Goldcorp Ready To Surge On Strong Production, Cash Flow

 |  About: Goldcorp Inc. (GG), Includes: ABX, EGO
by: Mel Daris

Do you remember the tale of the countryman and the goose that laid the golden egg? The countryman went to collect the morning eggs. Under one goose, he found a yellow egg that glittered. He was about ready to throw it out when he realized the egg was pure gold.

Just as the man almost let a fortune slip through his fingertips, gold investors can be as quick to make a snap judgment. The appearance of gold collapsing in February shook the foundations for many investors. Many analysts are still quite bullish about gold. Standard Bank expects an average gold price of $1,790 for 2012. Nomura, a Japanese firm, forecasts a price of $2.063 in 2013. BNP Paribas is even more bullish pegging the average price for 2012 at $1,850 and $2,225 for 2013.

Investors often turn to gold as a stock market or currency hedge. Another option to consider is investing in gold miners. The last several years, gold appreciated considerably greater than gold miners did. While gold may outperform the average miner, gold does not pay a dividend. These dividends are currently outperforming savings accounts with an average yield of 2.06%.

This may be the best time in two years to look at gold mining companies. Take a look at a 3-year chart of the Amex Gold Bugs Index (HUI). It tracks the 16 largest publicly traded gold companies. It is a helpful cheat sheet for the industry. Gold miners are trading at the low end of the three-year range. In the last week or so, the index has shown an uptrend after multiple months of a bear trend. This often is a sign of a good buy opportunity.

Goldcorp (GG) is a Canadian company engaged in mining and exploration of silver, copper and gold throughout North and South America. Goldcorp had a record 2011 producing 2.51 million ounces of gold estimated to total approximately $220 per ounce. Goldcorp is forecasting gold production of 2.6 million ounces in 2012.

Goldcorp has six new mines in the project pipeline over the next five years. It is aiming to increase its gold production by 60%. The goal is to achieve five million ounces mined annually.

Despite some tumultuous months that have created severe fluctuations in Goldcorp's stock price, it appears it has positioned itself strongly to be profitable for the remainder of 2012. Goldcorp has made several key acquisitions in the last few years that are getting ready to pay off.

In 2006, Goldcorp and Glamis Gold merged. The $21.3 billion merger propelled Goldcorp into the third-largest gold miner in the world. Many financial experts questioned the massive merger as the right decision, as it did not increase Goldcorp's cash flow. Time has paid big dividends on that investment. The current gold price indexes show a $1,100 increase in value from 2006-2012 adding to Goldcorp's long-term financial strength.

At the time of the Glamis merger, gold was selling around $620 per ounce and Goldcorp's share price was $15. Goldcorp made another important acquisition in August 2008 purchasing Eagle Mines for $1.47 billion. Gold prices were hovering at around $800.

Thanks to its acquisition of Cero Negro in 2010 for $3.6 billion, 2011 was a year of positive financial progress for Goldcorp. Net earnings were up to $1.78 billion from $1.04 billion in 2010. Total assets in 2011 of $23.9 billion, is a $1.7 billion increase from 2010. The positive revenue figures center predominantly around Cero Nego's resource level doubling over previous projections.

News has been positive for Goldcorp's competitors as well. El Dorado Gold (EGO) recently purchased a Canadian gold mine and expects 1.7 million ounces of gold over the next five years. Barrick Gold (ABX) acquired Equinox as it continues to expand. Investors are encouraged by the growth and have seen share prices creep up to around $43.

If the price of gold continues to raise, especially if it reaches the projections of $2,000 per ounce, the value of these companies, in particular Goldcorp could be quite strong. Goldcorp is sitting on around $1.5 billion in cash. In any market, cash is king. With Goldcorp projecting an annual cash flow of $2.5 billion over the next five years, it has plenty of power to spread its wings and grow.

Last year, Goldcorp held down its operating costs despite inflationary times in its mining regions. There are several ways to value a mining firm. You can analyze reserves in the ground, adjusted earnings, dividend yield and adjusted operating cash flow.

The reason to be bullish on Goldcorp is the entire company. The portfolio of mines is a strong foundation. On an adjusted PE basis, Goldcorp sells for roughly 22.5 times earnings, high but justified with the cash flows projected for Pueblo Viejo and Penasquito ramping up to full production. The more than 1% monthly dividend yield is an added bonus.

Gold remains a coveted asset given its long-term supply and demand. Concerns by many over economic growth in developed countries make gold an attractive and safe investment option. The European debt crisis allows gold investors to hedge currency concerns. The pressure the US dollar continues to feel also contributes to the increase of gold prices.

Jewelry and investment demands in non-western markets continue to drive and improve economic development in India and China in particular. India alone consumes nearly 45%-50% of the world's gold production. China will likely emerge as the largest gold market in 2012 and the demand will double over the next 10 years.

Higher prices bode well for gold producers. While investors may prefer to hold the golden bars in their hand there are escalating costs involved in securing and storing the gold. Goldcorp is one of the golden eggs that the hen is sitting on at this very moment. All you have to do is reach your hand underneath and pull it out. Goldcorp is in a strong positive cash flow position. Goldcorp will see a healthy production in its mines in 2012. It will reap the benefits of the acquisitions of the past few years.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.