The gold industry might have a new major player on the rise, with Canada's Iamgold (IAG) purchase of Trelawney Mining. For a company like Goldcorp (GG), the question must be asked: How will this development affect its margins? If Iamgold continues to elbow its way into other companies' market share, there could be a potential risk of loss. However, I believe that there is enough room in the market for Goldcorp to withstand Iamgold's onslaught, although smaller stocks might not be so lucky.
The price of gold rose last week by about 1.2%, thanks to the U.S. Federal Reserve's decision to leave interest rates at their current near-zero level. Since this move weakens the dollar, it boosts international buyers' ability to get involved in the gold market and actually strengthens gold's value overall. As demand rises, so does the price, which leaves Goldcorp in a strong position to carry on as usual.
That being said, Goldcorp's profits were somewhat disappointing last quarter. Production dropped off at the Red Lake mine, leaving a 70,000-ounce gap in production compared to last year. The concurrent rise in operating costs, from $188 an ounce to $251, also paints a gloomy picture. However, I believe that since this shrinking of profits is very unusual for the gold giant, investors have no need to worry. On the contrary, I would suggest that this is an excellent opportunity to buy into the company at a relatively low price.
According to CEO Chuck Jeannes, "Solid operating results throughout most of our mine portfolio were offset by a challenging first quarter at Red Lake." If this is the case, then as far as I can tell the company has one minor problem to deal with, not a huge disaster like some analysts and media outlets seem to suggest.
Politics have disrupted some parts of the gold industry; for example, Mali's political coup possibly hindered Randgold Resources (GOLD). However, things seem to be back on track for Randgold Resources and for other names, so I do not see any reason for concern about the industry in general. The small lapse for this company can only serve to boost Goldcorp on its way back up, in my opinion. Similarly, Newmont Mining (NEM) might have to change its mind about the proposed Conga mine in Peru, due to environmental concerns that make the plan economically more expensive than previously thought. The CEO's response to this setback was almost blasé, which I understand considering that nothing has been invested in the project yet. Putting the money elsewhere will make little or no difference to the stock's value, and the dividend yield should be unaffected as far as I can tell.
Barrick Gold (ABX), on the other hand, looks to me to be in a bit of a struggle. Although margins are up across the board, this company just sold off all its shares in Highland Gold Mining (HGM) for $130 million. Either the company has decided that this stake is not conducive to its long-term goals, or it needs to bring in some quick cash and tighten up operations. The likely outcome in this case would be the latter. As demand for copper declines, Barrick Gold might have to cut corners and expenditures in other areas, including gold. Since copper is more of a staple in the mining industry it is more important to maintain its viability than that of gold, so it is actually a smart move on the part of the company, in my opinion. Although the value of gold keeps climbing, it is likely that it will drop again at some point, whereas copper is so ubiquitous that I expect demand to remain relatively high. Thus, Barrick has the right idea: By selling off its stake in Highland Gold Mining, this company can focus on the important things.
This is good news for Goldcorp, as I see it, because if major competitors back off a little, then Goldcorp can easily step in to fill the void as long as it keeps up production. On the other hand, if gold production slackens among all the top gold companies, this will only push up the price even higher. It looks like it could be a win-win situation for this stock and its investors.
At the end of the day, Goldcorp looks like a strong stock worthy of attention these days. Despite a few hiccups this past quarter, I do not believe that there is any real reason to say it is struggling. Traders are becoming more bullish across the industry -- and rightly so, in my opinion.
Gross margins, at the time of writing, stand at over 57%, and I feel that the company has handled the Red Lake mine issues very well. Despite the small loss for the first quarter of this year, I think that this is a stock to be reckoned with, and I expect to see some very satisfied investors in Goldcorp over the course of the remainder of 2012.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.