A Miner With the Midas Touch
11/02/2009 12:45 pm EST
Yiannis G. Mostrous, editor of Silk Road Investor and associate editor of Personal Finance, picks Goldcorp as the top play on rising gold prices.
Gold deserves a place in every well-diversified portfolio because of its status as a store of value over time. Gold tends to maintain its value relative to other goods in the economy, a characteristic that qualifies it as a hedge against both deflation and inflation.
The Midas metal has languished before. But the price of gold has trended upward for the past 10 years, rising from approximately $250 per ounce earlier this decade to above $1,000 this year. Consider any pullback in the gold price an opportunity to add to your positions.
Goldcorp (NYSE: GG) is our favorite major gold company. The acquisition of Glamis Goldin late 2006 vaulted Goldcorp to the forefront of global producers. The company now has growing production, low cash costs, solid earnings-generating ability, large reserves, a strong balance sheet and one of the most respected management teams in the industry.
Three characteristics make Goldcorp a desirable holding for any portfolio. Much of its production is located in relatively safe jurisdictions such as Canada, Argentina, Mexico and Australia; it pays a monthly dividend; and it doesn’t hedge its production.
Goldcorp is also the fastest-growing senior gold producer and generates the best margins in the industry. The company has a strong balance sheet with $866 million in cash, and management forecasts average annual cash flow of $1 billion for the next five years. In a recent speech in Denver, CEO Chuck Jeannes reiterated management’s forecast that Goldcorp will produce 2.3 million ounces of gold at a production cost of $365 per ounce, net of byproduct credits, in 2009.
Goldcorp is on track to deliver on its three main development projects in 2009. The company’s largest effort, Peñasquito in Mexico, is expected to begin commercial production in January 2010 and achieve and full milling capacity by the second half of 2011. Now 83% complete, Peñasquito, with proven and probable gold reserves of 17.4 million ounces, will be Mexico’s largest open-pit mine. Execution remains the crucial point for management.
The company has said that it won’t issue equity or debt, despite the strong gold markets, because it has enough cash on hand to develop its growth projects. Management has been looking outside North America for acquisition targets but has yet to identify a target that presents sufficient opportunity at reasonable risk.
That said, Goldcorp recently disclosed the purchase of around 13% of the outstanding shares of Canada-based Osisko Mining (TSX: OSK, OTC: OSKFF). Goldcorp is a buy up to $45. [Shares traded in the vicinity of $38 at midday Monday—Editor.]