Will Goldcorp Shine Again?

Source: Thinkstock
Source: Thinkstock

It is no surprise to anyone who follows the markets that gold and silver have been up and down all year here in 2014. The SPDR 500 Gold ETF (NYSEARCA:GLD) and the iShares Silver Trust ETF (NYSEARCA:SLV) are up just 5.3 percent and 4.1 percent respectively year-to-date. But how can we play a potential bounce? Well, I like the miners — and the large ones, in particular.

Goldcorp (NYSE:GG) is one of the world’s fastest growing senior gold producers. Its low-cost gold production is located in safe jurisdictions in the Americas and remains 100 percent unhedged. I reiterate gold and silver equities are a good buy right now, particularly for the long-term, as I see gold prices climbing higher due to inflationary pressures rising. Right now, inflation is at bay however, it is only a matter of time before inflation picks up, in my opinion. Those holding gold, silver, and stocks in the sector as insurance against inflation will be rewarded in time. I am looking forward to the second quarter report, but let us review the highlights of the first quarter.

Gold sales in the first quarter were 684,000 ounces on production of 679,900 ounces. This compares to sales of 595,100 ounces on production of 614,600 ounces in the first quarter of 2013. Silver production totaled 9.6 million ounces compared to silver production of 5.6 million ounces in the prior year’s first quarter. This is incredible year-over-year growth. What’s more, all-in sustaining costs came down $840 per ounce of gold compared to $1,134 per ounce of gold in the first quarter of 2013.Further, adjusted revenues were $1.2 billion, essentially unchanged from the first quarter of 2013, as increases in metals sales were offset by lower metals prices. With lower metal prices, net earnings declined. They came in at $98 million, or $0.12 per share, compared to $309 million, or $0.38 per share, in the first quarter of 2013.

An important development took place recently, and that is first gold production was announced at the company’s Cerro Negro site. On July 25, the initial production was achieved in a when 100 kilograms was poured at the mine containing an estimated 317 ounces of gold. Overall, progress at the mine remains on track for declaration of commercial production by the end of the year. Production guidance for 2014 is expected to be between 130,000 and 180,000 ounces of gold. Initial capital costs have been reduced by $100 million and are now expected to be between $1.6 and $1.7 billion. Chuck Jeannes, Goldcorp President and Chief Executive Officer, stated:

“We are very pleased to have first production on schedule and within our current capital cost guidance range from this world class mine. Very importantly, this achievement was reached safely, with Cerro Negro in the midst of a run of over 4.1 million man hours without a lost time accident. This milestone signals not only the start of Cerro Negro’s mine life, but also a period of sustained growth for Goldcorp. The team at Cerro Negro has done an outstanding job amid occasionally challenging circumstances and I congratulate them for this outstanding effort. We look forward to strong contributions from Cerro Negro to Goldcorp’s overall performance for many years to come.”

Looking ahead, the stock is still a buy. For 2014, Goldcorp should produce between 2.95 and 3.10 million ounces at all-in sustaining costs of between $950 and $1,000 per gold ounce.This year should see substantial growth for the company. You are being paid a 2.5 percent dividend yield to wait for the coming rebound in gold and silver. The latter is key. If we can get some support from gold and silver prices, things should take off for the company.

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Disclosure: Christopher F. Davis holds no position in Goldcorp and has no plans to initiate a position in the next 72 hours. He has a buy rating on the stock and a $29 price target.

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