Goldcorp, Inc. (USA) (NYSE:GG)

CAPS Rating: 3 out of 5

The Company is engaged in the acquisition, exploration, development and operation of precious metal properties.


Player Avatar FoolSolo (69.58) Submitted: 2/20/2011 1:51:55 PM : Outperform Start Price: $45.80 GG Score: -21.08

I'm just getting into gold and precious metals, so I've been doing a bit of research and I like what I see in Gold Corp (GG), for a number of reasons. First, their performance over the past 10 years is superior to just about any other gold producer; up 1400%, whereas gold itself is up 420%, and the rest of the sector is up just 670%. Clearly GG is outperforming the sector and most of its peers. Secondly, GG is diversified. Besides being one of the largest gold producers, they are also one of the world's largest silver producers, expected to produce over 40 million ounces of silver in 2011, up from 32 million in 2010. They also mine copper, zinc and other metals. All very good to have in this market.Third, they seem to be smart about their growth and acquisition plays, with their most recent acquisition; Argentina-focused Andean Resources for C$3.6 billion, which was approved on 12/30/2010. Recent vein discoveries at Andean's Cerro Negro project in Argentina helped to nearly double gold reserves and resources at the site. How significant is this acquisition? A week ago GG reported they had increased proven and probable gold reserves in 2010 by 23 percent to 60.1 million ounces, and its measured and indicated gold resources increased 13 percent to 25.7 million ounces, following recent discoveries at its gold projects in Argentina and Canada.Finally, what I like most about the company is management's aggressive growth strategies and their prowess in executing those strategies. Here are some of their activities; I discovered in their Q3 report that costs were going up and production was slowing down in their San Dimas mines in Mexico, so they sold it off to Primero, and got $213 million in cash, plus 31 million shares of Primero, a 36% stake. And within a month, they put that cash to use in the Andean Resources deal. Besides Primero, GG also had a 58.1% controlling interest in Terrane Metals Corp., which they sold in October/2010 for C$240.5 million in cash plus 13.9 million common shares (8%) of Thompson Creek Metals. They also have 40% equity interest in Tahoe Resources, a publicly traded company in silver exploration and development, including the Escobal silver project Tahoe purchased from Goldcorp on June 8, 2010. As you can see, this management team is not sitting idle, they're rocking and rolling, which is why they're growing and have averaged over 70% sales growth the past 5 years.According to the CEO, Chuck Jeannes, they have a proven and unique way of keeping costs low. As example, their cost per ounce of gold in 2009 was $192, in 2010 it was $285/ounce. They are estimating the cost will go up to about $475-$500/ounce in 2011, based on the price of gold. That trend seems ominous on the surface, but it is quite normal for miners in a price appreciation market like we have seen in the past three years. Contrast this with the rest of the sector and you get a glimpse of how efficient GG is at cost control. According to an article in Mining Weekly, analysts estimate that, on average, tier one gold producers had all-in costs of $582/oz in 2009, while tier two companies were slightly worse off, at $634/oz. Forbes estimates industry-wide cash cost per ounce is believed to have risen, on average, from roughly $150 per ounce in 2001 to about $450 per ounce in 2009 across the industry. Given these comparisons, GG seems to be a rare breed, which is why GG has one of the highest profit margins in the sector at 41%.For the financials, I again turned to Gold Corp's 3rd Quarter report published 9/30/2010, the most recent in publication as far as I can tell, located on their site: Revs in Q3 were $885.8M, up from $692 Q/Q, and $844.3M in the June quarter. They sold 568 million of the 596 million gold ounces they produced, for an average price of $1,239/oz, which is up from $968/oz Q/Q. This produced $408.6M in cash flow from operations for GG, with net earnings of $466.5M, or $0.63/share of stock, versus $114.2M or $0.16/share Q/Q, that's more than 400% better than one year ago. GG paid $33.2 million in dividends to share holders (0.80% yield, 9.94% payout ratio), and ended Q3 with $732 million in cash. Of course, the 28% increase in the price of gold is attributable for most of this gain. If you've read some of my other rants about the erosion of the US$, and the currency war we're in, then you already know why I believe precious metals, energy and raw materials are a good hedge against erosion of the US$. In conclusion, I believe Gold Corp. represents a sound investment in precious metals, which are largely currency neutral. Their diverstity, and apparent leadership in the sector means they will continue to benefit from the rising appreciation in precious metals, as inflation rises along with incresed deficit spending, and the US$ erodes further. As such, I will look to open a real position in GG very soon, either by buying their shares directly, or through bullish stock options.

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Member Avatar FoolSolo (69.58) Submitted: 2/20/2011 1:55:38 PM
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I wish I knew how to insert paragraph breaks... the Fool posting interface seems to strip out all the line breaks and crunch all the text together. Sorry.

Member Avatar awallejr (77.67) Submitted: 2/25/2011 8:10:21 PM
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Hit enter twice.

As I just did. Tried reading your pitch but did start going cross-eyed ;/

Member Avatar LohnRanger (< 20) Submitted: 3/3/2011 2:00:37 PM
Recs: 0

nice job Solo! I couldn't agree more!

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