Goldcorp favored among senior gold stocks dented by ETFs – GMP Securities

In an analysis published this week GMP (Griffith McBurney) Securities asserted that "a significant amount of the money that now resides in the [gold] ETFs would have otherwise been deployed into gold equities, in particular the large-cap producer groups."

Metals analyst George Albino and Associate Matthew Sheppard suggested that the main culprit in lowering senior gold multiples" is the bullion ETF.

"We would highlight that the SPDR Gold Shares (GLD NYSE Arca) is, in effect, by far the largest gold ‘company' by market capitalization with a current value of $51.6b," they noted. "If we look at the bullion ETFs as a whole (and include similar vehicles like the Central Fund of Canada and the Central Gold Trust) we estimate that the total value of alternative gold vehicles is about $70 billion."

The analysts urged gold companies to "focus on what the bullion ETFs can't deliver."

"The most important of these is, in our opinion, growth-by this we mean growth per share in terms of ounces (on an annual ounce as well as life of mine reserve basis) and especially in terms of cash flow and earnings," they advised.

"In our view the senior group has been tarred by the brush of being ‘ex-growth,' and as a result has been losing the battle for investors to the ETFs," the analysts counseled. "In our view that is too much of a generalization with Goldcorp showing very significant growth over the coming 5 years, whereas we see Barrick as essentially flat, and Newmont as flat to down in terms of annual output."

In their analysis Albino and Sheppard highlight gold company dividend yield with both Barrick and Newmont have recently raised dividends by 20% and 50% respectively. Several mid-tier producers have either begun paying or have increased dividends including Eldorado Gold and Yamana Gold.

"This clearly is another way that gold companies can distinguish themselves from the ETFs, with an income being key for many large generalist investors," they advised.

"Leverage to gold price is another attribute that is missing from the ETFs (although some investors can inject this themselves by employing financial leverage)."

GMP recommends Goldcorp and Barrick, which they feel "offer opportunities for strong returns to investors. The relative underperformance of the senior producer has, in our opinion, been overdue leaving potential returns here better than for many of the smaller gold companies."

Nevertheless, Albino and Sheppard referred to Goldcorp "with its locked-in and easily financeable growth" as their favorite of the senior gold producers. However, they cautioned "in a very strong price environment, however, its strengths become a weakness given its low operating and financial leverage result in the lowest NAV or cash flow leverage to gold."

"We believe Barrick offers reasonable value, operating scale and liquidity, but lacks Goldcorp's ability to grow organically," they said.

"Newmont, in part because of its recent outperformance, does not present as compelling a case for investors in our view-its biggest drawback is a challenge in maintaining, let alone, increasing, gold production," GMP advised.

While Barrick is the global gold leader with the highest annual production by a substantial margin, the analysts feel "the largest challenge that Barrick faces is growth-we see issues for this senior in maintaining, let alone, increasing, its annual production."

Meanwhile, the analysts advised, "Goldcorp holds the enviable position among as the seniors of having both the most robust growth profile as well as the lowest cash costs per ounce due in part to by-product rich mines (we point out, however, that it maintains this position among the senior group even when looking at the company using co-product accounting."

"It is, however, the production growth that we see extending through at least 2015 that leads us to favor Goldcorp in this group," they said. ‘We see this increase in gold (and other metals) production leading to very strong growth in earnings and cash flows over the next four years.'

"We also believe that there is upside not presently captured in our model at several of Goldcorp's key assets that may allow the company to extend its growth period beyond what we currently model," they concluded.

The analysts rated Goldcorp a BUY with a C$61 target (29% return), Barrick BUY with a C$56.60 target (13% return) and Newmont HOLD with a $64.50 target (5% return).

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