It May Be Awhile before Goldcorp’s Earnings Pick Up

While Goldcorp’s (GG) historical premium valuation is due to its lower leverage and quality assets in safe jurisdictions, that premium is waning. The company’s reduction in its long-term production guidance and the operational issues at its existing mines are negatively impacting investors’ sentiments.

Goldcorp may have reached the lowest point in its operational performance, which means that it could see better prospects ahead. The company’s management has reiterated its stance that its operations will turn around in 2H16. The execution of the new management’s goals could go a long way toward improving analysts’ sentiments about the company.

Analysts are projecting a revenue fall of 11% to $3.9 billion for Goldcorp in 2016. This is mainly due to Goldcorp’s production guidance downgrade in its 4Q15 results. Its midpoint production guidance for 2016 implies 3 million ounces—a fall of 14.7% from the production levels it achieved in 2015.

Its revenue is expected to rise from a lower base in 2017. Analysts estimate revenue of $4.3 billion, a rise of 9.4% year-over-year (or YoY). The company’s growth projects are expected to come online in the medium term, which will drive its revenue.

Goldcorp’s costs trended higher in 1H16. However, management expects them to normalize in the second half of the year and beyond. As the company’s production takes off and its costs normalize, analysts expect its margins to expand as well. While analysts are forecasting an EBITDA (earnings before interest, tax, depreciation, and amortization) margin of 41% for 2016, their expectations for 2017 and 2018 are 47.3% and 48.6%, respectively.

Goldcorp’s closest peers Newmont Mining (NEM), Barrick Gold (ABX), and Agnico Eagle Mines (AEM) are also showing better-than-expected cost controls.

The Sprott Gold Miners ETF (SGDM) invests in US-listed gold miners. Kinross Gold (KGC) and Goldcorp make up 14% and 4% of SGDM’s holdings, respectively. Investors can gain exposure to gold by investing in the iShares Gold Trust ETF (IAU) and the SPDR Gold Shares ETF (GLD), both of which track gold prices.