A worker walks underground at Goldcorp's Borden all-electric gold mine near Chapleau, Ontario, on June 13, 2018.Chris Watty/Reuters
Peter Jacobs, chief investment strategist at Washington-based financial firm Stifel RMG Group, was so impressed by what he heard when he attended an investment presentation for Goldcorp Inc. last January that he started buying the company's shares.
He said Goldcorp management's presentation made a strong case that the mining company was “on track to increase production and reserves, reduce costs, reduce balance sheet debt and further enhance shareholder value.”
A year later, the situation isn't much better. In late October, Goldcorp lost nearly a fifth of its market capitalization in a single day after announcing falling production, rising costs and dwindling reserves. Gold grades at its flagship Cerro Negro gold mine in Argentina fell more than 30 percent in the third quarter compared with the previous quarter. Production also fell more than expected at its Musselwhite gold mine in Ontario and the giant Pueblo Viejo mine in the Dominican Republic, which it co-owns with Barrick Gold Co. The company lowered its 2018 production forecast and boosted its cost forecast.
Goldcorp's shares have been plummeting for a long time, trading at $12.86 a share on the Toronto Stock Exchange on Friday, down from more than $54 in 2011. Sources say the company is considering a possible merger with another gold mining company to turn itself around.
“I don't know how the other shareholders feel, but I think and I hope they are disgusted that the goals they had set last year weren't met,” Jacobs said. “The company has failed on every front.”
During an October conference call after Goldcorp released its third-quarter earnings, Jacobs accused CEO David Garofalo of avoiding responsibility for the company's poor performance and acting as if it was “business as usual.”
Some have pointed the finger at management. In a note titled “Has the Market Flew the White Flag to Goldcorp?”, Scotia Capital Markets analyst Tanja Jakskonek wrote that Goldcorp's stock price plunge partly reflects “a loss of confidence in management.”
Just three years ago, Vancouver-based Goldcorp was the world's most valuable gold company. It was worth more than Barrick Gold Corp., despite producing far less than Barrick. Goldcorp was praised for weathering gold's boom-and-bust cycles better than Barrick by not hedging its gold exposure during the upswings and by maintaining a much stronger balance sheet during the downs.
But Goldcorp was plagued by unseen problems, including failed acquisitions, a tendency to over-promise and under-deliver, and execution problems on the technical side of mining.
Jeff Phipps, co-founder and portfolio manager at Toronto-based hedge fund Arrow Capital Management, said Goldcorp's decline has been “a really painful, slow decline that's exhausting for shareholders.”
The company's shares are currently trading near a 17-year low, and “Goldcorps,” as mining blogger IKN calls it, is now the seventh most valuable gold company in the world.
“I don't think anybody is happy with where the stock is going,” Garofalo said in an interview in late November. “Absolutely not.”
Garofalo acknowledged the company could have predicted the problems at Musselwhite better and said it should have done a better job of forecasting them to investors. But he said investors overreacted to a “soft quarter” and blamed the company's woes primarily on flat gold prices over the past few years and capital outflows from mining to areas like marijuana. He called the past few years “a terrible time for gold investors in general.”
Now Goldcorp could be the target of the next big gold mining deal. It was recently in talks with Australian gold producer Newcrest Mining Corp. about a deal, but those talks fell apart, said a person familiar with the matter who was not authorized to speak publicly about the matter. (A combination of the two companies would have created the world's second-largest gold miner after Barrick. Newcrest has a market capitalization of more than $17 billion; Goldcorp's is worth $11.2 billion.)
Goldcorp has since been in talks with U.S. gold miner Newmont Mining Corp, but it is not clear whether the talks will lead to a deal, the people said. Spokespeople for Newcrest and Newmont declined to comment.
Goldcorp may be reluctant to sell on the stock market at such a low valuation, but a deal by Newmont Mining would likely be welcomed by institutional investors, said Rick Rule, CEO of Sprott US Holdings Inc. A combination of Newmont and Goldcorp could lead to significant savings in general and administrative (G&A) expenses, including corporate costs and salaries for management and directors.
“The resulting company will command a higher premium and therefore have a lower cost of capital,” Rule said.
Garofalo has faced harsh criticism after years of poor performance, but he has defended his tenure at Goldcorp, pointing to improvements he has made since taking over in early 2016, including cutting costs and building reserves. And some say he cannot be blamed for all the company's problems.
“The company has been mismanaged under several CEOs, not just Garofalo,” said Benoit Gervais, a veteran mining portfolio manager at Mackenzie Investments, who said Goldcorp has a long history of missing targets, making ill-advised acquisitions and paying management big money for disappointing results.
