Evaluation of Business and Financial Performance of Goldcorp

Published: 2021-06-27 01:55:04
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Most of the tools and methods which are required to be used in this research thesis are detailed in several papers of ACCA curriculum. However, after learning those tools, I did little to practice and apply them in real world scenarios. This research report provides me with an opportunity to apply those tools and methods to a practical company.
I believe that by pursuing this topic of research, I would gain a deep understanding of a company’s financial reporting procedures and methods. This will help me a lot in my future professional life as a qualified accountant.

The Industry and Company
The industry which I chose for my research work is the gold mining industry. Mankind has been mining gold as early as the first millennium BC. Today, the industry has become a multi-billion dollar cash cow and many large corporations from around the world are its participants.
The company I am researching for my work is Goldcorp Inc. Based in British Columbia, Canada, Goldcorp is one of the largest gold producers in the world with 16 operations and development projects in 6 countries (citation from Wikipedia). In 2009 alone, the company managed to produce about 2.42 million troy ounces of gold and earned topline revenues of about $2.7 billion (citation).
Reasons for Selecting Goldcorp
I selected Goldcorp as my primary research company due to the following reasons:
As stated above, Goldcorp is one of the largest gold producers in the world and is a key player in the gold mining and extraction industry. I believe researching a market leader in one of the oldest industries in the world can be both exciting and informative.
The company fits the definition of a global company. It has operations in more than 6 countries. Researching a global company will help me understand the effects of global economy on a multi-national concern. I think that can be very useful knowledge for my career progression.
Gold has been one of the most important safe havens of investment since the economic crisis hit the developed nations in the mid-2007. Analyzing the effects of volatile gold prices on gold extraction companies can be an interesting case for research.
The Competitor
In order to research and analyze a company’s financial and business performance, it is essential to compare it with a suitable competitor. The company which I chose to compare with Goldcorp is Barrick Gold Corporation.
Barrick Gold is another leader in the gold mining industry. The company is also based in Canada and has produced nearly 7.7 million ounces of gold. The revenues of Barrick Gold in the year ending December 2009 were nearly $8.1 billion.
Objectives of the Research
The primary objective of this research thesis is to analyze the financial performance and position of Goldcorp Inc. I will analyze various financial aspects of the company like profitability, liquidity, financial risk and investment view. Financial data for the past three financial years will be used to evaluation the performance. After the analyze of the financial situation, I will recommend whether the company is a good investment choice or not.
The secondary objective of the research work is to analyze the company’s business performance. This will be done by analyzing the effects of the global economy and various industrial factors on Goldcorp. The effects of various forces which influence the competitiveness of the company will also be studied in detail.
Research Methodology
I will use various tools and methods to complete my research objectives.
In order to carry out the financial analysis, I will primarily use financial ratios. Various ratios will be calculated using a Microsoft Excel Spreadsheet and I will use them to perform a trend analysis of the company’s performance for the past three years. I will also compare the most recent financial ratios of Goldcorp with its key competitor to make a judgment with regards to its financial performance and position.
For the business analysis, I will use strategic business models. The strengths and weaknesses of the company will be analyzed using the infamous SWOT Analysis. Further, I will also use Michael Porter’s Five Forces framework to identify the effects of the key industrial forces on the performance of Goldcorp.
Information Gathering
Collection of information is one of the most important parts in any research work. The quality of research being done highly depends on the information which is used for the research. Information sources are of various types and they provide various qualities of information. Majorly, sources of information are categorized in two general types:
Primary Sources
Secondary Sources
Primary Sources
These sources of information contain the firsthand account of events, transactions, occurrences, experiments, etc. Naturally, primary sources of information are generated for a specific purpose and are highly reliable. In a business report like this one, primary source of information can be interviews with company officials, questionnaires and email correspondence with relevant staff members of the subject company. Despite being reliable and accurate, sometimes primary sources of information can be biased.
Secondary Sources
These sources of information contain secondhand accounts of events and transactions. Secondary sources are generally less reliable than the primary sources, mainly because they are generated for different purposes. Examples of secondary sources include business journals and newspapers, internet and company’s annual reports including financial statements.
