We are maintaining our Neutral recommendation on Goldcorp Inc. (GG). Third-quarter 2012 adjusted earnings (excluding one-time losses and gains other than stock-based compensation expense) of 54 cents per share exceeded the Zacks Consensus Estimate of 45 cents.
Revenues jumped roughly 18% year over year to $1.54 billion on higher gold sales and beat the Zacks Consensus Estimate. Improved operating performance across the Red Lake and Penasquito mines contributed to the growth. The company backed its guidance for 2012.
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. 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 to 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 53,000 ounces of gold to Goldcorp’s production this year.
However, Goldcorp faces geopolitical risks along with risks arising out of volatility in prices of metals. Moreover, it is exposed to cost pressures as well as certain short-term challenges across its Red Lake and Penasquito mines.
At Red Lake, Goldcorp’s production remains affected by operating delays in the High Grade Zone due to increased seismic activity. On the other hand, the Penasquito mine continues to face water supply issues. Moreover, the company saw lower production at the Porcupine mine in Ontario in the third quarter due to lower grade.
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.
Our recommendation on Goldcorp is in agreement with a short-term Zacks #3 Rank (Hold).
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