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Morningstar | Goldcorp Provides Underwhelming 2019 Guidance, but Acquisition by Newmont Remains on Track

After three disappointing quarters in 2018, Goldcorp cut its full-year guidance from 2.5 million gold ounces at all-in sustaining costs (AISC) of $800 per ounce to 2.28 million gold ounces at ASIC of $850 per ounce. At the time, we saw even this guidance as unachievable, as we forecast full-year production of less than 2.2 million ounces at AISC of $875 per ounce. However, for 2018, the company ended up producing 2.294 million ounces at AISC of $851 per ounce. Although the company surpassed our expectations, we are still not impressed by the results, given the lowered expectations.

The outlook for 2019 doesn’t look much better, as Goldcorp provided guidance for 2.2 to 2.4 million ounces at AISC of $750 to $850 per ounce. The AISC guidance is particularly underwhelming given the higher amount of byproducts the company expects to produce in 2019.

We’ve updated our model to include lower production and higher costs than we previously anticipated. On a standalone basis, we would have cut our fair value estimate to USD 13 per share from our previous standalone value of USD 16 per share. However, the announced acquisition by Newmont should close during the second quarter as expected. As a result, we’re maintaining our fair value estimates of USD 11 per share and CAD 14.50 per share, which are based on the announced exchange rate and Newmont’s fair value estimates. Goldcorp’s no-moat rating remains unchanged.

As we stated in our Jan. 14 note, we think Goldcorp shareholders were shortchanged, as the offer price came below both our fair value estimate and the median consensus price target. Nevertheless, we do expect the deal to close as announced. It will be up to Newmont's management team to turn around Goldcorp's struggles.

In December 2018, the U.S. Federal Reserve once again raised the federal-funds target rate by 25 basis points to a range of range of 2.25% to 2.50%. This was the fourth rate hike of the year. However, the Federal Open Market Committee appears to be taking a more cautious approach to future rate hikes. The dot plot has reflected a meaningful change in expectations. The December dot plot implied two rate hikes in 2019 versus the three hikes that had been implied back in September. Additionally, language in the FOMC statement now takes a softer tone, indicating a more cautious approach to further rate hikes.

The market has taken a bearish view on the FOMC’s more dovish tone. Current interest rate option prices imply a more-than 90% chance that there will be no rate hikes by the end of 2019. Additionally, they reflect a higher probability for a rate cut than a rate hike by the end of the year.

All else equal, a slower rate hike path reduces the downward pressure on investment demand for gold that we’ve observed over the last few years. However, the FOMC would likely return to rate hikes if inflation were to strengthen due to stronger economic growth. Although pressure on investment demand for gold has softened, we don’t expect a strong resurgence in the near future.

On the back of stabilizing investment demand, gold prices have settled in the high-$1,200 to low-$1,300 per ounce range, falling roughly in line with our forecast for a nominal gold price of $1,300 per ounce by 2020.