Goldcorp: There Are More Efficient Ways To Capture Gold

Goldcorp (NYSE: GG) forecast production of approximately 2.8 million ounces of gold in 2007 at an anticipated total cash cost of $150 per ounce. By-product assumptions used to forecast cash costs are silver at $10 per ounce and copper at $3 per pound.

The exploration expense for 2007 is forecast at approximately $55 million or 10% of the current cash position, split almost evenly with $23 million in Canada and $22 million in Mexico. This seems anemic but admittedly the cap-ex budget of $750 million exceeds cash, therefore financing will be required. How much is left for exploration?

Gold and mineral companies are frequently acquisition oriented. Goldcorp’s signal is that they will allow others to explore and they will show up in the last minute after the risk and heavy lifting has been done.

Has Goldcorp become just a gold developer with substantial production? If so, the stock price should reflect gold prices and hedge activities if any. So why invest directly and take-on the risk of corporate problems or the inevitable environmental problem that usually befuddles mining operators? Gold may be played more efficiently.

Comments

[huangjin:]

Isn't the advantage in owning Goldcorp that if gold moves from $600 to $1000, Goldcorp sees a gain of 267% on cost, versus a 67% gain if you buy the metal yourself? It ignores hedging, but my guess is their gain would be something north of 67%.

2006 Dec 19 05:16 PM

[George Guto...:]

My concerns with Goldcorp or any Gold producer are always the corporate event risks. While Goldcorp is based in the America's the geo-political risks are muted but still existent. They are currently undertaking huge developments which offer completion risks, potential cost over runs issues as well as the day to day difficulties of extracting economically.

I have always been skeptical of the what if gold goes to $1,000 scenario. Yes the number appears highly leveraged. But then you probably need catastrophic world events to drive that price. If catastrophic events do occur and gold becomes a more important medium of exchange then you will want it in hand and not held as a financial asset in a stock portfolio.

Finally as a gold producer Goldcorp is naturally depeleting its reserves. It must continue spending money to expand existing reserves if possible and economic and or find entirely new reserves. Hence my comment about very low levels of exploration expenditure.

To my way of thinking gold companies at the exploration stage represent attractive leverage. As they transition from exploration and become mature producers the risk premium is not warranted and I feel actually owning gold either physically or in tradeable form is preferable.

A bar of gold will not ask you for anything. A mine manager will always have a capital expenditure budget that needs to be closely managed.

2006 Dec 20 09:11 PM

[dwot:]

I so agree with your comments. I've never owned Goldcorp, but I started looking at it because of its part ownership of the Alumbrera mine, which is also partly owned by a that a stock I am very interested in, Northern Orion.

I did some very detailed analysis of Goldcorp compared to Northern Orion. Northern Orion has a property that can be developed with a 23 year mine life that would produce about 300 million pounds of copper per year, 150,000 oz gold, and 15 million pounds of molybdenum.

It's current share of the Alumbrera mine is about 50 million pounds of copper per year, and is subject to a 20% royalty that new mine wouldn't have.

That's simply an enormous growth potential. With the copper prices peaked, if you extrapolated the prices for a full year, the earnings/share would have come to about 85-90cent/share. So, with the drop in prices copper, I consider about 45 cents/share a reasonable estimate of earnings from current copper.

It just seems to me that if copper goes down to $2 lb, the earnings/share will still get to at least $2/share.

Every bit of analysis I did on Goldcorp said its cost are going to increase with increases in gold prices because it has become a monster that needs to be fed, and if I was that junior company that Goldcorp needed, I'd be hitting them for a price based on gold prices, so costs increase. And, they need to build one and sometimes two new mines per year to keep production going.

I don't know if links are allowed, but this is my blog where I started looking at the financials, and I was shocked at what this exercise showed me.

www.stockhouse.ca/blog...;blogID=459&po...

2006 Dec 28 04:45 PM