Even with its recent losses, Goldcorp (GG) is still a very good buy given its growth potential and its high earnings per share. In the third quarter of 2012, the company posted earnings of $498 million, or $0.61 per share. This was a healthy increase of earnings compared to $336 million ($0.42 per share) in the third quarter of 2011. Production had fallen for much of 2012, however. The Canadian miner produced 578,600 ounces of gold during the second quarter of 2012 compared to production of 597,100 ounces of gold during the same period of 2011, representing a 20% drop. Much of this drop was blamed on problems at two of the company’s biggest mines; Red Lake in Ontario and Penasquito in Mexico. Problems reaching high grade ore at Red Lake and a water shortage at Pensaquito were driving up costs and cutting into production. The problems appear to have been solved as production for the third quarter stood at 592,500 ounces, an increase from 592,100 for the same period last year.
However, falling production is not the concern investors have with the company, rising costs are. It costs the company $660 per ounce of gold mined. That compares to $551 per ounce in 2011, and $619 per ounce for the second quarter of 2012. That is a very large production cost increase for just one year. This is cutting into both profits and earnings per share. These are the risks that are keeping Goldcorp’s shares down, even as the company is turning a profit.
If this continues, we could see similarities with one of Goldcorp’s competitors, Barrick Gold (ABX). Barrick has been losing value despite relatively high gold prices, and has seen its share price decline over 30% this year on declining income. Barrick is suffering from other issues as well, like poor management and an attempt to enter the copper mining business. But it still serves as a reason some investors are shaky on Goldcorp.
Despite these problems, Goldcorp is well-positioned for future growth. The company has several new mines ready to come online in the near future. In the Dominican Republic, the company owns 40% of the Pueblo Viejo mine, which is believed to contain 25.3 million ounces of gold. Mining has already begun at the site with a goal of mining between 68,000 and 85,000 ounces of gold by the end of the year. At Cochenour, near Red Lake in Ontario, the company is planning to mine between 250,000 and 270,000 ounces of gold per year, with production beginning in early 2014. Goldcorp believes there could be even more gold at the site and is continuing with exploration operations. Also going into production at the beginning of 2014 is the Eleonore mine near James Bay, Quebec. The mine will produce 600,000 ounces of gold per year for up to 15 years. The company is planning on spending around $400 per ounce to produce the gold at this site, so that will improve production costs considerably. Production has already begun at the Cerro Negro site in Argentina. This area is expected to produce 550,000 ounce per year, with a cost of less than $200 per ounce. This is a serious play for Goldcorp and one that could ease any lingering concern over production costs. The company has also entered into a partnership with New Gold (NGD) in the El Morro Project in Chile. This site will begin production in 2017 and is expected to produce 210,000 ounces of gold per year and 200 million pounds of copper.
While Goldcorp has had some rough times this past year, it seems to be emerging strongly from its downturn. It has many good projects just beginning production or about to begin production. A couple of them with substantial decreases in production cost – the main concern surrounding the company. These projects are expected to generate hundreds of thousands of ounces of gold per year. Goldcorp has probable gold reserves of almost 37 million ounces and estimated gold reserves top 60 million ounces. It also has proven silver reserves of 673 million ounces. Goldcorp has tremendous assets, and has proven ability to generate profit in the face of declining prices and rising costs.
Goldcorp appears to be a better buy than Rio Tinto (RIO) and Freeport-McMoRan (FCX) - two companies that are feeling the pinch of declining copper prices.
Goldcorp’s potential for growth is very high and for that reason investors should be bullish on the company. I expect gold prices to at worst stabilize, but given the uncertainty surrounding the global economy, it is highly likely gold prices will increase. With Goldcorp beginning production in areas that will see significant production cost declines, I expect Goldcorp has its best days ahead of it. The company has a high potential for leveraged profits and a demonstrated ability to generate profits, even in the face of low gold prices and increased costs. I believe its aggressive expansion in production will see this stock hit $65 by the end of spring and will double its current price before the end of 2013.