Update Goldcorp (GG)

09/10/2010 4:13 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

What you think of Goldcorp’s (GG) $3.4 billion bid for Andean Resources will depend on how impressed you are with Goldcorp’s track record valuing potential acquisition candidates.

There’s no doubt that Andean Resources’ (ANDPF) Cerro Negro project in Argentina is an attractive gold asset. The project isn’t scheduled to go into production until late 2012, but indicated reserves now come to 2.1 million ounces of gold and 20.6 million ounces of silver. Production costs project out as relatively low, a key criterion for any Goldcorp acquisition, at $60 an ounce after silver revenue.  Capital spending to get the mine up to production targets are a reasonable $275 million to $300 million, according to Goldcorp.

But, and it’s a huge BUT, the price that Goldcorp is paying is high—unless there’s a lot more gold in the ground here than the current indicated reserves show. At the current indicated reserve level, Goldcorp is paying $1,400 per reserve ounce. Recent deals by competitor Newmont Mining (NEM) have been at prices closer to $300 an ounce for reserves. (For more on my recent buy of Newmont, see my post http://jubakpicks.com/2010/09/03/buy-newmont-mining-nem/ )

At the price it’s paying for Andean Resources, it looks like Goldcorp believes that it can triple or quadruple indicated reserves at Cerro Negro. “We aren't buying Andean for a 3 million ounce resource,” Goldcorp CEO Chuck Jeannes told Reuters. “We wouldn't be surprised to see the indicated resource double in fairly short order.”

Some analysts, at least, agree. “Goldcorp is betting on the exploration potential of Cerro Negro,” UBS analyst Jo Battershill told Bloomberg.  “I believe there are 10 million ounces there.”

Goldcorp beat out an all stock offer from Eldorado Gold (EGO). That company withdrew its offer on September 7.

My take? Goldcorp has a solid but very aggressive track record of growing by acquisition. The company had only $70 million in revenue in 2000 and used acquisitions to climb to $2.7 billion in revenue in 2009 as the second largest gold miner. But Jeannes took over just 20 months ago as CEO from Kevin McArthur and I worry that he might be trying too hard to put a quick mark on the company.

I think the rising price of gold makes Goldcorp a hold but the risk does go up with this deal.

As of September 10, I’m leaving my Jubak’s Picks target price at $51 a share by December 2010.

Full disclosure: I don’t own shares of any company mentioned in this post in my personal portfolio.

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