Goldcorp: The Oxymoron of Fiat Creation

Goldcorp has taught me a lot about what can be hidden in a stock. When I look at the dynamics of what drives a gold stock, the gross irony of Goldcorp is that, from my point of view, it is the epiphany of investor fears that is driving the gold bull in the first place.

So, just what are investor fears driving the gold market? The answer I get is currency devaluation due to government just printing more money. As the money supply grows, there is an escalation of inflation. The U.S. national debt is so enormous, printing money to pay bills seems more likely, so this is a serious and valid concern. Governments printing money is the cause of hyper-inflation.

Gold is supposed to be protective against this. Gold should hold its value against other currencies. This makes a certain amount of sense, however, gold stocks are not gold. They represent business that mines gold. They do not mine the gold and just sell enough to cover expenses and then save the hard asset that is supposed to protect valuation; no, they tend to sell all that they mine, paralleling the gold bug complaint that the gold that used to back currency has been sold off.

Gold companies do not print money, however, they do print stocks. Stocks are to a business what currency is to a country. If a business is printing stock, or issuing new equity, it is very comparable to government printing more money.

Just How Many Shares Has Goldcorp Printed?

The graph below show just how frivolous Goldcorp is with issuing new equity, options and warrants. Options and warrants are included and must be included to get a true picture of a company.

If you owned say 1% of Goldcorp in 2003, well now you only own about 1/4 of one percent of the company.

Dilution is easily hidden. It can be found, but it really doesn't show up in a chart of the company's performance, like this one on Goldcorp's share price:


A chart of a company's share price completely and utterly hides dilution. To see a true picture of performance, you really need to look at a graph of fully diluted market cap. But where do you get that? As far as I can tell, it just doesn't exist, but it is probably one of the strongest pictures of how the market is valuing a stock.

There is no way that I can go back and figure out fully diluted share/warrant/option count on a daily basis and multiply it by the share price, but, I could do it for 10 points, say at the end of each year.
The dilution thoroughly hides the gross escalation of market cap. Seriously, this looks more like the Zimbabwe exchange than a real investment. The share price and market cap graphs look nothing alike.

There were events tied to issuing of new equity. Some was to pay back debt, much like how governments have printed currency to pay back loans. Other events were asset acquisition, such as the take over of Glamis.

The midas touch, $6 billion of fiat book value in a single deal

Glamis was a gold producing company with a good development property. Their book value in their Q3 financial report before the takeover was $2.2 billion dollars. When Goldcorp took over Glamis the cash and equity value of what they issued was $8.2 billion dollars, and Goldcorp now carries $8.2 billion dollars in assets on their books for the Glamis properties.

Essentially, Goldcorp has a hyper-inflation of asset valuation being carried on their books. As assets are mined from the ground, an appropriate allocation of book value for each mine is written off.

The hyper-inflated Glamis assets are currently mostly non-producing assets, so what is currently written down is tiny compared to the total asset picture of Goldcorp, and it is tiny compared to the relative book value that the company is carrying for all of its properties. Once these assets start producing the writing down of the fair allocation of book value of these hyper-inflated assets will implode earnings.

I find that Goldcorp is masterful at taking the focus from what ought to be the first priority for investors and and spinning impotent results into a good story. For example, look at the graph of revenue. It tells a stellar growth story, but merely looking back at the total share count suggests the revenue growth is inadequate compared to the equity growth.

Indeed, the revenue per share has actually declined.

Goldcorp also printed a pretty cash flow chart, again in total cash flow, and again, a pretty picture.

But again, the per share picture isn't so pretty, it is actually down 22%.



But not to be disuaded, I decided to look at the next "Go Goldcorp!" graph, which was earnings, and again, their presentation looks stellar.

When you use Goldcorp's numbers for individual shareholders, it actually does look like an improvement.

But I check calculations for myself I found $408 million in earnings when there were 703.5 million shares fully diluted did not "add" up to what they report. Practically none of the effects of share dilution and fiat book value from the Glamis merger show up in the financial reports. I took the earnings and the fully diluted share count at year end and re-plotted the data. This is ultimately what share holders are getting.

In 2003 with 52c eps Goldcorp was trading under $16.