In my thesis, I mainly used secondary sources of information. I ensured that the data I use is reliable and accurate. Following table shows the information sources I used for the collection of information:
Sources
Use of Information Source
Collection Technique
Annual Report (2009, 2008 and 2007) of Goldcorp Inc. and Barrick Gold Corporation
I used the annual reports of both the companies extensively during my research. They provided me not only with the financial statements, which were used to calculate the ratios, but also with a great deal of information about the companies operations and its financial performance.
I downloaded the annual reports of both the companies from their respective websites (the investor section). I saved pdf copies of the reports and also printed out certain pages (like the financial statements) which I used a lot.
Websites of Goldcorp and Barrick Gold Corporation
In the information age, the usefulness of websites can never be ignored. I used the official websites of both companies for various purposes. I got various statistics about the companies from their sites, like the amount of gold reserves they hold, etc.
While I surfed the websites, I wrote every piece of important information in a separate word file along with the links to the page in which the information was present. This helped me to re-visit the page when required and also in the preparation of my List of References.
Reuters.com
I used this website extensively to do preliminary research the companies. Reuters has tons of information on companies like their recent share prices, summarized financial statements, latest articles and news, etc.
I downloaded various pieces of information from Reuters to use in my project. This includes the company overviews as well as the relevant news articles.
Google Finance
Google Finance is a very user-friendly website. I used this site to primarily see market capitalizations of the companies, find about the competitor companies, watch share price charts, etc.
The company pages on Google finance are very dynamic and they change all the time. Therefore, I bookmarked the relevant company pages on my browser and visited them every now and then to update myself.
Online Newspapers Editions
One of the most important sources of information I used in this research were the online newspaper articles. Newspapers like New York Times, Telegraph, Wall Street Journal, etc. had very interesting articles on my subject companies. These helped me a lot in knowing various facts as well as executive comments about the companies.
Every time I came across a relevant article, I downloaded it to my computer in order to access it later. I maintained a separate folder for each such article.
ACCA Textbooks
I used my old text books to revise my financial ratios concepts as well as various strategic business models like Porter’s Five Forces and SWOT.
Limitations of Information Gathering
Research and Analysis
Economic Analysis
The economy of the world has been through a tough time in the last three years. In the second half of 2007, the developed economies started to suffer from one of the worst economic crisis since the Great Depression in 1930s. The epicenter of the financial crisis was the subprime and housing market in the US, which collapsed in 2007.
The high interest rates in the US in 2007 forced many people holding subprime mortgages to default on their payments. The high default rates translated into a large number of foreclosures, which increased the housing inventory held by banks and financial institutions. Since almost all of these subprime mortgages were securitized in financial products, they were held by various US and European banks as investments. When the housing and subprime market started to collapse, these securitized products lost their value rapidly, thereby forcing large banks and financial corporations to make huge writedowns in their financial statements. Soon the crisis engulfed the entire financial and banking industry with many well-known names like Lehman Brothers getting bankrupted. Housing giants like Fannie Mae and Freddie Mac were nationalized in order to avoid their bankruptcy.
The effects of the economic meltdown were not just limited to the financial and banking sector. Many other industries suffered greatly from the crisis. Gold played a key role in the international economics during the recession. Since the beginning of the crisis, gold was seen by many investors around the world as a potential safe haven investment. This increased investment in the precious metal in the last two years. Gold prices have therefore, seen significant increases and news highs have been tested frequently. Gold mining companies like Goldcorp and Barrick Gold have seen steady rise in their revenues over the last three years, despite the economic slowdown. This was mainly due to the high prices of the gold in the last few years.
Industry Analysis
The gold mining industry has been a key economic sector in the 20th century and its importance has increased much more in the last few years. As discussed above, the economic turmoil had turned gold into one of the most desired safe haven investments. The gold mining industry involves all activities from the extraction process to the eventual refining and sale. The growth of the mining industry is largely related to the price of gold in the international markets. This is because the price of gold determines the profits a company will make by the extraction process and eventual sale.
