Things may not be looking good for Goldcorp (GG) with the suspension of its previously approved environmental permit to work on the El Morro copper-gold project. The suspension came from the Supreme Court of Chile which said the suspension would be in effect until such a time as some deficiencies, which were identified by the court, are corrected by the Chilean environmental permitting authority (the Servicio de Evaluación Ambiental or SEA).
You will remember that Goldcorp has a 70% share in El Morro, while the remaining 30% belongs to New Gold (NGD). The suspension of the permits had immediately led to a drop in Goldcorp's share by 2.2% to $38.26 while New Gold also suffered the same fate at a higher level that will see it dropping 8.35% to $9 per share.
If the Chilean authority does not lift the suspension in good time, Goldcorp may continue to see its price drop. The El Morro mine, which has its location in north-central Chile has proven to hold probable gold and copper reserves of 8.4 million and 6.1 pounds respectively. If mining operations should continue as planned, it will surely lead to a rise in Goldcorp. However, continued delay of mining operations makes the $3.9 billion that was used to build the mine useless and money poorly spent.
Another point that may see Goldcorp falling further is the problems that it is currently facing at its Red Lake Mine in Ontario. The low ore grades caused Goldcorp to produce and sell a lesser amount of gold than it produced and sold in the last quarter of last year. In giving the reasons for the wide margin of 524,700 ounces in Q1 this year and 637,000 ounces last year, the CEO of Goldcorp Chuck Jeannes had this to say:
Solid operating results throughout most of our mine portfolio were offset by a challenging first quarter at Red Lake. Adverse ground conditions at Red Lake delayed the development of new mining faces in the High Grade Zone which, taken together with lower grade in other areas of the mine, led to our slow start to 2012.
Nonetheless, the lower ore grades and adverse ground conditions did not stop Goldcorp from making $479 million in profit in the first quarter of this year. In fact, it posted revenues of $1.3 billion as well as an 11% increase over the same quarter of the previous year. Thus, Goldcorp has been able to show that it can rise even in the face of obstacles.
However, we can only wait and see if it will continue to rise in the face of suspended mine operations in Chile as well as adverse ground conditions in Red Lake. Yet, it is safe to project that Goldcorp may be in for a bearish trend if quick action is not taken to find a permanent solution to the problems hanging in the air.
In another development, a report made by Bloomberg is also another nail in the coffin of the bearish trend that may soon plague Goldcorp. The report reveal that the thirst for gold in China that was presumed to be insatiable is now on a declining trend and may continue indefinitely. This revelation was made based on the generalizations of the interviews that Bloomberg's correspondents in China had with some Chinese jewelers and consumers in Honk Kong and China.
According to the report, Chinese jewelers and consumers are no longer comfortable with the steady drop in the price of gold since last September and are learning to avoid making further such investments. In essence, I would say that China has awakened to the realization that the traditional belief about investing in gold for long-term security may no longer be viable in the dynamic economy of the world today.
However, it may interest you to know that the findings are not presented as a factual representation of the market conditions. More so, there is little or no statistical evidence to support the argument that the demand of gold is falling in China. The presumption is made based on the generalizations from the findings, yet, such a report gives small comfort to gold miners. This is because a reduction in the demand for gold in China will invariably lead to more supply of gold than the demand. In simple economics, when the supply of a commodity is more than its demand, then its price will invariably fall and a further fall in the price of gold is the last thing that gold investors want right now.
As it is, competitors like Newmont Mining (NEM) and Barrick Gold (ABX) are also in for hard times if the Chinese projection should turn out to be a reality. This is because they will also bear the brunt of the reduction in the demand and would need to compete with other producers for other gold markets. Thus, I can say that a lot hangs on the accuracy of the Chinese projection because if it turns out to be right, then, gold miners need to compete with one another for a part in an ever-shrinking market, in addition to falling gold prices.
However, things are looking good for AngloGold Ashanti (AU), especially now that it has plans to embark on developmental and expansion projects with an estimated budget of $1.9 billion. The developmental and expansion projects are designed to benefit, its Creek and Victor Mine in Colorado as well as its Kibali and Mongbwalu projects in the Democratic Republic of Congo. The objective of the projects is to raise the production capacity of AngloGold Ashanti to about 5.6 million ounces by the year 2014.
However, miners like AngloGold Ashanti and Vale (VALE) that have operations in Argentina may also find their production plans being disrupted by the recent policy adopted by the Argentine government which requires them to buy more Argentine made products.
Although, AngloGold Ashanti may suffer to a lesser degree because all it received from Argentina's Minister of production was a warning to comply with the new protectionist regulations. Vale on the other hand is in a precarious position because it has been given 15 days, as of May 7, to present new plans on how it intends to increase the value of its ores as well how it plans to buy more Argentine products or face stiff penalties.
All these contribute to the argument that gold may no longer be stable investment it once was, and Goldcorp will need to take serious proactive steps for it to avoid falling into a trap it can't climb out of.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.