Reaffirming Goldcorp at Neutral

Zacks

We are retaining our Neutral recommendation on Goldcorp Inc. (GG). Second quarter adjusted earnings (excluding one-time losses and gains other than stock-based compensation) of 34 cents per share missed the Zacks Consensus Estimate of 41 cents.

Revenues slipped roughly 16% year over year to $1,113 million on lower gold sales and trailed the Zacks Consensus Estimate. Goldcorp failed to meet expectations in the quarter despite a rise in the average realized gold price as production fell at the Red Lake mine and cash cost jumped at a double-digit clip.

Goldcorp is an unhedged producer of gold and as such, it is well positioned to gain from increase in gold prices. It enjoys a leading position in the industry and aims to attain 70% production growth by 2016.

The company has a high leverage to spot gold prices due to its completely unhedged position. This will help it to derive the maximum value due to rising gold prices in the future. Moreover, Goldcorp is one of the lowest-cost gold producers and has a strong balance sheet.

Goldcorp has been working hard to meet its long-term growth target through a number of acquisitions. The Cerro Negro and El Morro acquisitions helped it establish two more important operating bases in South America, providing further impetus to its already substantial growth pipeline. Moreover, the addition of the Camino Rojo deposit near Penasquito will further add to Goldcorp’s growth profile at a lower cost.

Goldcorp also has a number of projects at hand, which are expected to help it to achieve its long-term growth objectives. The company, in August 2012, registered its first gold production at the Pueblo Viejo mine in the Dominican Republic. The company holds a 40% interest in the Pueblo Viejo mine while Barrick Gold Corporation (ABX) holds the remaining stake. Pueblo Viejo is expected to contribute around 68,000 to 85,000 ounces of gold to Goldcorp’s production this year.

However, Goldcorp has been hit by a decline in production from the Red Lake mine. The company, in July 2012, cut its gold production target for 2012 given the weak production from the Red Lake mine in the first half of the year and lower expectations from the Penasquito mine for the second half.

At Red Lake, Goldcorp’s production continued to be weighed down by operating delays in the High Grade Zone due to increased seismic activity. On the other hand, insufficient water supply is affecting mill throughput at Penasquito. The company has slashed its production guidance for these mines factoring in these bottlenecks.

Moreover, the company’s aggressive acquisition policy can also be an area of concern as integrating new mines and businesses might not be completely seamless. Also, Goldcorp’s ability to maintain or increase its production depends on its ability to bring new mines into production while expanding reserves at current mines.

Goldcorp currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

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