Could Reaching a Deal at Los Filos Boost Falling Goldcorp Earnings?

It’s a tricky time to be Goldcorp. On the one hand, the future is looking brighter in Chile where Goldcorp was finally granted permission this month to resume operations at its El Morro site. But on the other hand, Goldcorp is not out of the foods when it comes to other land disputes – particularly in Mexico, at its Guerrero-based Los Filos mine site, where activity has been suspended for a month now due to a breakdown in talks between Goldcorp and the surrounding community over land use.

Now Goldcorp also has stock issues to fret about. Today Goldcorp reported a dramatic decline in its first quarter earnings for this fiscal year, with net income dropping from $309 million (33 cents per share) at the same time last year down to $98 million (12 cents per share) this year, attributed to a severe drop in the overall commodity price of gold from $1,622 per ounce down to $1,297 per ounce.

When prices decline, the ability to deliver in volume becomes crucial for lifting a company’s worth. After Goldcorp’s announcement this week, the need for the company to come to an agreement over the Los Filos mining site is being thrown into sharp relief. It’s good that El Morro is back open for business again, and the company is also paving the way for work in Quebec at its recently awarded Malartic mine site, but Goldcorp needs all the gold in bulk that it can get to recoup its earnings. According to Reuters, Goldcorp had expected to extract as much as 345,000 ounces of gold from its Los Filos mine in 2014 – that’s close to $448 million left on the table if an agreement isn’t reached.

Goldcorp has expressed optimism that a deal will eventually be reached – and even if it is, it’s still a gamble that requires a delicate balance. After all, overdelivery of too much gold could drive gold’s worth down even further, effectively digging a deeper hole for Goldcorp’s earnings. But if Goldcorp is able to play it right, it could be well worth the effort to avoid another El Morro-type standoff and reach a compromise in Los Filos before too much time has passed.