Most of the gold extracted by the mining players is actually used for jewelry purposes. A much lesser percentage is used as a financial asset by major corporations around the globe as well as many central banks. According to Dollardaze.org, a market research blog, nearly 52% of the gold present in the world is in the form of jewelry (https://dollardaze.org/blog/?post_id=00479&cat_id=20). The chart below illustrates this:
Most of the demand of gold also comes from the Jewelry sector. In 2006, this sector was estimated at nearly $44 billion. This is followed by investment sector and the industrial sector (which includes electronics, dentistry and decorative applications) (citation). The supply of gold is much more segregated. Most of the gold was extracted and mined by South Africa as of 2006, with China and Indonesia following it (citation).
Industry Life Cycle
Business Analysis
In the business analysis, I will analyze the effects of various competitive forces on Goldcorp Inc. I will also study the strengths and weaknesses of the subject company.
Porter’s Five Forces
This strategic business model was introduced by the well-known Harvard professor, Michael Porter in 1980. Below, I have applied the model to Goldcorp Inc.
Threat of New Entrants
The threat of new entrants in the gold mining industry is quite low. This is mainly due to the principle entry barrier of large sums of capital. The entire chain of gold mining and extraction is very capital intensive and it requires large sums of capital. Construction of mines and production facilities require a significant amount of long-term finance, which is difficult to obtain by new entrants. Apart from that, acquiring a suitable mine itself is very difficult because the gold reserves are limited and the already-known reserves are controlled by large mining corporations.
The low threat of new entrants influences the margins of gold mining companies including Goldcorp positively.
Bargaining power of suppliers
The main thing required to gold mining corporations is land on which mining operations can be performed and gold can be extracted. Since land which is suitable for mining is limited, the bargaining power of suppliers is considerable high. Lands are normally controlled by governments of various nations and it is usually leased to the mining corporations under long-term agreements. The approval and permits to mine these lands can very expensive. Further, there is normally much competition regarding the acquisition of land by gold mining corporations because many major companies bid to acquire the same piece of land.
Therefore, the high bargaining power of suppliers puts up a negative pressure on the margins of Goldcorp Inc.
Bargaining power of buyers
Gold is a commodity. This means that gold provided by one company is not very different from gold provided by other companies. Purity levels can be different but the price of gold normally incorporates that. Therefore, the buyers of gold have a significant power over the suppliers of gold. The price of the gold is decided by the international supply and demand; therefore buyers look for best contractual terms rather than low prices.
The high bargaining power of buyers also exerts a downward pressure on the gold mining corporations.
Threat from substitutes products
Gold is a precious metal and has many substitutes like diamonds, silver, platinum, etc. However, despite the wide range of other precious metals, they are relatively less widely accepted. Gold has the prestige of being a worldwide alternative currency and it is accepted in almost any country. Therefore, the threat from substitutes is low at present from other precious metals. However, it can be argued that the other precious metals are gaining significant popularity and they may become as important as gold in the coming years.
Current the threat from substitutes is low and does not affect the profitability or performance of Goldcorp largely. However, in the coming years, this may change.
Competitive rivalry
As discussed above, the price of gold is determined by the market forces. Therefore, the gold mining corporations does not compete on the basis of price. Further, gold is a commodity, so the competition is also not largely based on quality. The primary competition element between gold companies is the gold reserves. Gold corporations spend large sums of capital to acquire reserves and use them to mine gold. Reserves are the main strength of a gold corporation and the basis of inter-company competition.
As of December 2009, Barrick Gold Corporation has the highest amount of proven and probably gold reserves, amounting to nearly 139.8 million ounces (https://www.barrick.com/GlobalOperations/GlobalOverview/default.aspx). Goldcorp ranks second on the basis of proven and probable gold reserves held, which amounts to 48.75 million ounces as of December 2009 (https://www.goldcorp.com/investors/reserves_resources/).
