As expected, Goldcorp takes a hit

But Wall Street shrugs off the non-cash write-down.

By Jim J. Jubak Jul 25, 2013 5:46PM

Image: Gold Bars (© Stockbyte/SuperStock)Goldcorp (GG) took a $1.96 billion write-down when it announced second quarter earnings Thursday. Including that write-down, the company reported a loss of $2.38 a share, considerably lower than the 26 cents a share in profits reported in the second quarter of 2012 and the 23 cents a share earnings consensus among Wall Street analysts.

So why was the stock down just 0.78% as of 3 p.m. New York time? (Goldcorp is a member of my Jubak’s Picks portfolio.)

First, because the big write-down is a non-cash item. Goldcorp wrote down the value of potential exploration assets at its Penasquito mine in Mexico. Lower market prices for gold mean that Goldcorp put a lower value on the assets in the ground at Penasquito. But the write-down didn’t cost the company any cash and Wall Street analysts have basically shrugged -- saying what was written off the books today will get written back onto the books tomorrow, when gold prices rally.

Second, because the write-down was a non-cash item and a one-time non-cash item at that, Wall Street pretty much discounted it when it compared the company’s announced earnings with Wall Street projections.

From this point of view Goldcorp showed adjusted earnings of 14 cents a share. That’s still lower than the 23-cent consensus, but not nearly the disaster suggested by the unadjusted earnings numbers. If you figure in the huge big drop for Goldcorp shares of 39.5% from the September 20, 2012 high, even after the recent rally, some part of Thursday's earnings miss, you’ve got to figure, is already in the stock.

All that’s true, but there was some more bad news in Thursday's earnings that may not yet be figured into the current low price. The company did indeed lower its projections for future capital spending as, like all its competitors, Goldcorp cut back on spending to expand production in order to cut costs. Goldcorp’s forecast calls for a $200 million drop in capital spending. The company also announced a $16 million proposed reduction in general and administrative (G&A) spending and another $25 million cut to exploration.

But to me it still looks like the company will have to make other cuts to get its costs for the year down to the numbers in Thursday’s guidance. In the quarter by-product cash costs -- which credit sales from by-products of gold mining (such as copper) against the cost of producing gold -- came to $646 an ounce. For the full 2013 year Goldcorp has guided to by-product cash costs of $525-$575. Either the price of by-products (such as copper) has to rise or Goldcorp has to cut costs, or the company will miss guidance.

Cuts in capital spending will help reduce this quarter’s $1,279 an ounce in all-in sustaining costs, but Goldcorp also faces a challenge in hitting all-in sustaining cost guidance of $1,000 to $1,100 for the year.

This wasn’t the 'kitchen sink quarter' that I was looking for, before adding to positions in Goldcorp.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Goldcorp as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio.

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