Goldcorp's fall: management under fire as miner slumps
By NIALL MCGEE
Saturday, January 12, 2019 Print Edition, Page B1
Peter Jacobs liked what he heard when he attended Goldcorp Inc.'s investment day in January of last year. So the chief investment strategist with Stifel RMG Group, a Washington-based financial firm, started buying shares.
Goldcorp management's presentation made a strong case that the mining company "was on track to increase production and reserves, lower costs, deleverage the balance sheet and create additional shareholder value," he said.
A year later, the picture isn't so pretty. In late October, Goldcorp lost close to a fifth of its market value in a single day after reporting falling production, rising costs and a decline in reserves. Gold grades at its flagship Cerro Negro mine in Argentina fell by more than 30 per cent in the third quarter compared with the previous quarter. Production at its Musselwhite mine in Ontario and giant Pueblo Viejo operation in Dominican Republic, which it owns alongside Barrick Gold Corp., also fell more than expected. The company reduced its production forecast and bumped up its cost expectations for 2018.
Goldcorp shares have been in a long-term tailspin, trading at $12.86 apiece Friday on the Toronto Stock Exchange, down from more than $54 in 2011.
Sources say the company is exploring options for a possible combination with another gold miner in a bid to revive its fortunes.
"I don't know about how other shareholders feel but I would think and hope they are also disgusted by the lack of execution against goals laid out" last year, Mr. Jacobs said. "The company has failed on all fronts."
In an October conference call after the release of Goldcorp's third quarter results, Mr. Jacobs accused chief executive David Garofalo of shirking responsibility for the poor performance and behaving as if it was "business as usual."
Others also pointed the finger at management.
The steep decline in Goldcorp's share price in part reflected a "loss of confidence in the management team," wrote Scotia Capital Markets Inc. analyst Tanya Jakusconek in a note titled "Has the market thrown in the towel on Goldcorp?"
Just three years ago, Vancouverbased Goldcorp was the most valuable gold company in the world.
Goldcorp was worth more than Barrick Gold Corp., even though it was nowhere near as big in terms of production. Goldcorp was lauded for navigating the great commodities gold boomand-bust cycle better than Barrick by not hedging its gold exposure on the way up, and having a much better balance sheet on the way down.
But hidden from view, problems were brewing at Goldcorp, including flawed acquisitions, a tendency of overpromising and underdelivering, and execution issues on the technical side of mining.
Geoff Phipps, co-founder and portfolio manager with Torontobased hedge fund Arrow Capital Management Inc., says the decline of Goldcorp has been a "really painful slow burn that just exhausts shareholders."
With its stock now trading near a 17-year low, "Goldcorpse" as mining blogger IKN calls it, is now only the seventh-most valuable gold company in the world.
"I don't think anybody's happy with the share-price performance," Mr. Garofalo said in an interview in late November. "Absolutely not."
Mr. Garofalo acknowledged the company could have done a better job of anticipating problems at its Musselwhite mine and that the company needed to give better forecasts to investors. But he said investors overreacted to a "soft quarter," and he pins the company's travails largely on the flat gold price over the past few years as well as the flight of capital out of mining into sectors such as cannabis. He calls the past couple of years "a miserable time for gold investors, generally."
Now, Goldcorp is a possible target in the next big gold-mining deal. Goldcorp was recently in talks with Australian gold producer Newcrest Mining Ltd. about a deal, but those talks have lapsed, said a person familiar with the situation who isn't authorized to speak publicly about the discussions. (A merger between the two would have created a sizable mining company: Newcrest has a market capitalization of more than $17-billion, compared with $11.2-billion for Goldcorp.)
Goldcorp has since engaged in discussions with Newmont Mining Corp., the big U.S. gold miner, the person said, although it is far from clear that the talks will lead to any transaction.
Spokespeople for Newcrest and Newmont declined to comment.
Rick Rule, CEO of Sprott U.S.
Holdings Inc., says even though Goldcorp may be loath to sell at such a depressed stock-market valuation, an acquisition by Newmont Mining would be welcomed by institutional investors. A Newmont-Goldcorp combination could lead to significant savings in general and administrative (G&A) expenses, which include head office costs and salaries for management and directors.
"The resultant company would command a better premium and hence a lower cost of capital," Mr. Rule said.
Facing heavy criticism amid years of underperformance, Mr.
Garofalo defends his tenure at Goldcorp, pointing to improvements he has made since he took the job in early 2016, such as reducing costs and growing reserves over that time period. And others say not all of the company's troubles can be pinned on him.
"This company's been mismanaged under a couple of CEOs, not just Garofalo," said Benoit Gervais, veteran mining portfolio manager with Mackenzie Investments. He says Goldcorp has a long history of missing targets, making ill-advised acquisitions and paying enormous sums to management for subpar performance.
"There's something wrong in this company," he said. "Who's signing off on this?" Goldcorp's acquisitions haven't always worked out as planned.