SWOT Analysis
SWOT Analysis is generally used to access the strengths and weaknesses of an organization. It also analyzes the opportunities present for a company in the business environment along with potential threats.
Strengths of Goldcorp
Reserves
Goldcorp has a large amount of gold reserves spanning in various parts of the world. In the gold mining business, reserves are the backbone of any company. Not just the gold reserves, the company holds a large amount of silver as well as copper reserves as shown in the following table:
Table and source
These reserves provide a substantial strength to the company’s asset base.
Diverse Mining Operations
Goldcorp has not concentrated its mining efforts in one particular region. In fact, its operations exist in various countries and regions including Canada, United States, Mexico and Central and South America (source). The geographical diversity in helps to minimize the regional risk factors present in individual territories and countries.
Weaknesses of Goldcorp
Less Diversification in Revenue Base
Despite the strength and recognition of Goldcorp, the company has certain weaknesses like all other major corporations. Although, Goldcorp deals in various precious metal products, but its revenue base is relatively less diversified. The prices of precious metals are normally positively correlated. This means that in the event of a decline in prices of the metals like gold and silver, the revenues of Goldcorp can be negatively affected.
Prone to Exchange Rate Fluctuations
Further, the business model of the company is also prone to variances in the global exchange rates. Fluctuations in currency prices have serious effects on the profits of the company and this is evidenced by the large decline in the profitability of the company in 2009 (see profitability analysis below).
Opportunities available
Acquisition of more reserves
Goldcorp owns a large amount of precious metal reserves but there are still various untapped gold resources. Many countries like India and China have huge reserves and Goldcorp can make deals with respective governments to mine them. The company has enough financial strength to expand beyond its conventional gold reserve sources.
More Diversification
As pointed out in the weaknesses of Goldcorp, the company has a relatively less diversified revenue base. The opportunity to diversify is present in the external environment and it will enable Goldcorp to ensure against falling precious metals. The competitor of Goldcorp, Barrick Gold Corporation holds interest in oil and gas properties as well besides its conventional precious metal business. Therefore, Goldcorp can also mitigate its risks by more diversification.
Threats
Competition
One of the major threats faced by Goldcorp is the intense competition in the gold mining industry. The companies present in the sector normally compete on acquiring mines and pieces of land. With the gold prices soaring to new highs, it is very likely that new competitors, especially state-sponsored companies might step up their mining operations, making the marketplace even more competitive.
Volatile price of Gold
Another threat to Goldcorp is the volatile price of gold. Gold prices are normally determined on market related factors like supply and demand. Therefore, the variance in the prices of the precious metal can have substantial effects on the revenues of Goldcorp. A steep fall in the price of gold in the international market can cause a serious blow to profitability.
Financial Analysis
This section will deal with the financial aspects of Goldcorp Inc. In order to perform a better analysis, I will compare the key financial aspects of the company with its competitor, Barrick Gold Corporation.
Profitability Analysis
Revenue Analysis
The topline revenues of Goldcorp have surged consistently in the last three years. The year-over-year increase in revenues has been 13% in 2009 and 10% in 2008. Most of this increase was a direct result of rising gold prices in the international markets. The increasing appeal of gold as a safe haven investment has led to the surge, which in turn positively affected the revenues of the company. This is illustrated by the following graph, which shows the price of the precious metal for the past 5 years:
Besides the sharp increase in the prices of gold, the company also benefitted from increasing its production levels. In 2009, the production of gold increased by nearly 4%, whereas in 2008, it increased by more than 13%.
The competitor company, Barrick Gold Corporation, also managed to considerably increase its revenues. Its sales increased by 7% in 2009 and 27% in 2008. A comparison of Goldcorp and Barrick Gold sales is given below:
Just like Goldcorp, an increase in the annual production as well as rising gold prices helped Barrick Gold to improve its revenues.
Net Profit Margin
The net profit margin ratio is commonly used to determine the efficiency of an organization in converting its revenues of profits. It helps the analysts and investors to understand the underlying cost structures of the company. Net margin ratio is calculated by dividing the net profits of an organization with its revenues. Higher net margin ratios means that the organization has effective cost controls in place and the profitability is, therefore, better.
