GOLDCORP, INC. (GG)
Overall
it appears that Goldcorp holds a superior
advantage over Barrick and Newmont when it
comes to gold production, costs and valuation
criteria.
Goldcorp’s
hedge-free growth in production, highlighted
by expansions at Red Lake and Luismin, startup
of Los Filos and development of Penasquito,
Eleanore and Pueblo Viejo support a superior
view of this Company to that of Barric or
Newmont.
Goldcorp’s
$120 million program in 2007 has produced
discoveries which the company believes will
replace reserves mined in 2007. For any gold
mining company replacing reserves of a mined
commodity is always as crucial in an evaluation
as market value and costs of production.
Mining
Activity
Red
Lake – discovery of veins in the Party
Wall (historical boundary area between the
Red Lake and Campbell mines) returning average
grades of 2.82 opt over 49.7 ft as well as
new FW3 vein at depth (as good as 5.09 opt
over 6 ft); returning average grades of 2.12
opt over 26.2 ft.
Eleanore
– four rigs working on adding to the
2.76 Moz resource with the ultimate goal of
5 Moz, new shear zone(s) to the north (217
gpt over 2 m) and east (199 gpt over 3 m)
of main Roberto Zone.
Musselwhite
– reserves (and grade) likely to increase
with successful drilling of PQ Deeps, new
parallel shear zone called "Moose"
zone also discovered (14 gpt over 4.8 m).
Penasquito
– deep manto/skarn mineralization represents
potential for underground resources and encouraging
early stage results at Noche Buena target
located 5 km north of two main Penasquito
deposits.
The
Net Asset Value sensitivity (at peak scenario)
of a 30% throughput expansion at Penasquito
coupled with a further 25% reserve addition
and incremental capital costs of $300 million
would add approximately 6.5% to NAV (NAV would
increase by 1.1% exclusive of further 25%
reserve add).
Silver
Wheaton NAV estimate increased by a wider
margin (i.e., 8% inclusive of reserve addition,
3% exclusive of reserve addition) given that
the capital cost increases are borne only
by Goldcorp.
Our target price of US$41.75 reflects an approximate
1.8 times multiple of our 5%/$850 peak gold
NAVPS of $22.86.
Fully
Diluted Shares (ITM) 722,187,000
DISCOUNT
RATE 0% 5%
Value Per Value Per
($000s) share ($000s) share
NPV
- Gold/Silver
Impact – Neutral
This morning, Goldcorp provided details of
its plan to expand mill throughput by 30%
to
130,000 tpd at its Penasquito project in Mexico.
Average
annual payable LOM production over 19 years
is now forecast at 400,000 oz gold, 31 mm oz
silver, 97,000 tons lead, and 189,000 tons zinc.
•Estimated capital costs have increased
to $1.494 billion from $882 million specified
in
the June 2006 feasibility study. Of the
$612 million increase, 40% is due to changes
in project scope inclusive of revised infrastructure
requirements, 40% is attributable to the
throughput increase, and the remainder due
to general cost escalation.
Sustaining
capital expenditures have also increased,
rising to $561 million from $327 million.
•Unit
operating costs have increased to approximately
$8.00/ton ore from $6.25/tonne ore. Assuming
unchanged concentrate shipping, smelting,
and refining costs of $3.65/ton ore, total
operating costs would increase to $11.65/ton
ore from $9.90/ton ore.
•Incorporation of the updated information
from the study would be slightly dilutive
to our 5%/$850 peak gold NAVPS in the amount
of 4%.
The
decision to expand milling throughput is likely
predicated on an expectation of future resource
to
reserve conversion and that a modest 20% reserve
addition would cancel out NAV dilution related
to increased capital and operating costs.
The Penasquito project currently hosts 13
mm gold oz in the reserve category, an additional
4.8 mm oz in the M&I category, and a further
8.9 mm oz in the inferred category.
•Silver
Wheaton’s valuation will benefit from
the expansion of mill throughput as the terms
of their 25% purchase of LOM silver production
from Penasquito state that capital cost increases
are borne only by Goldcorp. The company continues
to pursue optimization efforts particularly
highlighted by:
•Potential to reduce power costs if
a power plant is built (potentially by a third
party) which could reduce costs by 2-3 cents
per kwhr which could yield $35 million/year
in savings (the plant requires 200 MW).
Recovery
upside, pilot plant test work still pending.
The sensitivity of 2% recovery in gold, silver,
zinc and lead would influence our 5%/$850
gold NAVPS by $0.11, $0.13, $0.02, $0.05 per
share respectively, or $0.31overall.
•Potential
to reduce LOM capex, given potential for in-pit
crushing/conveying which could reduce the
mine fleet replacement needs.
Valuation/Action
We
rate Goldcorp shares as a BUY based on hedge-free
growth in production, highlighted by expansions
at Red Lake and Luismin, startup of Los Filos
and development of Penasquito, Eleanore and
Pueblo Viejo.
Our
target price of US$41.75 reflects an approximate
1.8 times multiple of our 5%/$850 peak gold
NAVPS of $22.86.
Investment
risks
The
typical risks associated with any mining investment
include commodity and exchange rate risk,
permitting and technical (development/operating)
risk. Investors considering an investment
in Goldcorp should consider the risks associated
with development of the large\ scale Penasquito
project, and the risk associated with expected
improved performance of the recent startup
of the Marlin mine.
GOLDCORP
SHARES LAGGING NEWMONT AND BARRICK
Goldcorp (GG-SO) shares have lagged Newmont
(NEM-SU) and Barrick
In
terms of operating costs, we also see Goldcorp
as being in a better position to not only
hold costs in check but at a much lower level
than the other two producers.
Exhibit
3. Cash Operating Cost
While
production statistics are important, we also
look to cash flow generation
as a key element for comparison.
Exhibit
4 shows that the 2008 cash flow multiples
that the companies are trading at using gold
prices of $800/oz. We have shown the effects
of subtracting Penasquito ($3 billion with
a 2x multiple) and the $1.5 billion holding
in Silver Wheaton (SLW-SP) held by Goldcorp
from
its market cap.
Essentially,
the removal of these items lowers Goldcorp’s
trading multiple by about 5 points. From this
perspective, Goldcorp trades at the lowest
multiple relative to the other two.
While
Barrick has a number of development projects
that are not in its cash flow figures, for
the most part the start times for these projects
are undetermined. Furthermore, the NPV calculations
for Donlin Creek, Pascua and Cerro Casale
are not overly material to the company’s
market capitalization using our long-term
gold prices of $600/oz.
Both
Barrick and Goldcorp share the Pueblo Viejo
project where we have not adjusted either
company’s share price for the same reason.
Source:
CIBC World Markets Inc.
Net asset value calculations favor Goldcorp
under most assumptions.
Exhibit
5 shows the current trading multiples for
Goldcorp as well as other gold producers.
Focusing
in on Barrick and Newmont as comparatives,
we note that only when we use spot gold prices
is there not a marked difference between them
and Goldcorp.
Goldcorp
– Mexican assets show well and fuel
production growth. We visited three of Goldcorp’s
mines/projects in Mexico last week –
Los Filos, San Dimas (Luismin), and Penasquito.
Overall, we were left with a favourable impression
of the assets. Los Filos and Penasquito represent
imminent and future production and San Dimas
is being expanded which all contribute to
Goldcorp’s superior production growth
profile. General site observations are detailed
below.
Los Filos is close to declaring commercial
production. While 2008 will prove to be a
rampup year, the mine is expected to average
production of 300,000 opy. Reserve and resource
upside looks very good, demonstrated by the
potential of the 4P project area located west
of the Los Filos pit and potential for higher
grade deeper skarn/manto style mineralization
below the two planned pits (Filos, Bermejal),
4P and Nukay.
Current production is derived from a run-of-mine
to leach pad configuration. While a primary
crusher/150 m vertical ore shoot was constructed
to process 30% of the ore (higher grade) from
Los Filos, problems (sloughing in ore shoot
and clay handling problems) have resulted
in a temporary closure of this circuit as
the company evaluates alternatives which could
include an overland conveyor. This is a minor
problem and will not incur any material level
of capital to rectify.
At San Dimas, work is well underway on the
$45 million mine/mill expansion (to 3,100
from 2,100 tpd, approximatley 66% complete)
and $28 million hydroelectric power plant
installation (84% complete), which are expected
to be operational by 2010 and mid 2008, respectively.
The tailings dam remediation plan was completed
in October and earlier this year (February
2007) the tailings circuit was changed over
to a dry stack system.
Construction is generally on schedule at Penasquito.
Highlights of current work include pre-stripping
in the Penasco pit, concrete foundations for
the primary crusher, mill and coarse ore stockpile
areas, and plastic liner/coarse rock overliner
material being laid down in a portion of the
oxide heap leach area.
On exploration, the focus of the presentation
was the encouraging high grade skarn/manto
mineralization at depth, located in the Southwest
Penasco area. Limited drilling at the Noche
Buena area located five kilometres north of
the main two pits has also identified both
oxide and skarn type mineralization. Last
year, the bulk of the reserve
addition at Penasquito resulted from extending
the Brecha Azul pipe as well as in-filling
the peripheral or halo mineralization on the
two deposits. After speaking with the geological
staff, there still is potential to expand
the reserve base via possible extensions to
mineralization along trend to the northwest
of Penasco (towards the El Sotol target),
convert a portion of halo mineralization on
the eastern flank of the current planned pit
and potential to in-fill mineralization in
the saddle zone of the pit between the two
breccia orebodies.
We
rate Goldcorp shares as a BUY based on hedge-free
growth in production, highlighted by expansions
at Red Lake and Luismin, startup of Los Filos
and development of Penasquito, Eleanore and
Pueblo Viejo. Our target price of US$41.75
reflects an approximate 1.8 times multiple
of our 5%/$850 peak gold NAVPS of $22.86.
Investment risks
The
typical risks associated with any mining investment
include commodity and exchange rate risk,
permitting and technical (development/operating)
risk. Investors considering an investment
in Goldcorp should consider the risks associated
with development of the large scale Penasquito
project, and the risk associated with expected
improved performance of the recent startup
of the Marlin mine.
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