Recommendation: Buy Target Price: C$31.00 Goldcorp Inc. (G-TSX; GG-NYSE) Q2/16 Results Weaker Than Expected Current Price C$24.91 Shares Outstanding (MM) 52 Wk High C$26.56 Basic 52 Wk Low C$13.55 Diluted Cash (MM) $328.0 Mgmt. & Dir. Debt (MM) $2,808.0 Market Cap. NAVPS C$16.50 EV P/NAV 1.51x Reserves Dividend Yield 0.42% Total Resource 853.2 867.4 5.5 C$21,253.7 C$24,010.6 40.7 MMoz 96.9 MMoz Fiscal YE Dec. 31 2015A 2016E 2017E Production Q1 725 784 A 761 (000 oz) Q2 908 613 A 765 Q3 922 759 770 Q4 909 751 774 FY 3,464 2,910 3,070 Cash Cost ($/oz) FY $605 $564 $486 AISC ($/oz) FY $894 $886 $800 EPS, adj. Q1.01.09 A.23 Q2.08 $(0.01) A.24 Q3 $(0.04).12.24 Q4 $(0.03).12.24 FY.02.32.94 CFPS, adj. Q1.45.40 A.54 Q2.43.17 A.54 Q3.45.47.55 Q4.41.45.55 FY $1.82 $1.50 $2.18 P/CF 10.4x 12.6x 8.7x Unless otherwise denoted, all figures shown in US$ Investment Thesis: Goldcorp has the best combination of balance sheet strength and geopolitical risk in the senior gold space. While the growth profile has been muted with the recent reduction of production expectations, the shares trade at an attractive valuation given the asset quality that remains. Highlights: Q2/16 Results Summary Goldcorp guided to a weak Q2/16 and it delivered on lower production and higher costs in the quarter. Production and costs should improve in H2/16 however, as the company flagship Peñasquito returned to normal levels in July and cost-cutting initiatives ($250 MM/yr by 2018) are implemented. The looming increases in free cash flow will augment the significant liquidity currently available to pursue high-quality external growth opportunities such as the recently completed Kaminak Gold acquisition. Maintain Buy Rating, C$31.00 Target We are not making any material changes to our NAV of C$16.50 or any of our near-term estimates. We are maintaining our target price of C$31.00 that is based on target multiples of 1.50x NAV and 12.5x CF. Goldcorp is going through a transition at the mines and at the head office, but what has not changed is the solid balance sheet, steady production and relatively low political risk. Company Description: Goldcorp is a world leader in low cost gold production focused on the Americas. Its core operations include Red Lake, Éléonore (Quebec), 40% interest in Pueblo Viejo (Dominican Republic), Peñasquito and Cerro Negro (Argentina). Source: BigCharts.com, July 27, 2016 (Chart C$) During the past twenty-four months, Cormark Securities Inc., either on its own or as a syndicate member, participated in the underwriting of securities and /or provided financial advice regarding the stock market insight and financial analysis regarding potential transactions and/or received a fee for the nonbrokered placement of securities for Kaminak Gold Corp.
Q2/16 Results Summary: Goldcorp guided to a weak Q2/16 and it delivered on lower production and higher costs in the quarter. Production and costs should improve in H2/16 however, as the company flagship Peñasquito returned to normal levels in July and cost-cutting initiatives ($250 MM/yr by 2018) are implemented. The looming increases in free cash flow will augment the significant liquidity currently available to pursue high quality external growth opportunities such as the recently completed Kaminak Gold acquisition. Figure 1: Quarterly Results Q2/15 Q3/15 Q4/15 Q1/16 Q2/16 % Q/Q Q2/16 Actual Actual Actual Actual Actual Diff. CSI Est. Gold Production (000 oz) 908 922 909 784 613-22% 697 Gold Sales (000 oz) 903 943 918 799 616-23% 697 Cash costs - by-prod ($/oz) $547 $597 $687 $557 $728 +31% $624 Cash costs - co-prod ($/oz) $656 $670 $739 $604 $716 +19% $595 AISC ($/oz) $846 $848 $977 $836 $1,067 +28% $994 Margins - by-prod ($/oz) $642 $592 $530 $646 $549-15% $635 Margins - co-prod $/oz) $533 $519 $478 $599 $561-6% $664 Margins - AISC ($/oz) $343 $341 $240 $367 $210-43% $265 Adjusted EPS.08 -.04 -.03.09 -.01 n/a.03 Adjusted CFPS.43.45.41.40.17-56%.37 Capital expenditures, $MM $317 $232 $240 $173 $166-4% $211 Free cash flow, $MM $174 $243 $239 -$101 $68 n/a $97 Cash balance, $MM $940 $257 $326 $401 $328-18% $482 Source: Cormark Securities Inc., Company reports Adjusted EPS loss of.01 was below our estimate, and consensus, of a gain of.03. Adjusted CFPS of.17 was well below estimate, and consensus, of.37. Free cash flow of positive $68 MM was below our $97 MM estimate and included $89 MM from the reduction of working capital. Free cash flow before working capital changes would have been negative $21 MM. Production of 613,400 oz was below our 697,000 oz estimate and 22% lower than the 783,700 oz produced in Q1/16. This was worse than the 15% decline that was projected after the Q1/6 results were released. The main culprits were Peñasquito (lower grades and a 10-day mill shutdown) and Cerro Negro (lower mill feed due to exhaustion of surface stockpiles). Average cash cost of $728/oz was above our estimate of $624/oz. AISC of $1,067/oz was above our estimate of $994/oz. Guidance for the year was maintained at 2.8-3.1 MMoz at AISC of $850-925/oz and cash costs of -575/oz. Goldcorp expects production to increase and AISC to decrease in Q3/16 and Q4/16 as Peñasquito returned to normal operations in July and higher grades are expected at several of the core mines. Cash declined to $328 MM from $401 MM at the end of Q1/16 as the free cash flow of $68 MM was offset by a $125 MM debt repayment. Total debt of $2.81 BB decreased from $2.94 BB last quarter. There is $2.88 BB available on its $3.0 BB credit facility and in late June the company extended the term to 2021 (from 2020).