The net margin ratio of Goldcorp was 8.82% in 2009, which decreased substantially from 60.99% in 2008 and 20.85% in 2007. The competitor, Barrick Gold, suffered substantially in the last three years, as its net margin ratio declined from 18.61% in 2007 to negative 52% in 2009.
As the above chart illustrates, there has been a substantial decline in the net margin ratio of Goldcorp in 2009. By looking at the financial statements, it can be seen that the decline occurred despite a 13% increase in the revenues, which leaves with just one explanation; the decline is caused by a sharp plunge in the revenues. A deeper look in the income statement shows that the earnings from mining operations of the gold giant actually soared by nearly 34% last year, which was mainly due to strict cost controls of Goldcorp. The operating expenses rose minimally by 2% despite the jump in sales. This cost effectiveness primarily resulted from very low production costs of the company as compared to its competitors. This is illustrated in the chart below:
It can be seen that the cash production costs per ounce of Goldcorp were very low in all the last three years as compared to Barrick Gold. Despite the low cast costs of production and increasing operating earnings, Goldcorp was not able to translate much of its sales into net profits. As it turns out, this was mainly due to a huge loss on foreign exchange transactions suffered by the company in 2009 as compared to a large gain in 2008. Most of the loss mainly resulted due to translation of future income taxes denominated in currencies other than US dollars like Mexican peso and Canadian dollars (pg 128, Goldcorp Annual Report 2009). As mentioned before in the SWOT Analysis, Goldcorp faces a significant threat from adverse currency movements and this huge loss is an example of such a threat actually effecting the profitability of the company.
Barrick Gold Corporation also managed to increase its revenues during the last year, but the company’s profitability was adversely affected as it eliminated its gold sales contract to un-hedge its gold reserves and benefit from rising gold prices. But the elimination of gold contracts cost the company more than $5 billion, eating up the revenues and turning them into an annual loss.
Return on Equity
Return on equity determines the amount of profit an organization earns as a percentage of its shareholder’s equity. This ratio shows the return a company is able to generate by using the funds provided by the equity investors. These funds include the share capital as well as the retained profits. Return on equity is calculated by dividing the net profits with the shareholder’s equity. A higher return on equity implies that the organization is effectively utilizing its shareholder’s equity to invest in projects which generate high returns.
The return on equity of Goldcorp was 1.55% in 2009, which declined substantially from 9.86% in 2008 and 3.55% in 2007. On the other hand, the return on equity of Barrick Gold was negative 5.08% in 2009, which declined from 5.08% in 2008.
The above chart illustrates that the return on equity of both the companies fell significantly in 2009, but the decline in Barrick Gold’s returns were much dangerous. The reason behind the plunging ROE of Goldcorp is the declining profits of the company. As discussed above, Goldcorp managed to earn decent operating earnings but failed to translate them into net profits, mainly due to a huge exchange rate loss. In order to access the company’s profitability situation without the exchange rate effects, I calculated the adjusted net profits of Goldcorp, in which I eliminated the exchange rate gains and losses for a deeper analysis.
2009
2008
2007
Adjusted Net Earnings (millions of $)
606.80
416.70
509.50
Adjusted ROE
3.92%
2.79%
3.93%
Source: Goldcorp Annual Report 2009
The above table shows that the adjusted earnings of the company increased in 2009, thereby increasing the adjusted return on equity as well. Moreover, the returns Goldcorp earned over its shareholder’s equity are quite consistent, which is a good sign for profitability.
Barrick Gold, the main competitor, suffered a major blow to its profitability in 2009. But that was mainly due to a one-time charge in its income statement relating to the un-hedging of its gold contracts. The loss from eliminating the contracts is not expected to continue in the future, therefore, the profits of the company are expected to show a significant rise in the coming years.
Overall, the profitability of both companies was masked by various events like exchange rate losses and hedging transactions. Goldcorp managed to improve its profitability as the price of gold and the high demand presented with a suitable opportunity. Barrick Gold also benefited from the favorable environment; however, its hedging decisions cost the company too much to show a better profitability position than its arch-rival.
