#Tahoe Resources ($THO) CAD 16.78 (- $ 1.71 or 9.2%) - #Goldcorp $GG sells its entire holding of 25.6%

M&A unlikely near term, dividend looks safe. 

  

Goldcorp announced its selling its entire holding in Tahoe Resources for close to CAD 1 Bio. Tahoe Resources is gearing up to full production on its first class silver mine in Guatemala (Escobal mine), which is the 3rd largest silver mine in the world. 

In full swing the mine should produce 20 Mio. ounces of silver annually over the first 10 years. Tahoe Resources also bought lately the La Arena gold mine (220,000 ounces per year) in Peru with the takeover of Rio Alto Mining.

 

 Comment from SCOTIABANK: 

- Goldcorp Divesting of Tahoe Stake – We Are Not Concerned on Imminent M&A:  Goldcorp (G-CN/GG-US, SO, US$28.00, Tanya Jakusconek) announced its intention to sell its 25.6% stake in Tahoe Resources Inc. for ~C$998.5 million in a bought-deal offering - a secondary offering by Goldcorp of 58,051,692 Tahoe common shares priced at C$17.20 apiece.   There will likely be a lot of speculation and concern this morning with respect to Goldcorp going after a major acquisition (ie. Detour Gold – unlikely in our opinion), especially in the context of the company also announcing last Wednesday that it had increased its credit facility from $2 billion to $3 billion and extended the term to June 10, 2020 (the unsecured, floating-rate facility bears interest at LIBOR plus 120 points when drawn, based on Goldcorp's current BBB+ rating). 

 

WHY are we not concerned about imminent M&A?  In recent discussions with Goldcorp CEO Chuck Jeannes – we believe they are focussed on their balance sheet right now.  Any additional liquidity will be earmarked to pay down debt (de-lever) and to buttress the company's industry leading and impressive ~488M per annum dividend (currently a 3.60% yield – see below how this compares with peers).  Consequently, we think the current dividend is indeed safe.  Realistically, the Tahoe block was always deemed non-core – so the secondary offering really came as no surprise to us.  

 

The Bottom Line:

 

Goldcorp has added ~$2.0 Billion of Additional Liquidity in the past 7 days in Order to:

 

1)     Pay Off its $1.14 billion drawn down (as of quarter-end March 31, 2015) on its current $3.0 billion revolving credit facility

2)     Maintain its unrivalled 3.60% Dividend (which was put into place assuming a $1,200/oz gold price environment)

3)     Maintain its BBB+ Rating (important for the company)

4)     Possibly maintain flexibility in the event of opportunistic M&A (but unlikely to be anything of significant size like a $3.0 billion+ takeover of Detour Gold (a close analog to its previous attempt to acquire OSK))

 

Recall comments made by Goldcorp CEO Chuck Jeannes at Scotiabank's Senior Gold London Conference two weeks ago:

 

·         Goldcorp confident they will replace reserves this year; good operational momentum through rest of year given a focus on execution through . G should do $500M in FCF this year that will serve to pay down the dividend (that is ~$488M)

·         Goldcorp has also turned inwards to look at the next projects in its internal growth pipeline: the company focusing on HG Young in the Red Lake Camp, Borden Lake (i.e. that came via the Probe acquisition), the Copper/Gold skarn at Peñasquito and El Morro.

 

- & Now With $2.0 Billion in Additional Liquidity for G – We Are Reiterating our "Buy Goldcorp" Thesis…

- Time to Buy Goldcorp?  We Think so… Here Are Three Reasons Why:

 

1)     Trading Below NAV (now at a screamingly cheap 0.89x – see below) and Near 52 WL (G is trading at just 11% above its 52WLs!! - see scattered charts below for relative valuation and share price performance). 

2)     Pays US$140/oz in Dividends or a 3.6% Yield (Safe in Our View)

3)     We think Operational performance improves through 2015 and finishes strong following a mediocre Q1.  We believe they will meet 2015 guidance.

 

 

 

Market cap of top 40 #Mining Co's is at the same level it was ten years ago. @Mineweb

World’s top 40 mines drop $156bn in value

It’s well documented that mining companies the world over are struggling to adapt to a climate of depressed commodity prices and sluggish output. But some of the findings in PwC’s latest global mining industry report, Mine 2015, really hit home.

Looking collectively at the top 40 mining companies, according to market capitalisation, the report found that market value plummeted 16% by $156 billion in 2014. As a result, the top 40 market capitalisation, now at $791 billion, was at the same level as it was ten years ago.

Changes in top 40 market capitalisation ($ billion) in 2014



Source: Mine2015

“Everyone expected that 2014 would be very tough year when we did the analysis, because of what happened to commodity prices last year,” said Michal Kotze, PwC’s head of mining for Africa.

Confidence was also low, with HSBC Global Mining Index hitting a five-year low in April 2015, at “levels not seen since the last global financial crisis”.

“What is clear is that investors are ringing the changes. They are moving out of investments in the mining indices, (which are being consistently outperformed by other indices),” said Kotze.

Dividend yield was at an all-time high at 5%, but only because companies were trying to maintain paying dividends at a time when their earnings were shrinking.

