Over the past several weeks, Goldcorp (GG) has faced significant downward pressure on its shares, largely as the result of bad public relations surrounding its cleanup procedures at its Marlin mine in Guatemala. On the other hand, the company's acquisition of the Cero Negro project in 2010, has led to positive operating results that should prove promising for the company on an ongoing basis. As one of the major players within the gold market - amongst Barrick Gold (ABX), Kinross Gold (KGC), Newmont Mining (NEM) and Yamana Gold (AUY) - Goldcorp is an important player in the industry. Given this status and the mixed information circulating about the company, understanding one's options within this stock is an important step for anyone investing in the space.
Miners Are Bad, Bad, Bad
In the midst of the green revolution, anyone who can be seen as damaging the planet is vilified and fitted for a black hat before the jury has been sent away for deliberation. And for anyone wondering if it really warrants the shameless use of so many mixed metaphors, just take a look at the number of major municipalities adopting "special" privileges in terms of parking and the like for hybrid drivers. The United States remains the greatest democracy on the planet, but if you came in a Prius, you will get special parking and a noticeable lack of dirty looks - we all remember the evil CEOs who traveled to Washington on company jets to answer idiotic questions with no chance of changing anything. Thanks, Washington, much better to leave the CEOs of companies in every major public pension plan out of touch as they schlep across the country in an electric bus. But why are we falling behind? What all this highlights is the simple truth that green is good and everything else is bad.
So, where does reality sneak into the picture? Overlooking the fact that inside the cell phone of every green activist is gold, silver and other metal circuitry that had to come out of a mine somewhere, the troubles in Guatemala do have the potential to be disruptive for Goldcorp. An independent report suggests that the actual cleanup costs will be significantly more than the company has predicted. The problem does have teeth as Amnesty International has joined the cause, participating in the circulation of a petition asking that Goldcorp be held responsible for all cleanup costs. Again overlooking the pure naivety of any argument that suggests that mining is evil, the reality is that miners have not always been seen as good corporate citizens. This negative image is one thing, but it can lead to political problems, particularly as so much mining is international in nature, and it can lead to significant litigation costs. Keeping these potential problems in mind, a careful investor should be cognizant of which companies are effectively managing their images. A rosy image is often positively reflected in a stock's price.
On the other end of the continuum, Goldcorp has made some critical moves that have improved its bottom line. As was mentioned above, the acquisition of the Cero Negro project yielded immediate results. In 2011, the company reported net income earnings that had risen from $1.04 billion in 2010 to $1.78 billion. Additionally, total assets had swelled by an impressive $1.7 billion to $23.9 billion, despite the $4 billion price tag attached to the project acquisition. The is a good example, not only of the favorable financial metrics surrounding the company, but stands as a testament to the judgment of the company's management to make strategically sound decisions that are in keeping with the best interests of the shareholders.
In terms of the investing landscape, valuations for gold companies are all over the map. Goldcorp has a trailing twelve month price-to-earnings (P/E) ratio of 17.9 relative to a P/E of 9.1 for Barrick, a P/E of 65.5 for Newmont, a P/E of 20 for Yamana and the lack of a P/E for Kinross based on negative earnings. Goldcorp is not the cheapest, but it is far from being the most expensive. In terms of operating efficiency, Goldcorp has an operating margin of 44.7% relative to operating margins of 46.7% for Barrick, 35.2% for Kinross, 40.1% for Newmont and 41.3% for Yamana. Again, Goldcorp is not the most efficient, but neither is it the least. Based on these metrics, Goldcorp ranks as being a solid investment within its peer group.
Based on each of the above considerations, one may still be unclear as to how best to proceed in terms of investing in or avoiding Goldcorp. While the answer is not clear, as with so many things, the best answer is it depends. If one is looking for a short-term investment vehicle that has both risk and reward potential, the company looks very promising. If gold pops based on global factors, the current weakness may prove to have been a nice entry point as well. On a longer-term basis, gold remains a solid investment against the backdrop of global macroeconomic uncertainty. In this latter context, Goldcorp looks attractive for all investors. The company is likely to solve its public relations problems, making any weakness an attractive entry point. The strong operating margin suggests that the company is well run and will show solid gains over time. Based on the company's success in the Cero Negro project and its sound financials, I believe this stock will reach and maintain a level between $50 and $52 by early to mid 2013.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.