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Recently, Fitch Ratings announced that it is maintaining the Issuer Default Rating (IDR) of Goldcorp (GG - Analyst Report) at ‘BBB.’ The agency also reaffirmed the ratings of the $862.5 million senior unsecured convertible notes and the $2 billion senior unsecured revolving credit facility at ‘BBB.’ The Rating Outlook was kept at Stable by Fitch.

Fitch said that Goldcorp’s portfolio has got substantial reserves with impressive mine lives. More importantly, these reserves are mostly located in areas where there is low geopolitical risk.

Also, the ratings agency holds Goldcorp’s credential of being one of the world’s lowest cost senior producer of gold in good light. Moreover, the company is highly focused on growing its business both organically and inorganically, a strategy which will help it deliver shareholder value in the long run.

In addition, the company has got adequate liquidity on its books. It had cash and cash equivalents of $1.4 billion as on March 31, 2012. Its credit line of $2 billion, which is set to mature in November 2016, was completely untapped.

Fitch noted that Goldcorp’s strong liquidity position will enable it to pursue its large capital spending program. The agency also said that the company might go free cash flow negative in 2012 as it incurs capital expenditure. But the metric is expected to get positive again in 2014 assuming gold sells at $1,200/oz from 2013.

First Quarter Revisited

Goldcorp had posted disappointing results in the last reported quarter. It earned 50 cents a share on an adjusted basis in first-quarter 2012, which missed the Zacks Consensus Estimate of 54 cents. The company witnessed an 11% year-over-year jump in revenues, which rose to $1.35 billion in the quarter, but came in short of the Zacks Consensus Estimate of $1.46 billion.

Also, reported net income dropped 26% to $479 million (or 59 cents per share) in the quarter from $651 million or 82 cents reported a year ago.

Puts and Takes

Goldcorp is among the leaders in its industry and it anticipates increasing its production by 70% over the next five years. The company’s expansionary moves, exploration projects and increasing gold prices are expected to act as tailwinds.

Due to its unhedged position to gold prices, Goldcorp is well-positioned to reap benefits from rising gold prices in the long-term. The high quality of its assets and the low cost nature of its operations are also key growth drivers.

However, we believe that the company’s near-term prospects might remain muted due to its aggressive acquisition strategy. Goldcorp will need to integrate the acquisitions swiftly to maintain or increase its production capabilities. In addition, higher interest rates and excessive increase in gold production might push down prices, hurting Goldcorp’s margins in the process.

Neutral on Goldcorp

We currently have a long-term Neutral recommendation on Goldcorp. The company, which competes with Barrick Gold Corporation (ABX - Analyst Report) and Newmont Mining Corp. (NEM - Analyst Report), retains a Zacks #3 Rank, indicating a short-term Hold rating.

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