Short-term production problems create buying opportunity in Goldcorp if you're building a long-term inflation hedge

07/11/2012 5:26 pm EST


Jim Jubak

Founder and Editor,

If you’re building a long-term gold position for the day when global central bank policy—run the printing presses—comes home to roost—in the form of higher inflation—today’s 10% drop in shares of Goldcorp (GG) is exactly the kind of dip on short-term bad news that you should be taking advantage of.

Yesterday, July 10, after the close in New York, Goldcorp cut its full-year 2012 production forecast to 2.35 million-2.45 million ounces of gold from a previous forecast of 2.6 million ounces. (The company also cut its forecast for silver production in 2012 from 30 million-31 million ounces for a previous forecast of 34 million ounces. Goldcorp left its copper forecast unchanged at 110 million pounds.)

I never like to see a gold company that I own—Goldcorp is a member of my Jubak’s Picks 12-18 month portfolio and my long-term Jubak Picks 50 portfolio --cut its production forecasts. That’s especially the case because I own Goldcorp because its potential to increase gold production is the best of the big gold mining companies. (I also own Goldcorp because the company has some of the lowest costs among big gold mining companies.)

But the problems at Goldcorp are the kind of short-term problems that all miners run into and these problems don’t look likely to reduce the company’s five-year production growth even as they hit 2012 growth.

The problems are concentrated at two mines.

At the company’s Penasquito mine in north-central Mexico drought has produced a water shortage that limited mine operations in June. The water shortage is expected to limit operations through the second half of 2012.

At the company’s Red Lake mine in Ontario the problem is geologic stress that has slowed production. The company has had to de-stress cuts in the high-grade zone at the mine due to continued seismic activity in the mine area. One de-stressing cut has been completed and a second is expected to be completed in the third quarter. The de-stressing work will also result in slightly higher capital spending at Red Lake and slightly higher production costs.

For the first half 2012 the company is forecasting by-product cash costs of $310 an ounce and co-product cash costs of $635 an ounce. Gold closed today at $1578 an ounce. (By-product costs deduct the value of copper, silver, etc. sold from the cost of the gold produced.)

In the short-run I think Goldcorp’s reduced production forecasts result in a 12% drop in discounted cash flow for 2012. On that basis—and on the continued strength in the U.S. dollar, which has depressed the price of gold—I’d reduce my end of 2012 target price for Goldcorp to $48 a share from my previous target of $55.

But since the problems that Goldcorp announced yesterday amount to postponing production rather than reducing it, I’d leave growth projections for any longer period—say five years—unchanged. You may have to wait longer, but the value of this gold stock as an inflation hedge remains intact.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Goldcorp as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at
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