by Mark Goldstein
While Goldcorp (GG) recently beat Barrick Gold (ABX) in a lawsuit regarding the ownership rights to an extremely lucrative gold and copper mining project, the win only paints part of the picture for Goldcorp's overall position in 2012. Goldcorp investors haven't gotten a whole lot of good news this year. The company's share price is down over 25%, and is currently near its 52-week low. It offers a small dividend, though nothing to write home about, and the company will need more good news to follow if it wants to stay ahead of the decline facing gold miners right now. In this article, I will show that, while the lawsuit victory is good for the company, investors should not forget that the gold industry is struggling overall.
First, The Good News
The lawsuit involves the ownership rights to the El Morro gold-copper project in Chile. Originally, the lawsuit began as a case that Barrick Gold filed against Goldcorp, a far smaller company, but still a major competitor. Some good news for Goldcorp stockholders -- the underdog came out on top.
El Morro is the biggest copper and gold reserve in Latin America. Recently, Goldcorp signed an agreement whereby it would acquire a 70% stake in the El Morro project, owned by Xstrata (XTA). Barrick Gold initially had a deal with Xstrata to buy a stake in the project. However, New Gold (NGD), a minority stakeholder in the project, refused Barrick Gold's offer. This was well within the boundaries of the law, as the right of first refusal was in place. When this happened, Goldcorp took advantage of the situation and put in its own bid. Goldcorp's bid was accepted.
Understandably, Barrick Gold was less than thrilled to lose the opportunity to benefit from this project. It therefore filed the lawsuit against Xstrata, New Gold and Goldcorp. Its claim was that the right of first refusal was invalid and that this 'illegal' refusal interfered with its right to acquire a stake in the company. However, the court overruled this clam, siding with Goldcorp. This is great news for investors in the Canadian-based gold company, as it means that there will be a long future of good returns to look forward to as a result of Goldcorp's productivity at the El Morro mine.
The victory also comes on the heels of Goldcorp's recent announcement that its expectation for production costs has increased. The company still has a $27 billion market cap, so the production costs won't drive it out of business. It just needs more good news like the Barrick win to buoy its revenue and reputation.
Barrick Gold is intent on pursuing the matter further, but for now, Goldcorp is on top. Goldcorp needs to keep a close eye on Barrick Gold's activities so it can stay ahead of any plans the larger company may have to reinforce its supposed claim to its El Morro stake. However, many believe that the judge's ruling will, in fact, herald the end of the long dispute between the two mining companies and bring peace for shareholders at both.
In addition, many who've commented on the situation believe that this win and the acquisition of the 70% El Morro stake could cause Goldcorp's stock to jump considerably in the very near future. I don't necessarily see that happening, though, as production costs are rising and gold is not necessarily the hot selling commodity it once was. Goldcorp is down almost 35% from it where it was this time last year, which is unfortunate for investors, but suggests that there is some room for growth. It will need more than that to get there, though.
As for Barrick Gold, its numbers this year are about as poor as Goldcorp's. It is down almost 25% year to date. The company recently brought in a new CFO, but I don't believe that will help much. Barrick Gold may be in scalding water, and this loss to Goldcorp could sting even worse. The company offers a $0.20 dividend, which is 4x higher than Goldcorp. Barrick Gold has that going for it just not much else.
Still A Struggling Sector
These companies certainly are not alone. No one in mining is doing particularly well right now, and most companies are down somewhere near 20% in 2012. There's some hope in sight, with possible increases in demand coming from India and Asia in general, but these may be too little too late for the coming quarters.
AngloGold Ashanti (AU) is down 10 points in 2012, and is also trading near its 52-week low. It's still the largest gold miner in South Africa, and has a $12 billion market cap. Still, AngloGold has some big-name backers, including John Paulson, who sees something in the company's future.
Goldcorp is currently sitting on total cash of $1.47 billion, and total debt of $748 million. The company has a profit margin of 31% and an operating margin of 45%. Goldcorp's victory is certainly a positive. However, with the industry at large struggling as it is, the good news is only good inasmuch as it helps Goldcorp weather the storm. Of course, we don't know how big that storm is or how long it will last, so I recommend avoiding Goldcorp for now.