As far as it goes, Goldcorp (NYSE:GG) probably isn’t the worst stock in the market. In fact, GG stock might actually be one of the better plays in the gold mining space.
But that’s not enough to make the stock a compelling play. As I wrote in April, the gold mining space has been a disaster for investors over the past few years. And GG stock has been no exception. Over the past five years, GG has lost 43% of its value, while gold has fallen barely 1%. The news is even worse over a decade: a -69% return for Goldcorp, while gold has climbed almost 30%.
It’s the same story seen across the gold mining space. Mining stocks are supposed to provide upside leverage to moves in the gold price. Yet that hasn’t been the case — for Goldcorp or pretty much any of the majors. Political problems, labor issues and mismanagement all have gotten in the way.
Therefore, any bull case for GG stock is based on the idea that “this time is different.” But with more concerns in the industry, I’m skeptical that it truly is.
The Bull Case for GG Stock
There is a case to be made that Goldcorp is the best pick among mining majors. Its AISC (all-in sustaining costs) figure is among the lowest in the industry. The company expects AISC of about $800 an ounce in 2018. That’s below the $810-$850 range cited by Barrick Gold Corp (NYSE:ABX). It’s notably better than that of Newmont Mining Corp (NYSE:NEM), which is forecasting $965-$1,025 this year and $870-$970 per ounce for the longer-term.
Goldcorp also has a stronger balance sheet than peers — notably Barrick — meaning it doesn’t have to sell off assets or enter into joint ventures to minimize risk. And the company’s 20/20/20 plan aims to increase production, reduce costs, and grow reserves — all by 20%.
Meanwhile, valuation isn’t prohibitive. GG stock trades at 19x forward earnings, and still at a discount to book value. For investors who believe gold prices will rise, Goldcorp stock seems like an intriguing play.
The Peak Gold Question
But one of the potential concerns for Goldcorp — and the industry as a whole — is whether miners have reached “peak gold.” Goldcorp’s own chairman, Ian Telfer, made exactly that case in May. The head of the World Gold Council has made a similar argument.
Goldcorp already has seen slowing output, though it is trying to reverse that trend with its 20/20/20 plan. But longer term, production seems almost certain to decline.
That raises two key concerns. The first is that barring a major rise in gold prices, earnings and cash flow are going to decline over time. That’s usually the case for individual mines to begin with — but there now will be much less supply to add over the long haul.
The second is that “peak gold” might be a good thing for gold prices. But it also strengthens the case for buying the metal instead of the miners. If peak gold causes production to fall, and prices to rise, miners will scramble to keep production relatively intact. And there will be a real risk that once again miners fail in practice to drive the price leverage their models should be driving in theory.
Is This Time Different?
All that said, in this day and age it remains difficult to recommend a gold miner. Again, a mining stock is supposed to offer leverage to the price of the underlying commodity — both to the upside and the downside. But investors can use options, futures, or ETFs to accomplish the exact same goal.
And it’s worth pointing out that many of those investors are buying gold for some level of safety. It’s commonly used as a hedge against inflation and/or political unrest. Adding ownership of a miner — whether GoldCorp, Barrick, or juniors like Yamana Gold (NYSE:AUY) or Iamgold Corp (NYSE:IAG) — adds risk to a trade that is supposed to hedge against risk.
In that context, it’s tough to recommend any miner. Forced to choose, GG stock would be an interesting stock (and it certainly looks more attractive than at least NEM and ABX at the moment). But investors aren’t forced to choose. And until Goldcorp and its peers prove they can do what they claim, there’s little reason to choose their stocks instead of gold itself.
As of this writing, Vince Martin has no positions in any securities mentioned.