Grading Goldcorp's Numbers
One of the world's largest gold companies reported earnings, and it's always interesting to see what numbers are really saying.
Some aspects of earnings for Goldcorp (GG) are a little difficult to explain, but let's give it a try before we go to the numbers.
There are big differences between financial accounting and tax accounting. In fact, on the CPA exam, they are given as entirely different tests.
Financial accounting is what is reported to shareholders and creditors. It is supposed to (but doesn't always, thanks to the Financial Accounting Standards Board) give the user a true picture of a company's financial condition and progress.
Toward that theoretical end, it takes into consideration things that haven't happened, but are likely to happen. Warranty expense is the easiest example. In financial accounting, a company has to estimate the future cost of fulfilling its warranties for repairing things like cars. It adjusts those estimates every year, based on incoming actual expense, until the warranty expires.
Uncle Sam, however, is not going to let a company take a tax deduction for an expense it thinks it will have. That ill-tempered old fellow will only allow them to deduct actual expenses incurred. The result is that taxes can be out of sync with financial income. It's usually just a timing difference that evens out over time.
That said, we can look at Goldcorp.
Fourth-quarter revenues rose 14.8%. A 23% rise in operating costs took a bite out of that, but earnings from direct mine operations still rose 13.5%.
A 111% rise in explorations costs took another bite, but will pay it back in spades within a few years. The company increased proven and probable reserves by 6%, and Goldcorp expects to increase production by 70% by 2016 due to the mines it is opening or expanding.
Other significant items were earnings in "associates," which subtracted $82 million from results. Associates are companies in which Goldcorp owns a stake larger than 20%, but less than 50%, and has no control over. It is equivalent to you owning a stock. When it goes up or down, you have a paper gain or loss until you sell it.
The company had fairly substantial losses in securities held for sale (these are not held as long-term investments) that were exactly offset by gains in derivatives, which includes things like interest rate swaps, currency hedges, and forward sales of production. Taxes rose disproportionately by 36.7% for the reasons I explained above. Corporate administration expenses were in line with increased revenues.
The net effect of all these items, and a few smaller ones, was that EPS from continuing operations fell 17%, to 39 cents per share from 47 cents. The company sold some non-core operations at a profit during the year; that affected net earnings, which includes discontinued operations in the comparison. Net earnings were 39 cents, versus 75 cents last year.
Full-year earnings from continuing operations were up 16.6%, and operating cash flow rose a robust 79%. Most of the items subtracting from earnings didn't affect cash, like the drop in value of associates.
Overall, I'm happy with the earnings report. The only thing worrisome was the jump in production costs. That can be a result of many things, but it's usually due to hitting a patch of lower grade ore in a major mine. If that's the case, it could be a long-term change or one that can turn around next year.
The stock is still on hold, and I'm inclined to leave it there for now, if only because of the time of year, which is usually not good for gold or the stock market. We should have a clearer course in a month or two.
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