In 2006, Goldcorp, under CEO Ian Telfer - who is now the chairman - paid US$430-million for the Éléonore development project in Quebec. Goldcorp said Éléonore would eventually produce 600,000 ounces of gold a year. But Éléonore, which went into production in 2015, hasn't measured up. Last year, it produced about 350,000 ounces of gold at a high all-in sustaining cost (AISC) of $900 an ounce.
(AISC is a measure that factors in most of the costs of mining.)
In 2008, then under CEO Kevin McArthur, Goldcorp paid $1.5-billion for an Ontario development property called Cochenour that had not yet even carried out a resource estimate. At one point, Goldcorp touted it as a five-million ounce deposit. More than a decade later, Cochenour sits as a project in its portfolio with a meagre 300,000 ounces in reserves. In 2010, Goldcorp, then run by Chuck Jeannes, bought what is now considered its flagship asset, Cerro Negro in Argentina, for $3.6-billion. In 2015, it wrote down Cerro Negro by $2.3billion.
John Tumazos, owner and CEO of Very Independent Research in New Jersey, says not only has Goldcorp consistently overpaid for assets without doing sufficient due diligence, the company's traditionally strong balance sheet has allowed it to spend far too much building mines, leading to poor investment returns.
"They have enough rope to hang themselves and they do."
In 2017, a little more than a year after Mr. Garofalo took over as CEO, Goldcorp paid around US$700-million for two development assets in Chile. As part of that deal, Goldcorp paid US$520million for a 50-per-cent stake in a project called Cerro Casale. The deposit contains a massive 23 million ounces of gold in the ground, but despite decades of study, no mining company has been able to make the case for building a mine. The grade is too low, its location in the Andes too remote and the capital cost, estimated at US$4.2-billion, too steep.
The economics of Caspiche, another Chilean development asset that Goldcorp bought at the same time for about US$100-million, appear even more tenuous.
All of its 12.5 million ounces are classified as "resources," which means there could be no profitable gold at all in the ground.
"That deal they did in Chile," said Robert Cohen, portfolio manager of the Dynamic Precious Metals Fund, "that's when I kind of mentally checked out on Goldcorp." He says it's hard to believe that Goldcorp would pay steep sums for two projects with such poor economics.
"I'm the first to acknowledge that Casale and Caspiche, the two deposits that make up Norte Abierto, on their own would have been marginal," Mr. Garofalo said.
But he's optimistic that by developing the two projects at the same time, the economics could work, as Cerro Casale and Caspiche could conceivably share common processing facilities and infrastructure.
Another acquisition made under Mr. Garofalo is the $530-million deal in 2016 to buy Kaminak Gold Corp., owner of the Coffee gold project in Yukon. Goldcorp expects Coffee to cost US$400million to build and Mr. Garofalo says the company's return on the mine should be between 13 per cent and 15 per cent. But Goldcorp recently cut Coffee's reserves by 23 per cent to 1.7 million ounces after doing further drilling.
The setback at Coffee, as with Éléonore a decade earlier, illuminates a long-running problem at the gold company, Dynamic's Mr.
Cohen says. Goldcorp has been repeatedly caught out by not having enough technical people - geologists, metallurgists and engineers - in its upper-management tiers, he says.
Mr. Garofalo, an accountant by training, says Goldcorp is working on improving its skills on the technical side of mining and taking more ownership over the process. As with most in the gold industry, Goldcorp relies on external engineering firms to build its mines, but internal staff now manage expansions.
"We have much more robust project execution teams at the mine site than we've had historically," he said.
Some say Goldcorp could take a leaf out of founder Robert McEwen's playbook.
In 2000, Mr. McEwen opened up the company's geological records on its Red Lake mine in northern Ontario to the world and offered a $325,000 award to anyone who could help find new discoveries. The gambit paid off when the winners eventually uncovered six million ounces of new gold.
Goldcorp used to hold on to a portion of its gold in lieu of cash on its balance sheet. Apart from benefiting from the ensuing appreciation in the price of gold in the 2000s, holding all that bullion in a vault also gave the company pause before spending its capital.
"I thought that was pretty smart," Mr. Cohen said.
And in an industry widely criticized for overpaying its executives, Mr. McEwen earned a salary of US$1 in 2017 as CEO of McEwen Mining. Mr. Garofalo was paid a salary of $1.35-million, a cash bonus of $1.9-million and various other compensation for a total of $8.4-million.
Veteran gold analyst John Ing with Maison Placements says regardless of whether Goldcorp gets acquired, it has a ton of work to do.
It must dispose of marginal assets, make deep cuts in general and administrative expenses and move forward with management changes.
"What's needed is more than just a pruning," Mr. Ing said.
It's "drastic surgery."
A worker walks inside Goldcorp's Borden gold mine near Chapleau, Ont., in June, 2018. GoldCorp CEO David Garofalo has been facing heavy criticism amid years of underperformance.
CHRIS WATTIE/ REUTERS