Goldcorp: $20 Is The Target

Goldcorp (GG) will, like all gold stocks, profit from rising gold prices. But Goldcorp will also perform well when gold price remains stable or declines, thanks to a strong balance sheet, the expected growth in production and the foreseen decline in its production costs.

The Belgian Dentist and gold stocks

The archetypal Belgian dentist is known to be a “tax-efficient” investor. For years, a lot of gold stock IDRs (International Depositary Receipts) were quoted on the Belgian stock exchange. The fact is that those IDRs were not registered, but bearer shares enabled the Belgian dentists to avoid paying dividend tax.

Time for value?

I’m not telling something new when I say that the US stock market is not cheap. The numbers in Exhibit 1 speak for themselves.

Exhibit 1: Worldwide valuations

This leaves US equity investors with two options:

  1. Take profit on your home bias and invest in foreign stocks and/or
  2. Invest in US value stocks.

According to Franklin Templeton, there's a strong historical relationship between value and non-US equities. Over the past two decades, non-US stocks have tended to outperform US stocks when value starts to work. Goldcorp is both a foreign stock and a value stock.

Commodities: at the start of a bull market

The most interesting investments are those that are at the same time undervalued and trending up. Do commodities fit into this category?

Let’s first take a look at valuation. As we can see in exhibit 2, commodities are at a multi-year low compared to equities. The last time commodities were this cheap was at the height of the dotcom-bubble.

Exhibit 2: Commodity cheapness

img src="https://static.seekingalpha.com/uploads/2018/4/47904412_15239102314596_rId10_thumb.jpg" data-width="640" data-height="479" data-og-image-twitter_small_card="true" data-og-image-twitter_large_card="true" data-og-image-twitter_image_post="true" data-og-image-msn="true" data-og-image-facebook="true" data-og-image-google_news="true" data-og-image-google_plus="true" data-og-image-linkdin="true"">>

In the years after 2000, the Goldman Sachs Commodity Index quintupled.

When we look at the price chart of PowerShares DB Commodity Index Tracking ETF (NYSEARCA: DBC) we can clearly see that after the lows at the end of 2016, commodities are slowly but firmly trending higher.

Exhibit 3: Commodity uptrend

img src="https://static.seekingalpha.com/uploads/2018/4/47904412_15239102314596_rId11_thumb.jpg" data-width="640" data-height="289" data-og-image-twitter_small_card="true" data-og-image-twitter_large_card="true" data-og-image-twitter_image_post="true" data-og-image-msn="true" data-og-image-facebook="false" data-og-image-google_news="true" data-og-image-google_plus="true" data-og-image-linkdin="true"">>

The investment clock

Is it a coincidence that commodities started trending up at the end of 2016, the moment the Fed raised the rates a first time?

Exhibit 4: US Fed Funds Rate

img src="https://static.seekingalpha.com/uploads/2018/4/47904412_15239102314596_rId13_thumb.jpg" data-width="640" data-height="300" data-og-image-twitter_small_card="true" data-og-image-twitter_large_card="true" data-og-image-twitter_image_post="true" data-og-image-msn="true" data-og-image-facebook="false" data-og-image-google_news="true" data-og-image-google_plus="true" data-og-image-linkdin="true"">>

According to the investment clock theory, commodities are the best asset class in the overheat phase. In this phase of the economic cycle, inflation picks up and central banks start raising rates.

Exhibit 5: The Investment Clock

img src="https://static.seekingalpha.com/uploads/2018/4/47904412_15239102314596_rId15_thumb.jpg" data-width="640" data-height="441" data-og-image-twitter_small_card="true" data-og-image-twitter_large_card="true" data-og-image-twitter_image_post="true" data-og-image-msn="true" data-og-image-facebook="true" data-og-image-google_news="true" data-og-image-google_plus="true" data-og-image-linkdin="true"">>

During the investor day 2018 Goldcorp showed itself the below graph that proves the same point we just made: gold performs well when central banks start raising rates.

Exhibit 6: Rising rates and Gold

img src="https://static.seekingalpha.com/uploads/2018/4/47904412_15239102314596_rId17_thumb.jpg" data-width="640" data-height="332" data-og-image-twitter_small_card="true" data-og-image-twitter_large_card="true" data-og-image-twitter_image_post="true" data-og-image-msn="true" data-og-image-facebook="true" data-og-image-google_news="true" data-og-image-google_plus="true" data-og-image-linkdin="true"">>

Gold: the only way is up?

One commodity that is on the rise is gold.

Exhibit 7: Gold Price Chart

img src="https://static.seekingalpha.com/uploads/2018/4/47904412_15239102314596_rId19_thumb.jpg" data-width="640" data-height="290" data-og-image-twitter_small_card="true" data-og-image-twitter_large_card="true" data-og-image-twitter_image_post="true" data-og-image-msn="true" data-og-image-facebook="false" data-og-image-google_news="true" data-og-image-google_plus="true" data-og-image-linkdin="true"">>

One of the main drivers of gold prices is a weakening dollar. In exhibit 7, we can see that the election of Donald Trump caused a brief dollar rally in the final months of 2016. At the same time, gold nosedived. In 2017, the picture changed and the dollar weakened while gold strengthened - a trend we expect to continue.

