Goldcorp shocked investors last month by declaring a $4.2-billion (U.S.) loss for 2015, as well as a dividend cut and radical reduction in production guidance.Kevin Van Paassen/The Globe and Mail
David Garofalo has a graph that should appall any precious metals aficionado.
It shows how nine major gold producers' share prices have fared over the past decade. Only one of those stocks – that of Agnico Eagle Mines Ltd. – actually achieved a lasting gain during the 10-year period.
All the other big global gold miners in the graph saw their share prices decline between 2005 and 2015. The sweeping, near-universal losses for investors in the sector – despite a gold price that shot upward over the time span – offer evidence of a massive case of value destruction.
Mr. Garofalo, who became chief executive officer at Goldcorp Inc. on Feb. 29, is clear that he doesn't intend to let that sad history repeat itself, at least not on his watch.
Goldcorp shocked investors last month by declaring a $4.2-billion (U.S.) loss for 2015, as well as a dividend cut and radical reduction in production guidance. The loss, announced just days before Mr. Garofalo moved into the top job, included a massive $4.9-billion writedown that stemmed from newly conservative assumptions for the long-term price of gold.
The news hammered Goldcorp's share price, but Mr. Garofalo, who had been working closely with retiring CEO Chuck Jeannes in the two months before the earnings announcement, makes no apologies for the grimmer outlook he helped install or for the dividend cut.
"I spend zero time thinking about which shareholders will like us," says the 50-year-old executive, who previously headed HudBay Minerals Inc., a copper and zinc producer, and before that served as chief financial officer at Agnico Eagle. "I do focus on building the value of the business."
He believes that a strategy of consistently adding to net asset value – the present value of a business's future cash flows – eventually will be reflected in a company's share price. His graph demonstrates a close relation between building net asset value and share price performance. Of course, "we build net asset value" is not the sexiest of slogans, especially at a time when gold is once again a red-hot asset class. But Mr. Garofalo, an accountant by training, believes that the metric is a great compass for any company trying to navigate the ups and downs of a cyclical industry, where price movements are unpredictable.
He jokes that the perils of prognostication can be seen in an interview he did with The Globe and Mail in December, when he predicted persistent weakness in the gold price through 2016.
His reasoning was that the U.S. Federal Reserve was just beginning a series of interest rate hikes, which would put pressure on non-yielding assets such as gold.
"I can't believe how quickly the Fed has done a 180 and I can't believe how quickly the bond market has opined on that and decided to drive yields into negative territory," he says. "It's a completely different world than just two months ago."
Some analysts accused Mr. Garofalo of using Goldcorp's big writedown in the fourth quarter as a way to create an artificially low basis for future comparisons.
He retorts that the company's new long-term gold price assumption of $1,100 an ounce – down from $1,300 previously – is actually higher than the spot price when he arrived at the company in early January.
The fickle, unpredictable nature of gold prices is precisely why it is vital to focus on building long-term value rather than simply boosting output, he says. It's a point that his graph drives home: The miners who were most obsessed with expanding production over the past decade failed to produce bottom-line results.
Grassroots exploration, in particular, typically generated disappointing returns during that time. "It's a bit of a lottery," Mr. Garofalo says. "There are lots of good geologists and they have lots of great ideas, but if you're lucky, one in 20 may prove to be economic" to develop.
Acquisitions of more mature companies have also produced lacklustre results because capital markets are quite efficient at valuing mines that are already operating. Finding a property that can add value after acquisition costs is rare. "We won't say it will never happen, but it's a bit of a unicorn at this point," he says.
For now, his strategy is to focus on Goldcorp's internal pipeline of projects while gradually building a diversified portfolio of small stakes in junior miners with promising exploration plays. "Our thought is to let juniors do the exploration game," he says. "Quite honestly, they're better at it than we are."
Another focus will be Argentina, where President Mauricio Macri's new pro-business government has made it a priority to encourage miners. The Macri administration has moved rapidly to ease import restrictions and slash export taxes on minerals, among other positive developments.
Goldcorp already owns the Cerro Negro mine in Argentina and Mr. Garofalo sees plenty of potential to develop and optimize the project. "We have a whole new perspective now on Argentina. We want to invest in it rather than just harvesting returns."
Ian McGugan