Goldcorp’s new-look ‘conservatism’ fails to impress

VANCOUVER — Goldcorp’s (TSX: G; NYSE: GG) first conference call of the year marked a changing of the guard, as well-known executive Chuck Jeannes retired and made way for new president and CEO David Garofalo. Jeannes has overseen a veritable golden period over the past nine years, which saw Goldcorp emerge as a preeminent Canadian mining company.

The way ahead is little murkier, however, and Garofalo will have his hands full due to stalling production growth, falling profits and a poorly received dividend cut. In fact, Garofalo’s first official day on the job involved explaining Goldcorp’s much more conservative guidance figures, which stand in contrast for a company that has often made big promises.

Goldcorp recorded an annual net loss of US$4.2 billion, or $5.03 per share. During the fourth quarter, the company reported a net loss of US$4.3 billion, or $5.14 per share, which was headlined by a stark impairment charge of US$3.9 billion. The writedowns include US$1.2 billion at the Red Lake complex in Ontario, and US$2 billion at the Penasquito and Los Filos operations in Mexico. 

The company generated strong free cash flow of US$$335 million last year, but it also slashed its annual dividend payments by two-thirds from US24¢ to US8¢.

“Now I’m well aware our shareholders are disappointed with some of the news … and I definitely share that disappointment. I hate that we’ve had to take such a large write-down,” Jeannes said during his final conference call.

“The fact that nearly all our peers have done the same, or worse, over the last few years does not soften the blow of having to remove this value from the balance sheet in the face of lower gold prices. In addition, I know our forward-looking guidance does not meet expectations, and everyone is disappointed in the dividend cut. But at our reserve gold price we would have been paying essentially 100% of our free cash flow in dividends.” he added.

Goldcorp reported record production of 3.46 million oz. in 2015 at all-in sustaining costs of US$850 per oz. It doesn’t seem the company will top that record any time soon, however, as it announced annual production guidance for the next three years of between 2.8 million and 3.1 million oz. at all-in sustaining costs ranging from US$850 to US$925 per oz.

The company’s reserves also dropped year-on-year, as it adjusted to a US$1,100 per oz. gold price. Goldcorp now reports reserves of 40.7 million oz., which marks an 18% decline from year-end reserves of 49.6 million in 2014.

The more restrained guidance and reserve estimates prompted CIBC World Markets analyst David Haughton to ask Garofalo whether the company was “sand-bagging” in its calculations, which effectively indicates it is under-promising, so it can beat guidance in future quarters.

“We will re-orient the organization to reflect the fact that we have exited a period of large capital expenditures and mine construction, and entered a state of optimizing a strong, low-cost and sustainable 3 million oz. per year business,” Garofalo added.

“We intend to compound the substantial returns we are now generating by reinvesting in a robust pipeline of internal opportunities. We’ll also continue to generate value through the divestment of non-core assets within the portfolio, and re-deploying that capital in opportunities that move the needle for the company,” he added.

Garofalo seemed to hint it was unlikely Goldcorp would look at any external mergers or acquisitions to boost its production portfolio, as he said the focus would be on organic growth driven by brownfield exploration and existing projects. He did indicate, however, that the company would look to invest in junior explorers.

“Organic growth and exploration at our mine sites will allow us to expand production at a low cost by leveraging our infrastructure and geological expertise in some of the most prolific and under-explored gold districts in the world,” Garofalo said.

“Outside of our mine sites we appreciate there are few large-scale gold deposits available in the world. So we intend help cultivate the next generation of development opportunities by having a well-diversified portfolio of small investments in multiple junior companies,” he said.

Goldcorp’s growth pipeline took a hit when it announced it was downgrading the Cochenour expansion at its flagship Red Lake mine to an “advanced-stage exploration project.” The company has spent most of the US$540-million budget earmarked to develop a 5 km underground haulage drift to move ore from Cochenour to processing facilities at its Campbell milling operations.

Cochenour’s inferred gold resources declined 37% to 2.2 million oz., which the company says reflects “the reinterpretation of geology and orientation of the deposit, as well as application of a higher cut-off grade to account for more selective mining methods.” Chief operating officer George Burns said the company was taking a step back due to “geologic complexities,” which may draw parallels to the Rubicon Minerals (TSX: RMX; US-OTC: RBYCF) Red Lake debacle at its Phoenix gold project.

“Most importantly … is my disappointment in Cochenour,” Jeannes said. “I helped buy this project and have pushed it along for the past seven years. We had planned, and hoped, for this deposit to be in production this year, but it is simply more geologically complex than we had expected. I am confident it will be part of Red Lake’s future, but until it is understood how it will be mined it will not be in the guidance.”

TD Securities analyst Greg Barnes changed his recommendation on Goldcorp from “buy” to “hold” after the results, and dropped his target price from $19 per share to $15.50 per share. Barnes noted that over the past few years the company has “struggled to meet its guidance,” which he speculates has contributed to a devaluation relative to the premium multiples it used to enjoy.

“We expect that Goldcorp will have to prove to investors that the new production guidance is either the new reality or that there is inherent upside to these forecasts that is not apparent at this point … management is probably setting a conservative guidance to ensure that it can be achieved. The organic project pipeline outlined with the guidance is a little underwhelming,” Barnes added in a Feb. 26 research note.

Goldcorp has traded within a 52-week range of $13.55 to $27.90 per share. The company dropped nearly 14%, or $2.96, during daily trading en route to an $18.73-per-share close at press time. Goldcorp ended 2015 with US$383 million in cash and equivalents, plus an undrawn $3-billion revolving credit facility.

“We’ve built in appropriate conservatism where we’ve had operating difficulties in the past. Two striking examples would be the folding at Eleonore, where we’ve built in additional dilution, and obviously removing Cochenour at this stage is a change in philosophy on how we include future production ounces in guidance.”