Liquidity Analysis
Current Ratio
The current ratio is generally used to access the ability of an organization to honor its short-term obligations. It is calculated by dividing the current assets of an organization with its current liability. Higher current ratio normally means that an organization has sufficient short-term assets and resources to pay off the obligations that may arise in the upcoming twelve months.
The current ratio of Goldcorp was 2.18 times in 2009, which increased from 1.56 times in 2008 but declined from 2.96 times in 2007. The competitor, Barrick Gold Corporation had its current ratio at 2.79 times in 2009, which increased from 2.23 times in 2008.
As the above chart shows, the current ratio of Goldcorp improved in 2009 from previous year’s figure. The main reason behind the increase in the current ratio of the company was a 111% jump in the current assets, whereas the current liabilities increased by just 51% in 2009. Goldcorp managed to increase its cash balance by more than two folds, suggesting that the company has sufficient liquidity to meet its short-term obligations. But a closer analysis of the various activities that provided the cash is necessary.
(millions of $)
2009
2008
Growth
Operating Activities
1270.2
866.0
47%
Investing Activities
(1457.7)
(441.7)
230%
Financing Activities
799.2
659.9
21%
Source: Goldcorp Annual Report 2009
The above table shows that most of the cash is generated by the operating activities. Also, the company managed to increase its operating cash flow in the last year, which suggests that Goldcorp is translating much of its profits into actual cash. This is a good sign and indicates a decent liquidity position.
Barrick Gold Corporation also managed to improve its current ratio in the last year. In fact, the competitor had a much higher current ratio than Goldcorp. The balance sheet of Barrick Gold shows that the cash balances of the company are much higher than Goldcorp and increased significantly in 2009. Therefore, on the basis of current ratio, it is safe to argue that Barrick Gold’s ability to meet its short-term obligations is much higher.
Acid Test Ratio
Acid Test ratio is another ratio which is commonly used to analyze the liquidity of a company. Inventory is often considered to be an illiquid item in the current assets because it is normally the most difficult to be converted into cash. Therefore, many investors and analysts prefer to take inventory out of the equation in order to better judge the liquidity situation. This ratio does exactly dat. Acid Test ratio is calculated by dividing current assets less inventory from the current liabilities.
Goldcorp had an acid test ratio of 1.70 times in 2009, which increased from 1.10 times in 2008 but plunged from 2.37 times in 2007. On the other hand, the acid test ratio of Barrick Gold was 1.92 times in 2009, which increased from 1.54 times in 2008.
Like the current ratio, the acid test ratio of both companies also improved in 2009. The inventory of Goldcorp increased by nearly 54% in 2009 but despite the increase in the stocks of ore, the company managed to maintain sufficient liquid assets. A higher amount of inventory is necessary to support a larger sales volume, therefore, the rise in inventory is essential to the expansion of the company. In any way, there is no evidence to support that the increasing inventory is due to stale stock because of the high demand of gold and other precious metals.
The competitor, Barrick Gold, also increased its stockpiles of ore by nearly 20% in 2009. This might be due to the same reason, which is to support larger sales. Further, the acid test ratio of Barrick Gold is higher than that of Goldcorp, suggesting that the company is in a better liquidity position.
Overall, it is safe to conclude that both the companies have sufficient liquidity levels and are in good position to satisfy their obligations. However, Barrick Gold have higher cash reserves and have better liquidity ratios, which indicates that the company has better liquidity.
Capital Structure Analysis
Debt to Equity Ratio
Capital structure is a very important financial aspect of any organization. A company normally finances its assets and operations with either equity capital or debt capital. In general terms, debt capital is a cheaper source of finance, mainly due to tax credits available on the interest payments. On the other hand, dividends paid to equity financiers receive no tax benefits, which effectively increase the cost of equity financing. Despite the fact that debt capital is less expensive, large amounts of loans or fixed charge capital can seriously increase the financial risk present in the company. Interest payments are normally fixed and do not vary with the company’s profitability. Therefore, an organization has to maintain a balance between equity and debt capital to ensure that its cost of capital is low and its financial risk is also tolerable.
