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Goldcorp: The Golden Con

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January 11, 2008 – Comments (10) | RELATED TICKERS: GG

Read my posts, How I Discovered the Gold Bubble, The CopperCorp Disaster, Goldcorp: The Oxymoron of Fiat Creation, and you might get a sense that I don't like Goldcorp.  The reason are extensively supported.

 

Goldcorp is up, way up and it simply has inflated book value just like real estate, perhaps more so, and it has grossly declining earnings despite the fact that gold price is up considerably.

Their January 8th press release reports that in 2007 production increased 35%, to the high end of their guidance range of 2.2 to 2.3 million ounces.  The first question with Goldcorp begs which guidance?

I start following Goldcorp in the fall of 2006.  At the time whatever source I was using was promoting that they would mine 2.8 million ounces for 2007, I put that in even another blog.  That 2.8 million ounces was already a reduced estimate from about a month earlier that was in a BMO "expert" analysis, by Geoff Stanley.  On page 3 it says Goldcorp is expected to produce 3 million ounces.  This "expert" is quite the analyst as well, he estimates they would earn 89c/share for 2007.  Well, with 9 months of reporting so Goldcorp's earnings are 29c, or 45% of Stanley's 9 month estimate. I haven't been following Goldcorp that closely lately, but they never make Stanley's estimate with earnings, unless they have an investment sale.

But, back to meeting that "higher" level of guidance, it is 76% of Stanley's estimate, or 24% below that report's expecations.  Last May the guidance had been reduced to 2.5 million, as that was what I was using for the graphs in the oxymoron of fiat creation post.  

Goldcorp reports that they did not meet their guidance of $150/oz cash costs because the price of copper is down, even though they had the highest level of gold production they've ever had.  Cash costs are calculated by taking the base metal and silver revenue and subtracting those profits off the gold mining costs and then brag about being a low cost producer.  Too many people when they read this double count the base metal and silver production.  It is already included in how they came up the cash costs figure.  At one time Goldcorp's cash costs were -$163.  That would mean that the price of gold would have to go up $313/oz to have the same profitability per ounce.

They estimate that cash costs are going up yet another $100/per ounce for 2008, so gold has to go up $100/oz to maintain profitability. 

When I was looking at Goldcorp last year I couldn't see they could make 50c.  The Glamis merger reduced effective earnings to 67c/share and then copper price had really decline.  It is appearing that I was bang on in my projection.

The share dilution has been enormous for Goldcorp and one excercise I did was a spotty fully diluted market cap versus time rather than share price versus time.  Fully diluted Goldcorp has about 721 million shares, which at today's price gives a market cap of $27.3 billion.  I had to add that to the graph that I made for the Oxymoron post.

The gold production per 1000 shares graph was based on 2.5 million ounces.  What they really did was 3.18 ounces of production for each 1000 shares, about the same as 2004, when the market cap was about $3 billion.

But heck, if you think it is reasonable to have about $12,000 invested to mine a single ounce of gold, of which 87% goes to paying costs, then Goldcorp is a buy. 

In any event, in this time of asset price inflation, read the oxymoron post about how Goldcorp created $6 billion of book value with the Glamis merger. 

10 Comments – Post Your Own

#1) On January 11, 2008 at 1:52 AM, MakeItSeven (32.31) wrote:

The report from Stanley was rather old so he migh tnot have taken into account the appreciation of the Canadian dollar (and hence the mining cost).  The earning was .90 in 2006 and the consensus is for .60 last year and .98 this year.   GG has reported .44 for the first 3 quarter of 2007 according to Zacks.

I agree with you that GG is bloated.   I have not touched it since 2006.

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#2) On January 11, 2008 at 2:37 AM, dwot (40.39) wrote:

I think he completely failed to come up with a valuation for what the Glamis merger did and also failed to take into consideration the decling grade of the reserves which increases costs through the roof.

There is a potential that Goldcorp will show a very good earnings once they tunnel to that massive vien they found.  But then they do the same thing over a couple years, where they had about 100g/ton and now down to 30 g/ton.  

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#3) On January 11, 2008 at 7:01 AM, camistocks (< 20) wrote:

Nevertheless, it seems the market likes GG. Remember I told you it would sell for a PE of 100? Well it's almost the case. There's much more to come...

 

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#4) On January 11, 2008 at 9:19 AM, dwot (40.39) wrote:

I don't remember that.  I remember telling you that despite their production going up, 35% over the year, their earnings would plummet.  So, for the first 9 months earnings from operations is 25c versus 90c yet production is up 35%. 