Goldcorp also puts its spin on gold production based on ounces for the company as a whole.



But, what Goldcorp is producing per share is far more important. The graph below is actually per 1000 shares, and the 2007 point is projected production. Already for 2007 production has been down graded twice from 2.8 million ounces.


The 2006 figure has totally imploded. With about $24,000 US investment you can expect to see about 2.4 ounces of gold produced. It begs the question, how can anyone possibly think that this is reasonable? If they meet their targets for 2007, the gold production per share will return to the historical levels.

Even looking at Goldcorp's Q1 financial reports you can see how they steer investors from looking at what is important in terms of their individual share ownership and direct them to the big picture of a company that is under performing on a per share basis relative to prior years. Eps for Q1 this year compared to Q1 last year were way down, but they report stellar improvement.

All in all, Goldcorp belongs to the honor role for the frivolous cap of fiat creation.

Read More......

Jones Soda Co, Breaking Down the Growth

When I look at a stock I always look at the fully diluted market cap and the P/E first. As of March 6, 2007 Jones Soda, JSDA, gives 25,667,491 shares, Stock Option 1,424,025 (2006 annual report), for a total 27,091,516. Additionally, it appears they have another 1,930,975 options they can issue. Current price as of Apr 28, 2007 is $23.02. That gives a fully diluted market cap of $623.6 million and if you include the options that can be issued, you get $628 million. I get two different P/E's, depending on which site I look at, 124 on Yahoo, and 99 on The Motley Fool Caps, neither of which looks good.

What do I calculate as a fully diluted P/E based on the 2006 income of $4.574 million and the fully diluted market cap? $623.6/$4.574 = 136.

If I use the 19c eps with the $23.02 price, I get a P/E of 121. If divide the 19c into the $4.574 million of earnings I get 24 million shares, so clearly the P/E of 121 is a understatement. I get a P/E more than 12% greater.

It is absurd to truncate eps calculations when they are mere pennies as from 18c to 19c is 5.6% difference in earnings. At 5c to 6c, you get 20% difference in earning. They ought to have 3 significant figures.

There is no question there is an awesome growth story here in terms of the business, but at the same time, from December 2000 with a share price of 41c to $23.02 today is 5,500% growth in share price, and because of increased shares, the growth in the market cap would be 7600%, yet revenue in 2000 was $19 million and in 2006 it was $39 million, only double.

What is striking about Jones Soda is that eps went from 6c/share to 19c/share, a stellar 217% improvement considering revenue only increased by 16.5%.

Where did the growth come from?

Breaking down Jones Soda's growth numbers show that actual sales revenue went up 16.5%, yet their cost of goods only went up 8.3%. This change enabled them to increase their gross margin by 30%, from $12.3 million to $16 million.

Thirty percent growth in gross margin is great, but, keep in mind that $16 million is only 2.5% of the market cap. They still have to pay promotion, selling, general and administrative expenses from this.

The promotion and selling expenses increased by 10.6%, and as an expense that accounts for more than half the gross margin, keeping this expense down relative to the gross margin is very good. The one place where they did not do so well is the general and administrative expenses which increased by 42%. Combined these expenses actually went up 20%, which exceeds the increase in sales revenue, but, because the margin was up 30%, it further leverage earnings.

The licensing part of gross margin declined by 6%. Overall the licensing revenue accounted for 2.67c/share of the income.

Earning before interest and taxes increased by a whopping 111%. This kind of number sounds great, but it means that earnings increased from $1.3 million to $2.7 million, or from 2/10ths of one percent of the market cap to 4/10th of one percent of the market cap. This is so far behind the rate of inflation, it is effectively a negative earning rate. It makes up for about 11 of the 19c eps, or 60% of the eps, before taxes.

What made up the other 40% of the EPS?

Taking a closer look at the earning for the year you find that the revenue was way more consistent than the earnings:

2006	Q1	Q2	Q3	Q4	TOTAL
Revenue	8,760,380	10,025,978	10,200,843	10,047,925	39,035,125
Earnings	2,542	2,313,795	194,774	2,063,328	4,574,439
EPS	$0.00	$0.10	$0.01	$0.08	$0.19
Using 3 s.f.	$0.000123	$0.0964	$0.00741	$0.0787	$0.183
Interest	12,710	100,637	438,958	360,252	912,557

What has happened in Q2 is a deferred income tax credit of $1,482,934, or $0.0618 per share, fully 34% of the earnings. This had come from a new equity issue, which leads to another significant portion of the earnings, interest!