“There's something wrong with this company,” he said. “Who's signing this?”
The Goldcorp acquisition hasn't necessarily gone according to plan.
In 2006, Goldcorp, under CEO Ian Telfer, who is now chairman, paid $430 million for the Eléonore development project in Quebec. Goldcorp said Eléonore would eventually produce 600,000 ounces of gold per year. But Eléonore, which began production in 2015, has not lived up to expectations. Last year it produced about 350,000 ounces of gold at a high all-in sustaining cost (AISC) of $900 per ounce. (AISC is a measure that takes into account most of the mining costs.)
In 2008, under then-CEO Kevin MacArthur, Goldcorp acquired Cochenault, an Ontario development property, for $1.5 billion, which the company touted at the time as having 5 million ounces of reserves. More than a decade later, Cochenault remains in the portfolio with just 300,000 ounces of reserves. In 2010, Goldcorp, then run by Chuck Jeans, acquired Cerro Negro in Argentina, now considered the company's flagship property, for $3.6 billion. In 2015, Goldcorp wrote down the valuation of Cerro Negro by $2.3 billion.
Not only has Goldcorp consistently overpaid for assets without doing enough due diligence, but the company's traditionally strong balance sheet has allowed it to spend heavily on mine construction while generating poor returns on its investments, said John Tumazos, owner and CEO of Berry Independent Research in New Jersey. “They have enough rope to hang themselves with, and they are.”
In 2017, just over a year after Garofalo became CEO, Goldcorp acquired two development assets in Chile for roughly $700 million. As part of the deal, Goldcorp acquired a 50% stake in a project called Cerro Casale for $520 million. The deposit holds a massive 23 million ounces of gold, but despite decades of exploration, no mining company has made the case for building a mine there because the grade is too low, it's located in a remote area of the Andes Mountains and the capital costs, estimated at $4.2 billion, are too high.
The economic outlook for Caspice, another Chilean development asset that Goldcorp bought around the same time for about $100 million, looks even shakier: All 12.5 million ounces of it are classified as “resources,” meaning there may never be any profitable gold in the ground.
“The deal they did in Chile was the moment I gave up on Goldcorp in my mind,” said Robert Cohen, portfolio manager at the Dynamic Precious Metals fund. He said he found it hard to believe Goldcorp would pay exorbitant prices for two projects with such poor economics.
“We are the first to admit that the two deposits that make up Norte Abierto, Casale and Caspiche, would not have been economically viable on their own,” Garofalo said, but he remains optimistic that developing the two projects together could work economically, since Casale and Caspiche could potentially share common processing facilities and infrastructure.
Another acquisition under Garofalo was the purchase of Kaminak Gold Corp., owner of the Coffee gold project in Yukon Territory, for $530 million in 2016. Goldcorp expects it will cost $400 million to build Coffee, and Garofalo said the company should earn 13-15% mining profits. But Goldcorp recently cut its Coffee reserve estimate by 23% to 1.7 million ounces after further drilling.
Dynamic's Cohen said Coffee's failure, like Eléonore's a decade ago, highlights the gold miner's long-standing challenges. Goldcorp has repeatedly run into trouble because of a lack of geologists, metallurgists and engineers in its senior management ranks, he said.
Garofalo, a former accountant, said Goldcorp is working to improve its skills in the technical aspects of mining and take more responsibility for the process. Like much of the gold mining industry, Goldcorp relies on outside engineering firms to build mines, but its in-house staff is now managing the expansion.
“We now have a much stronger project delivery team at the mine site than we've had in the past,” he said.
Some say Goldcorp could take a page from founder Robert McEwan's strategy.
In 2000, McEwen opened the company's geological records of the Red Lake mine in northern Ontario to the world and offered a $325,000 prize to anyone who could contribute a new discovery. The gamble paid off, as the winner ultimately discovered six million ounces of new gold.
Goldcorp held some of its gold reserves in lieu of cash on its balance sheet, and not only did it benefit from the gold price surge in the 2000s, but having all of its bullion stored in a vault made the company think twice before spending its capital.
“I thought that was a pretty clever idea,” Cohen said.
And in an industry that has been widely criticized for excessive executive compensation, McEuen received just $1 in salary as CEO of McEuen Mining in 2017. Garofalo received a total of $8.4 million in salary, $1.35 million, a cash bonus of $1.9 million and various other compensation.
Whether Goldcorp is acquired or not, it has a lot of work to do, said John Ng, a veteran gold analyst at Maison Placements, including liquidating marginal assets, drastically reducing general and administrative expenses and moving forward with a management transition.
“It's not just pruning that's needed,” Ng said. “It's drastic surgery.”
