As its name indicates, Goldcorp (NYSE:GG) is a specialized player focusing primarily on gold and silver and a few base metals. Further reinforcing the impression that it is both focused and a specialized player, are the facts that it concentrates its operations exclusively in the New World. Besides its home country it explores and mines in the United States and Mexico in North America plus Guatemala and Argentina. That said, Goldcorp is the third-largest gold miner in the world. It is one of Canadian specialized gold producers, among which are Barrick Gold (NYSE:ABX), El Dorado (NYSE:EGO), Kinross Gold (NYSE:KGC) and Agnico-Eagle Mines (NYSE:AEM).
Gold miners' share prices have taken a beating this past quarter. Indeed, gold has been losing its luster over the past year. Or, more precisely, gold-mining companies have been losing their luster. Mining Weekly encapsulates the big picture thus: "Valuations for gold firms have slid so much they now trade at a discount to the market, with a PE of 10 versus nearly 12." The Mining Weekly story explains that part of the problem is too many gold firms chasing investor dollars. Another factor is the newfound popularity of Exchange Traded Funds (ETF). ETFs allow easy investment in gold bullion itself and thus have eaten the gold companies' lunch - or at least some of it.
A third factor is at play too. Fears about currency, debt, and the economy in general have typically persuaded investors to invest in gold, and this has a positive knock-on effect on companies that produce the metal: the rise of gold is "driven by fear of the unknown and the unthinkable. The unknown is whether the U.S. dollar will continue to weaken, due in part to Standard & Poor's downgrade of U.S. government debt. The unthinkable is whether the world's major economies will suffer another near-catastrophic financial crisis." But over the past quarter these kinds of "unthinkable" fears about the eurozone have lightened to the point of vanishing off the front pages.
The news was so bad about Europe's so-called "PIGS" that the guarded optimism emanating these days sounds like good news - it sounds like economies are on the mend ... and that's always bad news for gold. For example, TodayNews has just stated that "firm demand at Spanish debt sales, positive U.S. corporate earnings and an improvement in a key German sentiment survey boosted investor confidence in riskier assets." According to BusinessDay "concerns on the eurozone crisis eased after a successful Spanish debt auction and a better growth forecast from the International Monetary Fund." And Xinhua reports that "French National Statistics and Economic Studies, Institute of Economic Research in Munich and the Italian Central Bureau of Statistics ... believe that the 2011 annual euro-zone economic growth of 1.5%, then will enter a slow recovery period of growth,"
So, in the words of the Financial Times as of only 30 days back, "With the U.S. economy showing signs of recovering and fears about the eurozone sovereign debt crisis easing, investors are putting their money into equities and other assets geared towards economic growth rather than havens such as gold."
Gold stocks peaked in September, a rise fueled partly by eurozone and currency fears, and from then on it's all been downhill on non-bad news, such as the sample reportage above.
As a result, Agnico-Eagle's shares have taken a lumping. Crossing $70 in September, now they're trading for about half of that at approximately $33. Kinross Gold's shares have taken a lumping. Touching $18 in September, now they too are trading at about half of that. El Dorado's shares have taken a lumping - hey, it seems like I'm repeating myself! Almost at $22 in September, they hover at about $14 now. Barrick's shares have fallen from $55 in September to around $40 now.
Goldcorp shares have also declined but the fall has not been anywhere near as precipitous as that of three of its competitors. From a September high of $51, they are trading at about $41 now. Proportionally, this drop is the lowest among the five Canadian gold miners we're looking at.
Before we examine other numbers, a caveat. Whether you're a multi-national, multi-million-dollar diversified miner or a specialized player like Goldcorp, you're prone to annoyed provincial governments or judiciaries suspending your license. It has happened to a giants like Anglo-American and AngloGold Ashanti (NYSE:AU) and it has happened to Goldcorp too: A Chilean court has suspended its mining license for the $3.9 billion dollar El Morro project. If a miner is constantly entangled with government watchdogs and the judiciary, that indicates something is wrong. But a license suspension here and a mining-rights lawsuit there -- for miners that is just the cost of doing business.
Onward to the comparison-by-numbers, and we see El Dorado posting a profit margin of 29% and return on equity of 11% (all figures trailing-twelve-months - ttm). Agnico-Eagle and Kinross, however, are both in the red, so no comparison here.
Barrick has done quite well as its 31% profit margin and 19.4% return on equity indicates. Goldcorp has a comparable profit margin of 35% but a return on equity of about 9%.
Goldcorp and Barrick are healthy, profitable companies whose share prices have been affected by externally-influenced sentiment. How does Goldcorp do it?
The company does not engage in "capital blowouts." Its meticulous value-based approach to exploration and acquisition mirrors the 'Value' philosophy of investing. Goldcorp tries to "buy an early stage asset, grow it through exploration and build it." The company's CEO explained "you just have to be careful to buy the right development asset ... acquire things that are very young in their life cycle, so that they have significant opportunity for growth going forward."
While competitors large and small in the precious metals sector are wilting, Goldcorp's meticulous, measured approach is "paying dividends" - literally. In a January press release, the company declared the year's "first monthly dividend payment for 2012 of $0.045 per share," noting that "Goldcorp has paid a monthly dividend to its shareholders since 2003." The company's 2011 fourth quarter revenues increased to a record $1.5 billion and it also achieved record operating cash flows. These and other strong numbers allowed it to pay dividends totaling $91 million.
I think the outlook for this gold company is "rosy" - and that's not looking at it through "rose" colored glasses. I am hardly alone in this opinion: Seeking Alpha author Mel Darin forecasts a "surge" for Goldcorp, citing its cash stockpile, record cash flow, and several new mines about to come on line as the bases. The simple fact, as inferred from the numbers and the news, is that this "yellow metal" company has a "blue chip" stock. Whatever you do, don't sell this stock. Considering that Goldcorp's shares are surely somewhere or another in a trough, feel free to buy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.