The company issued new equity, and much of that was invested and has given interest income. Fully, 20% of the earnings is from interest, or $0.0371 per share.

Together the interest and the deferred taxes make up 52.4% of the earnings.

The are separate adjustment where taxes are paid and the deferred taxes are reduced, leaving $1,144,491 still outstanding, or $0.0465/share.

What would the growth look like without the equity offering?

Without the equity offering there would not be this enormous increase in interest. Based on Q1, there might have $50k of interest income for the year. There would also not be the enormous deferred tax item, and the eps would be less than the 11c eps without taxes calculated above.

I have no idea what taxes would be without the interest income and and with the increased earnings. Taxes paid were $50k in 2005. There is $150k payable liability on the 2006 balance sheet. It would be fair to expect earning to be $100k less due to taxes if the equity offering had not happened, or eps of about $0.10, or a 69% increase, still stellar, but about 1/3rd of the 217% growth.

The earnings per share from actual operations is about 4/10ths of one percent of the market cap. They rest is from a tax thing that can not be repeated, and interest.

The interest component is especially interesting to think about. They have gotten $28,113,000 from an equity offering which has enabled them to earn about $900,000 in interest, or perhaps 5-6%. Investors in the stock then essentially buy these earnings in the form of at a P/E of 136, or 0.7% eps or they are paying a 1200% premium for these earnings.

I repeat, Jones Soda made about $900k of interest, and investors have created $900*136 = $122 million of market cap for it!

Alternatively, say the allocation of market cap to the interest is at 6%, or $15 million of market cap. The deferred tax thing is not worth any market cap, so that leaves about $610 million of market cap for the $2.6 million of business earnings. It gives a P/E of 235. They need to increase the real earnings of the business at least 10-fold to catch up with the market cap.

What is the company doing with all that equity?

It appears that they are preparing to expand directly into business rather than using their licensing option. There agreement with Target ended December 31, 2006, and with it goes some of that licensing revenue. They need to build replacement business for that revenue, and they have raised enough equity to expect to do that.

It took them about 6 years to double their revenue, excluding licensing. This stock is going to crash.

Attention getters for me:

As of December 31, 2006 we had 67 full-time employees.

Ok, so a lot of the business is through distribution, etc., but $623 million of market cap for 67 employees? To me it simply points to the degree to which the business is over valued. That's about $9 million of market cap per employee. It just gets my attention.

Net income for 2005 was $1,285,000 compared to net income of #1,330,000 for 2004. The decrease ... was primarily due to an increase in income tax expense (tax espense increased by 37k) and a smaller contribution from other income (interest income declined by 25k).

These same items are going to murder earnings in the future and if you've understood this post, you'll understand why.

Read More......

The CopperCorp Disaster (GoldCorp)

"How come Goldcorp is underperforming," I read over and over.

Tear into the fundamentals and the changing business dynamics and it isn't hard to figure out. My first post on the over valuation of Goldcorp pointed out many of the reasons why Goldcorp would not perform well.

It is time to update.

Prior to the merger with Glamis most of the earnings were from copper.

The cost of production changed from -$73/oz in Q4 2005 to $160/oz in Q4 2006. That's an enormous increase of $233/oz in production costs.

The eps for Q4 2006 compared to Q4 2005 is 11c compared to 30c, a whopping 63% decline. People should be grateful that the price has held at all. In Q2 2006 Goldcorp had 50c eps. Some of that reduced earnings is from a three-fold hit on copper:

• A 20% royalty kicking in.
• A 20% reduction in production.
• A 30% reduction in copper price.

There will be some recovery for the copper hit for Q1 2007 as they work out their copper production problems and copper prices recover. But, there is still a 20% royalty. To appreciate the effect of the negative leverage of copper, coupled with the reduced production and price, for Northern Orion from Q2 to Q4 eps when from 22c to 6c, a 73% decline. Gold corp has gone from 50c in Q2 2006 to 11c in Q4, a 78% decline. Part of this decline is from copper, but a big part is also from the Glamis merger.