Production over the 9 months is probably up more than 35% because Glamis production started to be counted in Goldcorp in the 4th quarter of 2006. 

But without that, their earnings per ounce have effective declined to 21% of what they were for the first 9 months of 2006.

The adjustments somehow add 4c/share, and with that it is 25% of last year.

You also did an extrapolation where anticipated an increase in earnings because of increase production.  Look at the chart you posted, 4 quarters in a row of declining earnings. 

This is an extremely stupid valuation level.  Mines are like cars, depreciating assets.  As the gold is mined and sold you eventually end up with just a hold in the ground.  If anything, a mine should be demanding depreciation and inflation into its valuation.  Valuing a mining company at a P/E of 100 is like expecting that the existing mines will last 100 years.  Gold mines tend to last 10-12 years. 

My conclusions a year ago that gold needed to increase by $230/oz, which was when the US dollar was 1.19 Canadian, to maintain earnings were entirely correct.  With currency changes they need about $275/oz. 

I don't remember every I looked at to come up with that conclusion, so now that they've increased their production guidance to $250/oz I am not sure if it should be added to the $230 or the $275 figure.  But it is fair to say that gold is only now in the price range to catch up to prior earnings.

I still think Goldcorp is, at best, a $10 stock.  This stock is up strictly because of hype, not fundamentals. 

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#5) On January 11, 2008 at 9:26 AM, Jro81 (< 20) wrote:

You are probably correct with your assessment but you see when CNBC talks about the Gold price going up .... Most of there viewers run to buy a gold stock .... I guess Barrick is too high so they buy Goldcorp .....

 Jared

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#6) On January 11, 2008 at 9:44 AM, dwot (40.39) wrote:

And Barrick has millions of ounces of gold hedged at something like $400/oz once they get new mines built.

These gold companies are the biggest scam artists out there.  The Barrick press release goes something like no hedging on existing production.  And people simply miss what they are trying to hide. 

But, Barrick currently has far superior earnings to Goldcorp and they've tended to report production costs on a metal allocation basis as opposed to this "you can get away with it because investors are that stupid" cash costs method.

I haven't put the hours upon hours of analysis into Barrick so I have no opinion as to the quality of their earnings.

I think Goldcorp takes a big hit to earnings because of declining base metal prices.  If you look at their 2006 earnings, it was pretty bad that about 60% of their earnings came from a part ownership of a copper mine.  Only about 25% of earnings came from Red Deer, "Canada's richest gold mine." 

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#7) On January 11, 2008 at 4:43 PM, XMFSinchiruna (27.64) wrote:

dwot, I really enjoy your posts and the quality of your research.  Keep it coming!  While I am extremely bullish on most gold stocks, I also will not touch GG.  I can't remember whether I have it as one of my CAPS picks, as I might have thrown it in there just as a chance to watch it, but in real life it's not one I want to own.  I had been a Glamis shareholder before the buyout, and was outraged by the deal.  But there are a lot of gold miners that in my opinion have very strong fundamentals behind their current share prices, and many which remain quite undervalued given the recent rise in gold prices.

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#8) On January 11, 2008 at 11:14 PM, abitare (31.21) wrote:

I like your analysis and sold my gg.

FYI - "Mozilo severance: $110 million and change

If he engineers a sale of battered Countrywide Financial to Bank of America, Countrywide CEO Angelo Mozilo stands to walk away with a severance package worth more than $110 million, the Los Angeles Times' Kathy Kristof reports tonight.

Such a payout would come on top of huge gains Mozilo has made selling Countrywide stock during the mortgage crisis."

http://latimesblogs.latimes.com/laland/2008/01/mozilo-severa...

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#9) On January 12, 2008 at 12:59 AM, dwot (40.39) wrote:

Sinchiruna, I suppose I don't buy into the valuation methods people are using for gold stocks.  There is so much valuation being given for what's in the ground, but very little of that is turned into actual earnings, and something like Goldcorp needs to build a new mine every year just for replacement.

abitarecatania, I saw that, and he also cashed in $440 million in options before the stock tanked as well.

Goldcorp is probably going to go up further before it comes down. 

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#10) On January 13, 2008 at 4:31 PM, dwot (40.39) wrote:

I am just having a look at the amount of income that needs to be made up from copper price decline and I get about $380 million.

So, it looks like gold has to go up about $150/oz to make up for copper declines.  It has to go up about $100/oz to make up for currency losses.  So gold has just gotten into a price range to enable it match 2006 weighted average earnings.  If you take Glamis and Goldcorp's earnings, add them and then average it over the total stock after the merger you get about 67c/share.

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