Strong Sell).
Cause for Concern
While Goldcorp anticipates production to speed up in second-half 2013 based on the ramp up at Pueblo Viejo, a joint venture between Barrick Gold (ABX) and Goldcorp, it faces geopolitical risks along with risks arising out of volatility in prices of metals. Gold price environment is not favorable of late. The recent decline in gold price may dent Goldcorp’s bottom line in the second quarter.
Moreover, Goldcorp is exposed to certain short-term challenges at Penasquito, one of its largest mines. Production at Penasquito remains affected by some water supply issues and lower grade.
Goldcorp is also seeing cost pressures across its Canadian and Mexican mines. The company expects cash costs to rise in 2013 on a year-over-year basis due to industry-wide cost inflation and the impacts of lower grades and by-product production at Penasquito. For 2013, the company estimates all-in sustaining cash costs of $1,000 to $1,100 per ounce, up from $874 per ounce in 2012.
Mining Stocks That Warrant a Look
While we prefer to stay away from Goldcorp, other companies in the mining industry with favorable Zacks Rank are Lake Shore Gold Corp. (LSG) and Impala Platinum Holdings Ltd. (IMPUY). Both carry a Zacks Rank #2 (Buy).
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