Yahoo Finance Can Strong Focus on Free Cash Flow Drive Goldcorp’s Returns?
Where Might Goldcorp Be Headed after Its 1Q16 Results?
Free cash flow
Like its peers (GDX) (GDXJ), Goldcorp (GG) is trying to achieve higher positive free cash flow (or FCF) per quarter. But the company wasn’t able to achieve positive FCF in 1Q16 mainly due to a normal seasonal working capital buildup. The company mentioned that it shouldn’t happen over the rest of the year. Goldcorp had FCF of -$101 million in 1Q16 compared to -$321 million in 2015.
FCF expectation
Goldcorp expects to generate more than $400 million in FCF at a gold price (GLD) (IAU) level of $1,200 per ounce in 2016. The company also mentioned that with every $100 per ounce increase in the price of gold, its FCF should increase by ~$300 million.
Reinvesting FCF to drive growth
Goldcorp’s intention is to reinvest its FCF in its organic project pipeline within its five prolific mining areas in low political risk jurisdictions. Reliance on its existing infrastructure at these sites, lower capital intensity, and internal financing have the potential to generate substantial returns for shareholders.
During its conference call, Goldcorp management said that at current gold prices, the company can easily finance its internal projects and dividend payments through FCF generation. Compared to $400 million of expected FCF generation annually at $1,200 per ounce of gold, Goldcorp’s projects will consume ~$700 million in the next three years. Pyrite Leach is a big project that will consume ~$400 million–$450 million, but the rest are smaller.
The above graph shows FCF generation for Goldcorp and its peers. Barrick Gold (ABX) and Newmont Mining (NEM) have generated positive FCF in 1Q16. But Goldcorp’s 1Q16 FCF turned out to be negative. However, that’s expected to reverse going forward. Goldcorp’s other peers, including Yamana Gold (AUY), AngloGold Ashanti (AU), and Kinross Gold (KGC), are yet to report their 1Q16 results.
Leveraged funds such as the Direxion Daily Gold Miners Bull 3X ETF (NUGT), the Direxion Daily Junior Gold Miners Bull 3X ETF (JNUG), and the Direxion Daily Junior Gold Miners Bear 3X ETF (JDST) are other ways to gain exposure to gold.
Next, let’s see what technical indicators are telling us about Goldcorp.
Browse this series on Market Realist:
