While gold prices are falling, gold miners’ stocks are falling at a faster pace. Gold prices are down 20% year-to-date. The shares of the biggest miner by market capitalization, Goldcorp Inc. (USA) (NYSE:GG), are down 29% year-to-date. The latest World Gold Council quarterly report has shown that gold demand was down 13% in the first quarter.
Commodity prices tend to overreact to demand changes. When demand slows, prices fall fast, and vice versa. This environment is tough for gold miners, but at one point, their shares will get so attractive that they would stop falling. Let’s see if such a moment is close for Goldcorp’s shares.
Recent results
Goldcorp Inc. (USA) (NYSE:GG)’s two biggest competitors, Barrick Gold Corporation (USA) (NYSE:ABX) and Newmont Mining Corp (NYSE:NEM), also saw a decline in the second-quarter earnings estimates. Estimates for Barrick’s second-quarter earnings have fallen 37%, while estimates for Newmont’s second-quarter earnings have shed 44%. If gold prices continue to fall, these estimates would be revised even lower. Gold price is the single most important variable for a gold miner, although Goldcorp also produces silver, copper, lead, and zinc.
Two main factors to consider
In this tough environment, two things are most important since Goldcorp Inc. (USA) (NYSE:GG) cannot control gold prices. These things are liquidity and costs. With low costs, the company could tolerate lower gold prices. Liquidity would step into the game if the gold prices are lower than costs, and the company would need money to get through difficult times.
Goldcorp Inc. (USA) (NYSE:GG) reported all-in sustaining costs of $1135 per ounce in the first quarter of 2013. Barrick Gold Corporation (USA) (NYSE:ABX) reported all-in sustaining cost of $900 per ounce. However, the company gave cost guidance in a range of $950 to $1050 for the full year 2013. Newmont Mining Corp (NYSE:NEM) reported all-in sustaining costs of $1086 per ounce. As we can see, Goldcorp’s costs were higher than those of the competition. On its earnings call, Goldcorp Inc. (USA) (NYSE:GG) explained that the elevated costs were temporary. The company expects costs to be higher this year due to planned low-grade cycles in Penasquito and Alumbrera mines.
Grade is a percent of gold in the ore. When there is little gold in the ore, costs rise. This happens because the cost to get the gold out of the earth is the same, regardless how much gold is in the ore. This cost spreads over the lesser amount of gold, thus raising all-in sustaining costs. Nevertheless, Goldcorp stated that it is on track to meet its all-in sustaining cost guidance between $1000 and $1100.
Liquidity is another important point to consider. Goldcorp reported $1.46 billion of cash and cash equivalents at the end of the first quarter. The company issued $1.5 billion in senior unsecured notes. Goldcorp has $2.27 billion in long-term debt. It has a very comfortable debt-to-equity ratio of 0.10. In comparison, Barrick has 0.59 debt-to-equity while Newmont has 0.37 debt-to-equity ratio. Goldcorp’s liquidity position is stable.
Bottom line
Goldcorp Inc. (USA) (NYSE:GG) trades at a 14.34 P/E and 11.79 forward P/E. In the current environment, these multiples are not very important because estimates for earnings are changed every month. Goldcorp has a solid portfolio of assets, good liquidity position, and low debt. If gold prices continue to fall, earnings projections for Goldcorp would fall too. This would lead to further decline in the price of the stock. Goldcorp is a very interesting stock to follow, and it might be attractive in the long-term. However, I do not advise to catch a falling knife. Gold prices must stabilize before Goldcorp’s shares would be able to rise.
The article Will This Gold Miner Stop Falling? originally appeared on Fool.com and is written by Vladimir Zernov.
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