The debt to equity ratio (also known as gearing ratio) determines the mix of debt and equity financing in a company. For Goldcorp, this ratio was 4.64% in 2009, which increased from 0.04% in 2008 and fell from 7.98% in 2007. On the other hand, Barrick Gold had a much higher debt to equity ratio in all the three years under review.
The above chart clearly illustrates that the gearing ratio of Barrick Gold is much higher than that of Goldcorp. The balance sheet of Goldcorp shows that the long-term debt of the company stands at $719 million, which increased by nearly from 5.3 million in 2008 and 1,036 million in 2007. The pattern of increase in the debt capital of Goldcorp shows that the company redeemed a large portion of its long-term debt in 2008 and borrowed more to replace the old debt in 2009. This is also confirmed by the cash flow statement of the company.
The low gearing ratio of Goldcorp implies a low financial risk. By reviewing the income statement of the company, it can be seen that the interest expense is significantly lower as compared to the earnings before from operations. In other words, the interest cover of Goldcorp is significantly high, as show in the following table:
Interest Cover
2009
2008
2007
Goldcorp
43
18
30
Barrick Gold
n/a
69
11
On the other hand, Barrick Gold fell victim to one of the classic outcomes of financial risk. The competitor had a much higher gearing ratio, which means that the financial risk is high. This in turn means that the company has higher interest payments and in times of losses, the fixed interest expense puts up a further negative effect. In 2009, Barrick Gold had negative profits to pay the interest expenses, which resulted in a negative interest cover.
Overall, the financial risk of Goldcorp is much lower than that of its competitor. Further, Barrick Gold significantly increased its debt levels in 2009, suggesting even higher levels of risk.
Investment Analysis
Dividend Cover
Dividend cover determines the number of times an organization can pay its dividends from current year’s earnings. This ratio is calculated by dividing the total annual dividend of an organization with its net profits. A higher dividend cover implies that an organization has sufficient profits to pay its shareholders in the form of dividends. This is interpreted as a good sign by potential investors. Further, high dividend cover also means that the organization can maintain its dividend policy in the future.
The dividend cover ratio of Goldcorp Inc was 1.83 times in 2009, which decreased from 11.45 times in 2008 and 3.61 times in 2007. The competitor, Barrick Gold, had a negative dividend cover ratio.
As the above chart shows, the dividend cover of Goldcorp fell significantly in 2009. The decline in the ratio came despite the fact that the company maintained its annual dividends at 18 cents per share. The primary reason behind the fall in the dividend cover of Goldcorp was the plunging net profits, which resulted as the company recorded a huge foreign exchange loss, which ate up almost all of its operating profits. Despite the falling profits, Goldcorp maintained its dividends, which might a result of two things:
The company expects the exchange losses to reverse in the upcoming years, therefore, a revision in the dividend policy was not considered appropriate.
On an adjusted basis and excluding the exchange losses, the company actually managed to increase its revenues and profits. Therefore, Goldcorp maintained its dividend policy as a signal of strength to its shareholders and potential investors.
Barrick Gold Corporation also maintained its dividends, despite a sharp fall in profits. As discussed earlier in the profitability analysis, un-hedging of gold contracts resulted in the huge loss posted by the company. The un-hedging is a one-off event and in the coming years, the company’s profits are expected to return to normal, therefore, Barrick Gold may have decided to keep the dividend payments stable.
Dividend Yield
Dividend yield determines the return on investment an investor can earn by receiving dividends from an organization. Dividend yield is calculated by dividing the cash dividends per share paid a company with share price. Investors and analysts normally look for companies with high dividend yield because that implies a higher return on the investment. For the purpose of this RAP, the dividend yield is calculated by dividing the dividend per share with annual closing share price of the companies (at the end of December).
