What a difference a quarter makes for a company. Do you remember Goldcorp (GG) in the second quarter; it did not look like anything would work for it. Revenues were falling; these two operational setbacks with Penasquito and Red Lake were just looming and looking bad. At the same time, inflationary pressures where increasing costs in project developments. As an example, the cost of the Pascua Lama gold mine on the border between Chile and Argentina will likely rise by 50 to 60 percent.
These two problems scared investors.
Red Lake in Ontario
We heard in the second quarter that the Red Lake mine encountered lower grades of ore and the distressing work was moving slower than expected. This quarter we are learning that the distressing work has been completed and stronger gold production has been the result. Not only has production been better, but access to higher grade ore has also improved with the discovery of a new high grade zone. This will give the company greater flexibility in future production.
Water shortage in Penasquito
We learned the second quarter that water shortages were hitting milling activity and this could hold back gold production the second half of the year. For this reason the company was drilling additional wells and working on creating improved water efficiency. Now we know that while a study is underway to deal with the crisis, there is enough water in the mine to reach its 2-12 production guidance.
Leaving these two project problems in the past, the company now has a nice turnaround compared to the second quarter. One bright spot is its third quarter revenue record. Increased production plus higher sales at higher prices equals record revenues. It increased by 17.3% year over year. Both gold and silver production was higher and the mining giant posted adjusted earnings of US$441-million, or US$0.54 a share, well above the consensus analyst estimate of US$0.46.
With this bright spot comes recent support from analysts. Some believe the stock has plenty of room to move up. Barclay's Capital gives it an overweight rating with a price target of $62.00 and Canaccord Genuity raised its price target from $53.00 to $62.50 with a buy rating in October.
After an over bought signal from the RSI indicator, the stock reacted accordingly and backed off from its high. Since that time it has been in a mild bearish pattern. This gentle sloping movement has brought both the MACD and RSI to a neutral position on the stock. As it hugs the 50 day MA, I do not believe any new directional pattern can be revealed from the chart. The Bollinger Band still slopes down and the stock could move up or down within the bands. More revelation may come since third quarter results were in and if gold continues to go up or not.
The Options Play
The stock is presently trading at 44.10 and I do not see a strong enough pattern to rely on. But with the fiscal cliff influence and believing gold will go up in the short term, I would be more apt to create a short term bullish income strategy.
- Buy the January 2013 call with a strike of '44' (priced at $2.76)
- Sell the January 2013 call with a strike of '45' (priced at $2.23)
- Net Debit to Start: $0.53
- Maximum Profit: $0.47
- Maximum Risk: net debit
- Maximum Length of Play: 3 months
Reasoning behind the Trade
- Good third quarter movement may lift stock
- Fiscal Cliff fiasco could temporarily lift gold prices