Net profit excluding impairments fell by 9%, while the return on capital employed (ROCE) fell to 8.4%, the lowest level in the report’s 12-year history. Having been at 9.5% in 2013, this sees the average ROCE continue below the minimum hurdle investment rate of 15-20%.

Only six of the top 40 – Coal India (coal), Norilsk Nickel (nickel), NMDC (iron ore), Randgold (gold), Shandong Gold (gold), and Newcrest (gold) – exceeded this benchmark.

It was also the first time in the report’s history that a South African company was not included in the world’s top 40.

“Anglo American is included, even though it has many South Africa-based subsidiaries. Last year Impala Platinum was there, but it is the first time there are no specifically South African companies in there,” said Kotze.

Five South African companies were included when the first edition of the report was published in 2004.

Miners doing their utmost

Despite difficult circumstances, miners have done their utmost to adapt, with free cash flows turning positive to $24 billion from a $3 billion deficit the previous year. The blow was also softened by an increase in production, currency devaluations, and lower input costs, which boosted margins. The miners also managed to reduce costs, with operating expenses down 5% at $509 billion.

Many companies implemented aggressive cost cutting measures, ranging from staff layoffs, to delaying capital projects, divestiture of non-core assets, and operational improvements.

Impairment charges were down 53% at $27 billion, and this saw the net profit increase 114% to $45 billion in 2014, when impairments were included.

Governments have also intervened in many countries to soften the blow. For example, Indonesia introduced a ban on export of unprocessed mineral ore in an effort to increase domestic processing capacity, while Zambia made some major reductions to taxes applicable to miners.

Cutting capex 

Top 40 companies reduced capital expenditure across all commodities, with the biggest cuts coming from OECD companies, which slashed capital expenditure by 23%. This was 9% higher than their BRICS counterparts.

The only concern is that this will hamper the ability of the mining sector to be able to produce enough output when the commodity cycle eventually turns around, said PwC assurance partner, Andries Rossouw.

The total asset base of the Top 40 declined by 1% in 2014 compared to an increase of 7% in 2013. Capital expenditures, including non-mining activities, were $103 billion in 2014, versus $129 billion in 2013

Said Rossouw: “It’s a vicious cycle. This is the period when companies should be investing in capacity, but what will eventually happen when the cycle turns, is that companies won’t be able to supply and commodity prices will sky-rocket again. It is just that capital expenditure is one of those discretionary choices that companies elect to cut in difficult times.

Historical and projected annual capital spend by commodity ($billion)



Source: Mine 2015

See the article online here: World’s top 40 mines drop $156bn in value - Mineweb

GERMAN #GOLD BUYING: A Chart You Have To See : SRSrocco Report

The Germans are buying more gold than anyone else in the west.

GERMAN GOLD BUYING: A Chart You Have To See

While EASTERN demand for physical gold investment remains strong, most of the folks in the WEST are bored with the barbarous relic as they continue to funnel their funds into highly inflated paper assets. However, the Germans seem to look at gold a bit differently… actually a lot differently.

Even though the Swiss continue to buy more gold on a per capita basis, German physical gold investment demand is the highest of all Western countries. How much higher? Let’s look at the chart below:



According to the World Gold Council, total German physical gold bar and coin demand during Q1 2015 was 32.2 metric tons (mt), Switzerland ranked second with 13.8 mt and the U.S. came in third at 9.9 mt. Interestingly, German physical gold investment increased 20% compared to the same period last year while U.S. gold coin and bar demand fell 12%.

Matter-a-fact, German gold bar and coin purchases (32.2 mt) during the quarter account for more than half of total European demand (61 mt). On the other hand, the British, French and Canadians ranked the lowest in the chart taking the 5th, 6th and 7th spots respectively. What’s even more amusing, total physical gold investment from these three countries is about a tenth of German purchases.

Furthermore, Germans purchased more than three times the physical bar and coin investment than did Americans during the quarter. Now, as I mentioned above, the Swiss still buy the most gold per capita due to their long-term fundamental belief in gold ownership. However, if we compare German buying versus American… this is the result:

Germany population = 80 million (32.2 metric tons)
United States population = 320 million (9.9 metric tons)

Germany is actually buying 12 times more physical gold per capita than the United States.

Again, if we exclude the savvy gold buying Swiss, the Germans continue to be the strongest physical gold buyers in the West. Lastly, if we add up all the other Western countries total gold bar and coin demand including Switzerland, here is the result for Q1 2015:

Germany = 32.2 metric tons (45%)
Rest of West = 39.5 metric tons (55%)

Is there something the Germans know about gold that most of the folks in the West don’t?

NOTE:  It was brought to my attention by a new reader that I state gold in metric tons and troy ounces.  The reader thought this was a bit confusing for new folks learning about the industry.  I agreed.  Unfortunately, the industry publishes gold statistics in these two metrics.  I could convert everything to one value or the other, but anyone reading the published reports would see these two different metrics and still be confused.

Here is the conversion:  32,151 oz = 1 metric ton

Please check back for new articles and updates at the SRSrocco Report.

GERMAN GOLD BUYING: A Chart You Have To See : SRSrocco Report