The dividend yield ratio of Goldcorp Inc was 0.46% in 2009, which decreased from 0.58% in 2008 and 0.54% in 2007. The competitor, Barrick Gold, had a much higher dividend yield than Goldcorp, as shown in the following graph:
The main reason behind the decline in the dividend yield of Goldcorp was a slight increase in the closing share price of the company in 2009. Higher share price means that a higher investment is required to purchase Goldcorp’s share, whereas the dividends provided by the company remained the same. Therefore, the return provided by the company to its shareholder in the form of dividends effective declined in the last year.
The competitor, Barrick Gold, also suffered a decrease in its dividend yield, however the company provided a much higher return to its shareholders in the form of dividends. This means that Barrick Gold’s shares are much more attractive to potential investors, if the dividend yields are considered.
Conclusion
Goldcorp is one of the largest gold mining companies in the world. It is a key player in the international precious metal industry and has business interests in various regions and countries around the globe. During the economic recession, which hit the developed markets in the last two years, gold prices have rallied to new highs as the demand for gold as a safe haven investment increased. Most gold companies, including Goldcorp and Barrick Gold Corporation benefited from higher prices and demand.
The industry structure of gold mining industry is interesting. The companies face little threats from new entrants as the financial barriers to enter the marketplace are quite high. But since gold is a commodity, the buyers have significant bargaining power. Gold mines around the world are also limited, which gives the suppliers of mining lands considerable power as well. The competition within the market participants is tough as well.
The profitability analysis of Goldcorp gave interesting conclusions. The company’s profits fell significantly in the last year, mainly due to large exchange gain losses. However, if the exchange losses (which are a very volatile item) are removed from the equation, then on an adjusted basis, the company actually managed to benefit from higher gold prices as well as soaring demand. Goldcorp increased in production in the year and reduced its production costs significantly, thereby achieving higher margins. However, despite the improvement in the adjusted profits of the company, the exchange gain losses cannot be completely ignore as currency prices do pose a very serious threats to companies like Goldcorp. If the company suffers more exchange losses in the coming years, then there may be some serious profitability concerns. On the other hand, the competitor, Barrick Gold, also suffered from a sharp decline in its profitability, mainly due to a large loss relating to un-hedging of gold contracts. Apart from this loss, Barrick Gold also improved its profitability in the last year.
Liquidity ratios of both the companies showed that both companies have considerable amount of short-term assets to satisfy their obligations. Goldcorp had sufficient cash reserves on its balance sheet and most of its cash came from operating activities, which suggests that the company is actually converting its profits into cash flows. However, despite a decent cash position, it is clear from the analysis that Barrick Gold had a much better liquidity situation than its competitor. The current and acid test ratios were higher as well as the cash balances.
Capital structure analysis of both companies also yielded very interesting results. The gearing ratio of Goldcorp was very low was compared to its main competitor. This shows that the company uses very little amount of debt capital to finance its assets and operations. Less amount of debt implies that the company has low financial risk, therefore, it is in a better position to raise more capital when needed. On the other hand, Barrick Gold Corporation highly geared and has a large amount of debt capital in its capital structure.
The investment analysis of both companies revealed that both Goldcorp and Barrick Gold managed to maintain their dividends in the last year despite fall in the profits. The dividend cover ratio of Goldcorp was much higher than its competitor, suggesting that the company might not have any trouble in maintaining its dividend policy in the future on a relative basis. But the dividends of Barrick Gold yielded much higher returns to the shareholders as compared to Goldcorp, which suggests that potential investors may find Barrick’s shares more attractive. It is safe to conclude that both companies have a decent investment picture at the moment, despite being dented by sharp declines in their profits.
Recommendation
Overall, I believe that Goldcorp showed a reasonable performance in the last three years despite the economic recession. It is true that the company suffered from large exchange losses but if the company hedge against future currency movements, then it may reduce them to increase its profitability in the future. Goldcorp remains a strong and large company and strong demand in the gold is expected to drive the revenues further up. But still, due to uncertainty in the profits of the company I would rate it at HOLD and would not recommend investing in the company at the moment.

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