Goldcorp: The Golden Con
January 11, 2008
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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.
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