Goldcorp Is Doing Just Fine Without Osisko

Goldcorp is a low-cost producer with operations in politically safe jurisdictions including Canada, Mexico, and Brazil. The company has made significant capital investments, most notably in Pueblo Viejo and Cerro Negro, over the past few years and is well positioned to generate positive free cash flow in the medium-to-long term.

As mentioned, Goldcorp is a low-cost asset, and all except one of the company's 12 operating mines produce gold at all-in sustaining cash costs (AISC) of less than $1,200 per ounce. I believe Goldcorp should see its multiples expand as its new low-cost development assets start commissioning later this year and as it successfully implements its cost-cutting initiatives.

Strong balance sheet
Goldcorp has a strong balance sheet and low level of gearing compared to its peers Newmont Mining and Barrick Gold . The company has a debt-to-equity ratio of 0.15, much lower than the industry average of approximately 0.4. Newmont and Barrick, in comparison, have much higher debt-to-equity ratios of about 0.7 and 1, respectively. Similarly, Goldcorp's CFO/total debt ratio of 0.32 is also much better than the 0.19 and 0.28 of Newmont Mining and Barrick Gold, respectively.

Healthy and growing dividend
Goldcorp offers investors a healthy dividend yield of 2.4% compared to Newmont's 0.4% and Barrick's 1.2%. As Goldcorp's new low-cost development projects come online, the company is expected to generate sufficient positive free cash flow to support a growing dividend. Strong operating cash flow and lower capital expenditures are expected to result in a significant increase in free cash flow in the next few years.

Development projects
Goldcorp's three main projects currently under construction continue to progress on time and on budget; expected first production is this year, leading to production growth of approximately 18% in 2015.

First production at Cerro Negro is scheduled by mid-year, with ramp to commercial production by the fourth quarter; this will lead to a 2014 production contribution of 130,000-180,000 ounces. The capex for the project remains unchanged at $1.6 billion-$1.8 billion. Similarly, at Cochenour, first production is expected in the fourth quarter of 2014, with minimal ounces expected this year. The forecast mine life production at Cochenour is 225,000-250,000 ounces.

At Eleonore, initial gold production remains on schedule for Q4 2014 (commercial production in Q1 2015), and 2014 guidance remains at 40,000-60,000 ounces. Engineering is essentially completed, surface construction is 74% complete, and ore has begun to be stockpiled. The forecast life of mine production at Eleonore is 600,000 ounces per year.

Among the company's operational mines, Penasquito, in particular, continues to improve operationally. Even though the life of Goldcorp's Penasquito mine has been reduced to 13 years from 19 years, the mine is expected to register a significant increase in mine production in 2014, driven by better quality and higher-grade reserves.

Source: Company documents

Operations resumed at Los Filos
The Vancouver-based company delivered strong quarterly results. It reported first-quarter 2014 EPS of $0.26, well above the consensus sell-side estimate of $0.14. The large beat was driven by lower costs and an adjustment related to unrealized losses on foreign exchange translations of deferred tax.

The company maintained its 2014 production guidance of 2.95 million-3.1 million ounces. This despite one of its largest producing mines, Los Filos, being temporarily shuttered for five weeks due to land occupancy negotiations with the Carrizalillo Ejido.

Goldcorp resumed operations at the Los Filos mine in Mexico in early May after signing a new occupancy agreement, which is valid for the next five years. While the company's total production guidance for the year remains intact, Goldcorp expects production for the Los Filos mine to fall to the low end of guidance of 330,000-345,000 ounces. With the mine being shut down for about five weeks, production at the mine could be affected by up to 30,000 ounces for the year.

Bottom line
Goldcorp is a low-cost producer with the majority of operations in the mining-friendly jurisdiction of the Americas. Despite lower gold production in the first quarter, Goldcorp maintained its guidance for 2014, implying a large pickup in the back-half as new projects are delivered. With the bulk of new project spending behind it, Goldcorp continues to expect positive free cash flow beginning in the fourth quarter at $1,200 per ounce of gold.

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