On Sep 10, we upgraded our recommendation on Goldcorp (GG) to Neutral. While the gold mining giant remains challenged by high costs, we are encouraged by progress of its project pipeline and signs of a recovery in gold prices.
Why the Upgrade?
Both revenues and adjusted earnings for second-quarter 2013, reported on Jul 25, missed Zacks Consensus Estimates. Goldcorp swung to a loss on a reported basis on a sizable impairment charge and lower gold prices. However, both gold production and gold sales rose by double digits in the quarter. The company retained its production and cost guidance for the full year.
Goldcorp anticipates production to speed up in second-half 2013 based on the ramp up at Pueblo Viejo, which it jointly owns with Barrick Gold (ABX), and higher grades at Penasquito late in the year. The company is progressing well with its development projects and remains on track to attain its long-term production targets.
In addition, Goldcorp is an unhedged producer of gold and, as such, it should gain from the recent rebound in gold prices if it can keep costs under control. Gold recovery is picking up steam as reflected by the recent rebound of prices to a $1,350 plus territory after touching a three-year low of $1,180.71 in Jun 2013.
While a strong dollar is still weighing on the price of the yellow metal, the prevailing macroeconomic uncertainty may support gold demand. Moreover, improving physical demand is expected to support gold prices.
However, Goldcorp is exposed to certain short-term challenges at Penasquito, one of its largest mines. Production at Penasquito remains affected by some water supply issues and lower grade.
Goldcorp is also seeing cost pressures across its Canadian and Mexican mines. The company expects cash costs to rise in 2013 on a year-over-year basis, partly due to industry-wide cost inflation. For 2013, the company estimates all-in sustaining cash costs of $1,000 to $1,100 per ounce, up from $874 per ounce in 2012.
Other Stocks to Consider
Other companies in the mining industry with favorable Zacks Rank are Gold Fields Ltd. (GFI) and Denison Mines Corp. (DNN). Both carry a Zacks Rank #2 (Buy).
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