Exhibit 8: EUR/USD price chart

img src="https://static.seekingalpha.com/uploads/2018/4/47904412_15239102314596_rId20_thumb.jpg" data-width="640" data-height="291" data-og-image-twitter_small_card="true" data-og-image-twitter_large_card="true" data-og-image-twitter_image_post="true" data-og-image-msn="true" data-og-image-facebook="false" data-og-image-google_news="true" data-og-image-google_plus="true" data-og-image-linkdin="true"">>

Another main driver is increasing inflation (and hence lower real interest rates).

Exhibit 9: Consumer Price Index

img src="https://static.seekingalpha.com/uploads/2018/4/47904412_15239102314596_rId21_thumb.jpg" data-width="640" data-height="266" data-og-image-twitter_small_card="true" data-og-image-twitter_large_card="true" data-og-image-twitter_image_post="true" data-og-image-msn="true" data-og-image-facebook="false" data-og-image-google_news="true" data-og-image-google_plus="false" data-og-image-linkdin="true"">>

As shown in exhibit 9, inflation is clearly picking up.

Goldcorp is growing and growing more efficient

Although the omens look good for the gold price, Goldcorp is a good investment idea, even if gold prices remain at the current levels. The first reason why this is the case is because Goldcorp has a strong balance sheet.

Exhibit 10: Goldcorp’s balance sheet strength

The Piotroski-score for Goldcorp stands at 6. The Piotroski-score is a financial score between 0 and 9 which reflects nine criteria used to determine the strength of a firm's financial position. This score helps to identify the best value stocks. Scores 7-9 are the best and 0-3 are the worst.

A second reason is that Goldcorp is investing in further growth and expects production to grow from 2.5 Moz in 2018 to 3.00 Moz in 2022, a growth of 20%.

Exhibit 11: Expected production growth

This 20% growth is one of the pillars of the 20/20/20 Plan. Besides the 20% production growth, the plan also aims to increase reserves by 20% and to decrease production costs by 20%!

Exhibit 12: 20 is the target

img src="https://static.seekingalpha.com/uploads/2018/4/47904412_15239102314596_rId25_thumb.jpg" data-width="640" data-height="282" data-og-image-twitter_small_card="true" data-og-image-twitter_large_card="true" data-og-image-twitter_image_post="true" data-og-image-msn="true" data-og-image-facebook="false" data-og-image-google_news="true" data-og-image-google_plus="true" data-og-image-linkdin="true"">>

And last but certainly not least, this means Goldcorp is getting more efficient. By 2022, Goldcorp expects its All-in Costs (AIC) to decrease from $856/oz (in 2016) to $700/oz in 2020! This implies that Goldcorp will remain profitable even if gold prices would decrease in the years ahead.

Exhibit 13: Lower production costs

img src="https://static.seekingalpha.com/uploads/2018/4/47904412_15239102314596_rId26_thumb.jpg" data-width="640" data-height="300" data-og-image-twitter_small_card="true" data-og-image-twitter_large_card="true" data-og-image-twitter_image_post="true" data-og-image-msn="true" data-og-image-facebook="false" data-og-image-google_news="true" data-og-image-google_plus="true" data-og-image-linkdin="true"">>

Another factor adding to Goldcorp’s robustness is the fact that it is geographically well-diversified, with activities in Canada, Mexico, Chile, Argentina and the Dominican Republic.

Exhibit 14: Geographical diversification

Valuation: 20 is the target

Based on figures provided by FundamentalSpeculation, we can clearly see that Goldcorp is cheaply valued compared to the Gold Industry.

Exhibit 15: Goldcorp Valuation vs. Peers

We expect Goldcorp to generate free cash flows of $1250 million and $1450 million for 2018 and 2019.

Exhibit 16: Free cash flow projections

Based on our above free cash flow projections and a WACC of 7.50%, we arrive at a price target of $20, which gives an upside potential of almost 40% (2 times 20%).

Price momentum

On the graph of Goldcorp we can see that the momentum is turning positive.

Exhibit 17: Price chart

img src="https://static.seekingalpha.com/uploads/2018/4/47904412_15239102314596_rId31_thumb.jpg" data-width="640" data-height="289" data-og-image-twitter_small_card="true" data-og-image-twitter_large_card="true" data-og-image-twitter_image_post="true" data-og-image-msn="true" data-og-image-facebook="false" data-og-image-google_news="true" data-og-image-google_plus="true" data-og-image-linkdin="true"">>

Conclusion

The combination of:

  • strong fundamentals,
  • the expected decrease in production costs,
  • the rise in production and free cash flow and
  • price momentum turning positive

should reward investors: buy Goldcorp!

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This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source : https://seekingalpha.com/article/4163396-goldcorp-20-target

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