Figure 2: Production & Cost Profile 1,000 $1,250 4,000 $1,200 3,500 Gold Production (000 oz) 750 500 250 $750 Cash costs (US$/oz) Gold Production (000 oz) 3,000 2,500 2,000 1,500 1,000 $800 $600 Cash costs (US$/oz) 500 0 $250 0 $400 Other Red Lake/Cochenour Peñasquito Pueblo Viejo Porcupine Musselwhite Los Filos Cerro Negro Eleonore Cash cost AISC Figure 3: Free Cash Flow Profile Free cash flow (US$ MM) $400 $300 $200 $100 ($100) ($200) ($300) ($400) Free cash flow (US$ MM) Other Red Lake/Cochenour Peñasquito Pueblo Viejo Porcupine Musselwhite Los Filos Cerro Negro Eleonore Cash cost AISC $1,500 $1,250 $750 $250 ($250) () ($750) () ($1,250) FCF at $1,400/oz FCF at $1,200/oz FCF at $1,300/oz FCF at $1,400/oz FCF at $1,200/oz FCF at $1,300/oz Figure 4: Cash Balance Profile $8,000 $8,000 Cash flow (US$ MM) $1,500 () () $1,500 () () Cash balance (US$ MM) Cash flow (US$ MM) $6,000 $4,000 () $6,000 $4,000 () Cash balance (US$ MM) ($1,500) ($1,500) ($4,000) ($4,000) () () ($6,000) ($6,000) CF at $1,300/oz Capital expenditures Dividends Debt additions Debt repayments Equity / Other Cash (at $1,400/oz) Cash (at $1,200/oz) Cash (at $1,300/oz) CF at $1,300/oz Capital expenditures Dividends Debt additions Debt repayments Equity / Other Cash (at $1,400/oz) Cash (at $1,200/oz) Cash (at $1,300/oz)
Two Projects Get The Go-Ahead To Proceed: The Goldcorp Board gave the green light to proceed with two brownfield projects: the Pyrite Leach Project at Peñasquito and the Materials Handling Project at Musselwhite. Pyrite Leach Project: This $420 MM project is expected to increase overall gold and silver recoveries by treating the zinc tailings before discharge to the tailings storage facility. The project will add annual incremental annual gold production of 100,000-140,000 oz of gold and 4-6 MMoz of silver beginning in 2019. The feasibility study projected an IRR of 17% at a gold price of $1,250/oz and silver price of $18.00/oz. Materials Handling Project: This $90 MM project will provide a more economical and practical means of transporting ore to the underground crusher. It involves the hoisting of ore through an underground winze that will reduce the reliance on the high cost truck haulage. Incremental production of 20% is expected by 2019 and the IRR was estimated to be 25%. Adding Kaminak To The Project Portfolio: With the closing of the Kaminak acquisition in mid-july, the Coffee project in the Yukon is added to Goldcorp s portfolio of development projects. The C$530 MM allshare acquisition came at an estimated P/NAV valuation of 1.0x and added a total of 2.2 MMoz of reserves and 5.2 MMoz of total resources. Goldcorp plans to drill and expand the resource base and will likely scope a much larger project than junior predecessor Kaminak envisioned with its January 2016 feasibility study that outlined a 5.0 MMt/yr open-pit, heap leach mine capable of producing approximately 200,000 oz/yr. Maintain Buy Rating, C$31.00 Target: We are not making any material changes to our NAV of C$16.50 or any of our near-term estimates. We are maintaining our target price of C$31.00 that is based on target multiples of 1.50x NAV and 12.5x CF. Goldcorp is going through a transition at the mines and at the head office, but what has not changed is the solid balance sheet, steady production and relatively low political risk. Mine performance and free cash flow should improve in H2/15 and restore confidence in the name. Figure 5: Gold Producer Valuation Multiples 2.50x P/NAV at Spot Gold 20.0x P/CF at Spot Gold 18.0x 2.00x 2.26x 16.0x 14.0x 17.0x 16.3x 1.50x 1.00x 0.50x 0.00x 1.67x 1.40x 1.23x 1.20x 1.13x 1.09x 1.08x 1.06x 1.05x 1.02x 1.00x 0.95x 0.89x 0.86x 0.80x 0.68x 0.59x ABX AEM G OGC YRI BTO RIC NGD IMG K DGC TXG ROG NMI AKG ELD P CG 12.0x 10.0x 8.0x 6.0x 4.0x 2.0x 0.0x 12.6x 10.2x 9.1x 8.8x 8.7x 8.3x 8.3x 8.1x 7.0x 6.9x 6.1x 6.0x 4.9x 4.8x 4.0x 2.5x ELD RIC AEM DGC AKG BTO ABX ROG TXG G NGD OGC IMG YRI CG K NMI P We, Richard Gray and Graeme Jennings, hereby certify that the views expressed in this research report accurately reflect our personal views about the subject company(ies) and its (their) securities. We also certify that we have not been, and will not be receiving direct or indirect compensation in exchange for expressing the specific recommendation(s) in this report. During the past twenty-four months, Cormark Securities Inc., either on its own or as a syndicate member, participated in the underwriting of securities and/or provided financial advice regarding the stock market insight and financial analysis regarding potential transactions for these companies
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