Goldcorp Retained at Neutral

We are maintaining our Neutral recommendation on Goldcorp Inc. ( GG - Analyst Report ) . The company’s first-quarter 2012 adjusted net earnings (excluding onetime items) of 50 cents a share missed the Zacks Consensus Estimate of 54 cents. Revenues jumped 11% year over year to $1.35 billion, missing the Zacks Consensus Estimate of $1.46 billion.

Gold sales in the quarter fell 13% to 545,700 ounces, but a 22.5% jump in gold price helped Goldcorp improve its top line. However, cash costs totaled $251 per ounce of gold on a by-product basis and $648 per ounce of gold on a co-product basis, significantly higher than $188 per ounce and $504 per ounce, respectively, in the year-ago period. As a result, the company’s top-line growth failed to pass onto the bottom line as adjusted earnings remained almost flat from last year.

Moving ahead, Goldcorp expects to produce 2.6 million ounces of gold in 2012. Total cash costs are expected between $250 and $275 per ounce of gold on a by-product basis and between $550 and $600 per ounce of gold on a co-product basis.

Goldcorp enjoys a leading position in the industry and aims to increase its production by 70% over the next five years. The company has been working hard to meet this target through a number of acquisitions. The Cerro Negro and El Morro acquisition helped Goldcorp establish two more important operating bases in South America, providing further impetus to its already substantial growth pipeline. Moreover, the addition of the Camino Rojo deposit near Penasquito will further add to Goldcorp’s growth profile at a lower cost.

Also, Goldcorp has a high leverage to spot gold prices due to its completely unhedged position. This will help the company derive the maximum value due to rising gold prices in the future. Moreover, Goldcorp is one of the lowest-cost gold producers and has a strong balance sheet.

However, the company’s aggressive acquisition policy can also be an area of concern as integrating new mines and businesses might not be completely seamless. Also, Goldcorp’s ability to maintain or increase its production depends on its ability to bring new mines into production while expanding reserves at current mines.

Further, Goldcorp might face problems from higher interest rates and excessive increases in gold production. These factors might push down the price of gold and hurt the company’s prospects. Moreover, the slowdown in the global economy, especially in emerging markets like India, could weaken the demand for gold and further hinder Goldcorp’s performance.

Goldcorp, 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.