Fitch Affirms 'BBB' Rating on Goldcorp (GG)

Fitch Ratings has affirmed Goldcorp Inc.'s (NYSE: GG) Issuer Default Rating (IDR) and ratings on the unsecured revolving credit and unsecured notes at 'BBB'. Approximately $6.0 billion in principal amount of debt and commitments is affected by this action.

Goldcorp's credit rating reflects its sizable, long lived reserves in areas of relatively low geopolitical risk at a diverse set of mine sites, favorable cost position, strong project pipeline, improved free cash flow (FCF) outlook due to cost savings plans and a reduced dividend, and expected future benefits from the ramp up of its two newest mines, Cerro Negro and Eleonore, to expected annual run-rate production levels. Offsetting factors include lowered future production guidance due to revisions in budgeting prices, project delays and underperformance, combined with the revision of Fitch's long-term precious metals price forecasts and its impact on the company's credit metrics. Goldcorp is committed to maintaining a conservative investment grade capital structure given its exposure to gold prices. In weak gold markets, the company has the ability to defer some development and exploration while cutting the dividend further to focus on cash preservation.

After announcing management changes, Goldcorp recently reduced the dividend, adjusted operational focus from production growth to net asset value maximization, and revised its three year production guidance downward, in part due to execution challenges at the Cochenour project and higher than expected dilution at the Eleonore mine, but also in an effort to focus on optimizing high quality production for increasing cash flow.

The Stable Outlook reflects Fitch's expectation that in Fitch's base case, total debt/EBITDA will generally be below 2.0x and FCF plus current liquidity will be sufficient to fund anticipated debt reduction efforts. Should internal cash generation fall behind expectations, Fitch expects the company to preserve and generate liquidity via credit neutral actions, including cost management, capital expenditure deferrals, non-core asset sales and potentially new equity issuances.

KEY RATING DRIVERS
LOWERED LEVERAGE, TOTAL DEBT REDUCTION EXPECTED TO CONTINUE

The company's recent financial performance has been relatively in line with Fitch's expectations. The company's leverage was reduced to approximately 1.5x at year-end 2015 after repayment of the revolver balance with divestiture proceeds and improvement in EBITDA to approximately $1.8 billion. In the base case, leverage is expected to remain under approximately 2.0x, and trend to under 1.5x through the cycle as naturally occurring debt maturities are repaid. Management has guided to roughly $700 million in debt reduction over the next three years, mainly due to repayment of the 2018 notes at maturity.

COMMODITY PRICE EXPOSURE

Goldcorp's earnings are sensitive to gold prices; the company forecasts that a $100/oz. decline in gold prices from the company's assumption of $1,100/oz. could result in roughly $300 million decline in FCF. Fitch expects Goldcorp to be FCF positive on average in a scenario where realized prices are greater than approximately $1,100/oz.

NEGATIVE PRODUCTION REVISIONS

Goldcorp revised its three year production guidance downward, from approximately 3.5 million attributable ounces of gold per year to 2.8 million to 3.1 million attributable ounces per year. The decline is mostly a result of Cochenour re-entering the exploration phase following and re-interpretation of geological data and higher than expected dilution at the Eleonore mine. Fitch expects these issues to reduce its previously forecasted cash flow growth.

COST REDUCTION EFFORTS

On an annual basis, cash costs have been mostly flat, if not slightly up in the past few years, while most cash flow improvement efforts have been through spending reductions so far. With the lowered budget price and managements shift towards a focus on net asset value per share, management has targeted $250 million in sustainable annual mine site and corporate efficiencies starting in 2018. The company is already in the midst of several cost reduction efforts that will likely start to bear fruit as early as 2016. Co-product cash cost and AISC for the first quarter of 2016 were $604/oz. and $836/oz. which are lower than, or on the low end of, management forecasts for the full year of 2016. Management has guided to an AISC of $850-$925/oz. for 2016, compared to $852/oz. in 2015 not including reductions relating to the carrying value of inventory.

CASH FLOW IMPROVEMENT

With growth capex at major projects largely complete and a reduced dividend, Fitch expects Goldcorp to be FCF positive in 2016 and when capex is below $1 billion as cost cutting efforts continue and production continues to increase at newer, lower cost mines. Goldcorp's new management has stated it will focus on a more measured approach to expansion, focusing on organic growth at existing mines and brownfield expansions, attempting to use existing infrastructure to limit risk and drive capex efficiencies. Growth capex has been reduced to roughly $100 million in 2016, which is targeted to advancing studies on organic growth projects. Management has guided to a total of approximately $800 million-$900 million of capex spending, down from $1.3 billion in 2015 and approximately $2.2 billion in 2014. Growth capex could increase, however, if the Penasquito pyrite leach and Musselwhite materials handling projects are approved.

Goldcorp benefitted from favorable foreign exchange movements in the first quarter, but costs also decreased from additional production ramping up at Eleonore and Cerro Negro. Further benefits are expected to come from a reduction in its labor force, productivity enhancements and revising mine plans to rationalize production and infrastructure, such as the efforts currently underway at Red Lake.

Cash flows are sensitive to currencies; a 10% depreciation or appreciation of the Canadian dollar and Mexican peso against the U.S. dollar would have resulted in an approximate $105 million and $55 million decrease or increase in the company's FCF, respectively. The company has stated is has very little hedges as of the end of the first quarter 2016.

KEY ASSUMPTIONS
--Gold Price of $1,100/oz.
--Production within management's three year guidance;
--Costs within guidance in 2016 with realization of at least some of the $250 million of sustainable cost reductions guided to start by 2019, leading to a longer-term co-product cash cost of $600-650 per attributable gold ounce;
--Capex within guidance of approximately $900 million in 2016 (including capitalized interest);
--Repayment of approximately $700 million in debt by end of 2018.

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include:

--Deterioration in gold prices and internally generated cash flow without an equal management response in the form of lowered costs, reduced spending, dividend cut, assets sales or the raising of equity.
--Expectations that total debt/EBITDA will be greater than approximately 2.0x on a sustained basis;
--Expected period of sustained negative FCF after dividends;
--Debt funded shareholder-friendly activity;
--Material disruptions or delays at major mine sites.

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

--Sustained positive FCF generation over $1 billion annually;
--Total debt reduction beyond management's guidance, leading to total debt/EBITDA below roughly 1.0x.

LIQUIDITY

STRONG LIQUIDITY, MANAGEABLE MATURITY SCHEDULE

Liquidity at March 31, 2016 was solid, with cash on hand and money market investments of approximately $458 million, and approximately $2.75 billion available under the company's $3 billion revolver maturing in June 2020. Goldcorp should remain well within its current financial covenants of a maximum ratio of total debt to tangible net worth of less than or equal to 1.00:1. Fitch expects the company to be cash flow positive in 2016 at current prices, and have the ability to be cash flow neutral in 2016 to 2018 after dividends, on average, with prices above roughly $1,000.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

--IDR at 'BBB';
--$3 billion senior unsecured revolving credit facility at 'BBB';
--$500 million 2.125% senior notes due March 15, 2018 at 'BBB';
--$550 million 3.625% senior notes due 2021 at 'BBB';
--$1 billion 3.70% senior notes due March 15, 2023 at 'BBB';
--$450 million 5.450% senior notes due 2044 at 'BBB'.

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