Goldcorp’s FCF Growth Could Strengthen Its Balance Sheet

Goldcorp (GG) has the strongest balance sheet in its peer group, which includes companies like Barrick Gold (ABX), Newmont Mining (NEM), and Kinross Gold (KGC). Goldcorp’s liquidity is also comfortable at $3.2 billion, including $940 million in cash and cash equivalents, as well as $2.16 billion of an undrawn revolving facility. As we discussed previously, Goldcorp extended its credit facility from $2 billion to $3 billion during 2Q15.

Goldcorp’s net debt reduced quarter-over-quarter (or QoQ) to $2.55 billion as on June 30, 2015, from $3.47 billion at the end of 1Q15. The company raised net cash of $768 million from the sale of its equity stake in Tahoe Resources (TAHO). It repaid the debt of $305 million during the second quarter. It also paid dividends amounting to $124 million.

The company’s management noted during the call that through the application of proceeds from stake sale in TAHO in the third quarter, the drawn amount on its revolver should be down to zero. This should leave the company with only long-term debt of $2.5 billion. The first scheduled repayment for the debt is in 2018.

After reporting a negative free cash flow (or FCF) of $374 million in the first quarter of 2015, Goldcorp has delivered a positive FCF of $174 million in 2Q15. The reduction of dividends by 60% should save the company another $300 million annually. The positive trend on FCF could continue going forward, given scheduled ramp-ups of its mines in the second half.

Goldcorp’s capital expenditure budget remains unchanged at $1.2 billion–$1.4 billion.

Investors can gain access to the gold sector through the VanEck Vectors Gold Miners ETF (GDX), which invests in intermediate and senior gold producers. Goldcorp makes up 7.6% of its holdings. The SPDR Gold Trust ETF (GLD) tracks spot gold prices.