The Glamis Effect on Earnings

The gross effect of the Glamis merger on earnings was not discussed in my previous post, only that it had been expensive.

Prior to the merger, and the restated eps, Goldcorp's eps was 89c for the first 9 months, but Glamis was only 44c. This was made much worse in that Goldcorp issues 1.69 shares for each of these dog Glamis shares. 44/1.69 gives a weighted average of only 26c eps. 284 million of these dog shares were added.

To just appreciate the affect of adding these shares consider the scenario that Goldcorp been able to continue at the same rate of performance, without the Glamis merger, you would have expected about $1.19 eps for 2007 (4/3*$.89). Using the same extrapolation for Glamis, you would have expected 35c eps for the diluted Glamis shares. If you do weighted average of the 418 million Goldcorp shares with the estimated $1.19 eps with the 284 Glamis shares that had the estimated 35c eps, the combined earning potential is 67c eps.

Never mind the copper hit, assuming all things remained the same, the Glamis merger reduced the possibility of earnings by 44% due to the vast difference in earnings at the time of the merger and the gross level of share dilution to acquire Glamis.

Goldcorp debases math

When I looked at their reporting of 2006 results, imho, how they reported the earnings should be against the law. It certainly violates every math concept I know, and I teach math. You have no idea how much I use this kind of debasing of math in the class room. I find that it get kids attention that they should appreciate math like nothing else I've ever used.

As far as I can tell what has been done is legal, but I can make an argument that earnings reports should correct for mergers and dilutions to reflect the effect on earnings of the dilution or merger. It is utterly nonsensical to add numbers together with different parameters as is done is earnings reports.

To show the point, here are is what Goldcorp has reported.

	eps	# of shares	diluted eps	diluted # of shares
Q1 2006	$0.27	340,961,000	$0.24	383,180,000
Q2 2006	$0.50	381,274,000	$0.49	386,951,000
Q3 2006	$0.14	418,180,000	$0.14	422,345,000
Q4 2006	$0.11	597,706,000	$0.11	603,429,000
Annual 2006	$0.94	435,189,000	$0.93	441,264,000
Dec 31, 2006		703,525,000

Net earnings were $408.3 million for the full year. If you divide the net earnings by the actual number of shares December 31, 2006, you get 408.3/703.5= $0.58 eps. Goldcorp reports 62% higher eps than if you take what the company actually earned and divide it by the real number of shares.

Above I did a weighted average between what Glamis' earnings had been and Goldcorp's to get 67c eps. The $408.3 million is only Goldcorp's earnings. Glamis had earnings prior to the merger and a proper way to do weighted averaging is to add those earnings to Goldcorp's earnings and then divide by the true number of shares. That gives 67c.

If you just look at Q4, the net earnings were $65.9 million, which if you divide by the 703.5 million shares give you 9c eps, not 11c. This result is overstated by 18% because there is over a month that the 284 million dog shares from Glamis are not included in the share count.

In this example the difference between what is truth when sound mathematical principles are applied and what is reported because of simply adding numbers with grossly different parameter is beyond comprehension, grossly misleading to investors and ought to be illegal.
And to make matters worse for Goldcorp investors, as of March 8, 2007 Goldcorp has 707.7 million shares, 15.1 million stock options (average exercise price $19.16) and 8.4 million warrants (exercise price $45.75), for a fully diluted count of 731 million.

Mines are depleting assets, and as such, it isn't wise to purchase mining stocks with a P/E of over 12 unless they have a stellar growth profile. If you buy into the fiscally insane idea that a gold stock should trade at a P/E multiple of 25, at the very least, it should be calculated on true earning potential. Goldcorp's earning potential is in the 67c/share range, and using that it is currently trading at an adjusted P/E of 43.

And, using the weighted average eps of 67c, it gives a share price of $16.75.

A future post will go over more problems with the Glamis merger and tear apart an analyst's valuation report. The analyst's report has set a price of 2x the NAV, which is like me saying my home is worth 2x the assessed value. The target price based on 2x the NAV was $36. But hey, I will sell you my home for 2x the assessed value. I'll even throw in my car.

Read More......