The Gold of the Gold Industry

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Based in Vancouver, Canada, Goldcorp (NYSE: GG) is the second largest gold miner by market value. Goldcorp is engaged in gold mining which includes extraction, exploration, processing and reclamation. The company has five mines in North America, three in Mexico, and two in South and Central America.

Goldcorp’s Earnings

Recently Goldcorp released its earnings for the fourth quarter, 2012. The company beat its market estimates and reported earnings of $504 million or $0.47 a share, up from $405 million or $0.39 per share from the same quarter last year. However, revenues took a dip to $1.44 billion from $1.52 billion; analysts were estimating revenues of around $1.56 billion. Gold sales were down to 645,100 ounces from 685,000 last year.

Production Costs

According to the company, the average production cost per ounce in the fourth quarter increased to $621 per ounce from $529 per ounce in 4Q11. The major reasons behind this were increase in labor rates, raw materials and equipment costs.

Production Levels

Production stood at 700,400 ounces compared to 687,900 ounces in the fourth quarter, last year. Production at company’s Red lake mine grew to 168,000 ounces from 154,000. Red Lake mine which is located at Ontario, Canada, is Goldcorp’s biggest gold producer. In case of Penasquito; total gold produced stood at 112,900 ounces, up from 82,300 ounces of gold in 4Q11.

Forecast for 2013

In 1Q13, the company expects to earn $0.44 per share on revenues of 1.32 billion. Goldcorp, which has plans of building three new mines in Argentina and Canada, announced that it expects to produce more than 4.2 million ounces of gold per year starting from 2016. Production is expected to be between 2.55 million and 2.8 million ounces while the cost per ounce of gold is expected to be somewhere in-between $525 and $575.

Valuation

Goldcorp Inc. is trading at a forward P/E (1yr) of 10.83x and has a dividend yield of 1.70%. It has a healthy PEG of 1.32, incorporating its dividend into its PEG gives us a strong PEG of 1.17. Using an average forward P/E (1yr) of 11x for the gold industry, we can value Goldcorp’s stock.

Thanks to its development projects mainly in Argentina and Canada, Goldcorp is expected to multiply its production in the coming years; hence, we would value it using the high estimates. As a result, we value it at $47.52. Therefore, it has an upside potential of almost 41% at this moment. In short, Goldcorp looks a great buy at this point in time.

Gold Industry’s Major Players

Based in Colorado, USA, Newmont Mining (NYSE: NEM) is one of the largest producers of gold. Currently, it is trading at a forward P/E (1yr) of 9.9x and has a dividend yield of 3.10%. A mean recommendation of 2.5 on the sell side depicts the fact that it isn’t as attractive as Goldcorp. However, it has a mean target price of $56.73 on the sell side; hence, it is undervalued by 30%. Adding its dividend yield in this return gives us a total return of almost 33%. Therefore, we recommend buying Newmont Mining.

The Canadian gold mining, Kinross Gold (NYSE: KGC) is trading at a forward P/E (1yr) of 7.54x, making it cheaper than Newmont and Goldcorp. It has a dividend yield of 2% and a healthy PEG of 1.51. Just like Goldcorp, it has a mean recommendation of 2.2 on the sell side, making it a top buy in the gold industry. Moreover, it has a mean target price of $12.32 on the sell side; hence, an upside potential of whopping 54%. Therefore, it’s a must buy.

Conclusion

One of the great things about Goldcorp over the years has been its ability to mint substantial profits without risking itself to high levels of debt. When compared to its industry, it has a 25% higher free cash flow to debt ratio. Moreover, it has one of the lowest cash cost per ounce of gold produced. Further, it has significantly more operating margins than its competitors. Having said this, company’s outlook for the future looks to be in a really good shape as it is expected to produce incremental levels of gold. As cost per ounce of gold produced is expected to decrease to $525 in 2013, margins are bound to go even higher. Moreover, investments in Argentina and Canada will make sure that the production levels continue to increase in the years ahead. The bottom line is that Goldcorp is one of the best buys in the gold industry at this moment; hence, it’s a must buy.


Vamosrafa7 has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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