GoldCorp (NYSE: GG) should be a very good long-term investment as the price of gold rises and it corrals some of the production challenges it is facing at a couple of its mines. Those challenges are expected to stay visible into 2013, hampering gold production. For this reason it may be next year before one should consider investing in the company. Let's take a look at what the company is facing and how one could take advantage of the short-term challenges to create some income.
Slower Productions & Earnings
Not only did earnings drop 45% this quarter, but Goldcorp also warned that factors at a couple mines will continue to inhibit gold production into 2013. Earnings figures came in at $268 million or 26 cents per share, which was down from $489 million and 52 cents per share one year ago. The company also had to revise its production guidelines for the year since it was taking longer than anticipated to access the reserves at Red lake in the mine's high-grade zone. The 2012 guidance for gold production was lowered to a range of 2.35 to 2.45 million ounces, compared with the previous guidance of 2.6 million ounces. Not only was it harder than expected to get at the high grade ore, but grades of ore in other areas of the mine were also lower than expected. One would prudently assume that at Goldcorp's announcement of inhibited gold production into 2013, the challenges the company is running into extracting the ore this year will continue into the near future. In another misfortune, a lengthy drought at Peñasquito mine in Mexico has caused a water shortage. The company is drilling 10 new wells near the mine trying to get production back up to forecasted levels.
What could a company say that has been running into these misfortunes like it has? "Gold will rise soon!" is what CEO Chuck Jeannes has to say.
Weak economic conditions will continue to favor loose monetary policy for some time. And in this environment, I think we could see the gold price test the $2,000 mark in the next six to 12 months.
Well that's all good and well, but the ore still has to be pulled from the ground and it seems Goldcorp has done something to piss off Mother Nature. Between the drought in Mexico and the extraction difficulties at Red Lakes, the company sure did not ask for these natural hardships hampering production this year.
Pueblo Viejo is a Bright Spot for the Future
Another revenue stream is getting ready to flow for Goldcorp. The Pueblo Viejo mine in the Dominican Republic stockpiled more than 16 million tons of ore, which represents about 1.9 million contained ounces of gold. This joint venture with Barrick Gold (NYSE: ABX) is going to be the largest mine in the Dominican and will create a large and steady income stream for the company for a long time. From a long-term perspective, this is a good thing. It just may not be the right time to get into the company long term yet.
Looking at a short-term income play, I first need to consider where Gold itself is presently going.
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Considering Gold Prices
I believe it is always important to consider the price of the metal that a mining company is extracting. I like looking at the Gold ETF chart of (NYSE: GLD). If we look at the chart, we can see a slight breakthrough above the bearish trend line the stock has been following. Does this mean the stock is going to start moving up? In itself - no. But we must also keep in mind the possibility of the Fed loosening the money and providing some sort of assistance again soon. This could support the rise in the price of gold again. This being said, it is also important to point out that Goldcorp's troubles are not based upon gold prices, but production troubles. So whether or not this can have a great influence upon the direction of the stock in the short term remains to be seen.
The stock is currently still in a downward pattern, but it also looks like it could have built a double bottom base. It is pretty well defined but I cannot identify this and maintain the opinion that the stock will now go up. It is not uncommon for a stock to form a triple bottom, which means that Goldcorp has one more to go before it is done. Both the RSI and MACD are following the direction of the stock and there are no signals of possible reversals taking place. The only other observation I would make here is also bearish and that is that the stock looks like it is establishing the 50-day MA as a point of resistance. This is also bearish. Sitting at the top of the Bollinger bands, I would expect the stock to now move back down.
The Options Play
The stock is currently trading at 36.70. I am prone to trade this one with the long-term trend of the stock and seeing it near the top of the Bollinger Bands, I would expect a pullback even before it moves up.
- Buy an October 2012 put with a strike of '36' (priced at $2.10)
- Sell an October 2012 put with a strike of '35' (priced at $1.64)
- Net Debit to Start: $0.46
- Maximum Profit: $0.54
- Maximum Risk: net debit
- Maximum Length of Play: 2 months
Reasoning behind the Trade
- Follow the overall larger trend on the trade.
- Goldcorp has production issues and has lowered expectations for the year. Investors don't like this.