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One of Goldcorp’s new mines, Éléonore in Canada, should lift its net asset value. Photo: Goldcorp Inc.

The price of gold has been on a tear this year, taking gold mining stocks along for the ride. But the rise has been selective: The shares of Newmont Mining and Barrick Gold have more than doubled, while the stock of No. 4 producer Goldcorp has gained 39%–pleasing gold dust, for sure, though hardly the mother lode the other two have struck.

“There’s a value gap that should narrow without needing the gold price to take it there,” says Ryan McIntyre, senior investment analyst at Tocqueville Asset Management, who thinks the shares can reach $23, or more than 40% above last week’s $16.06.

At times in the recent past, Vancouver’s Goldcorp (ticker: GG) has overpromised and underdelivered. For instance, it took a big fourth-quarter write-down for impairment charges because it overestimated the carrying value of several mines. That resulted in a net loss of $4.2 billion, or $5.03 a share, for the year.

The company also has spent heavily to develop new mines in Canada and Argentina, and invested more than $700 million a year to improve existing operations, making them more competitive with No. 1 producer Barrick (ABX) and No. 2 Newmont (NEM). While helpful long term, big spending amid falling gold prices pressured earnings, including not just last year’s loss but the previous year’s $2.2 billion shortfall. One result: Goldcorp cut its annual dividend by two thirds to 8 cents a share when it reported fourth-quarter earnings. More recently, it didn’t meet second-quarter earnings estimates because its biggest mine, Peñasquito in Mexico, came back on line from a maintenance shutdown later than planned. Last week, Peñasquito was revealed to have had a years-long toxic leak, which Goldcorp and regulators contend presents no public health hazard.

However, Goldcorp’s new president and CEO David Garofalo seems ready to tackle the problems head on. Garofalo, 51, who came on board six months ago, is a veteran of the mining business. He most recently headed HudBay Minerals and prior to that was CFO of Agnico Eagle Mines (AEM), a Canadian miner that grew from one gold mine to a global player during his tenure. He’s “good at running operations and getting personnel right,” says John Hathaway, senior portfolio manager at Tocqueville, which owns the shares in its Tocqueville Gold fund. Garofalo already has made significant operational changes: He’s cut Goldcorp’s corporate headcount and mining staff at Cerro Negro in Argentina by a third and replaced or reassigned key mine managers. Overall, he’s promised to cut costs over the next two years. Those savings, Garofalo says, should translate to about $2 billion of net asset-value accretion in that time. On a one-year basis, the cost cuts could add 20 cents a share to earnings, says John Bridges of JPMorgan, who has an Outperform rating on the shares.

“It’s very much about generating maximum cash flow and generating maximum return on invested capital,” Garofalo told analysts during the second-quarter earnings call. With all the spending, BMO Capital Markets expects Goldcorp’s cash flow adjusted for joint-venture results to fall to $1.12 billion, or $1.33 a share, in 2016 from $1.44 billion, or $1.73 a share, in 2015. By 2017, however, adjusted cash flow is forecast to rise sharply to $2.24 a share.

THE MISSTEPS AND SPENDING have cost the shares. Based on its stock price relative to estimated 2017 cash flows, Goldcorp trades at a nearly 40% discount to peers. It fetches about 7.2 times next year’s cash flow versus the industry’s average of 9.8 times. Over its history, Goldcorp has at times traded at a premium to the industry.

BMO Capital Markets analyst Andrew Kaip calculates that the stock trades for about 1.2 times its net-present value, present values of cash inflows minus costs. That multiple is well below peers’ 2.1 times. Blending his multiple for expected 2017 cash flow and a slightly higher net present-value multiple, Kaip has a price target for Goldcorp of $23 a share.





Improved net asset value—a key Garofalo goal—would build on some of Goldcorp’s traditional strengths, such as holding “very good assets” in safe jurisdictions, says Tocqueville’s Hathaway. Goldcorp has stakes in four mines in Canada, two in Mexico, and four in Central and South America.

The company also boasts one of the cleaner balance sheets in gold mining, with just $2.1 billion of net debt by year end and an investment-grade rating. Goldcorp this year is expected to report earnings before interest, taxes, depreciation, and amortization of $1.6 billion, or 32 cents a share, on revenue of $3.9 billion.

Of course, Goldcorp has another potentially strong tail wind for its stock price. After falling from a peak of $1,921 a Troy ounce in 2011 to $1,046 an ounce last December, gold prices have jumped 25% this year. Everything from ultralow interest rates to weak global economic growth to terrorist attacks to nationalistic politics and lower gold production supports higher prices. Celebrated investors like Stanley Druckenmiller and Bill Gross have advocated buying gold.

Tocqueville’s Hathaway thinks gold could rise from $1,320 currently to $1,500 by year end. “Despite strong recent gains, we believe the current alignment of political and economic factors is unusually compelling,” he wrote in his second-quarter letter. “In our view, substantial gains lie ahead.” If gold hits $1,500 an ounce, the firm thinks Goldcorp shares could nearly double.

The important point, though, is that even without gold’s support, Goldcorp shares can rise more than 40%.


 Goldcorp Shares Ready to Rise 25%


