Gold Still Glitters

11/18/2008 1:40 pm EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Roger Conrad and Yiannis Mostrous, editors of Vital Resource Investor, continue to like the precious metal.

Portfolio holding Goldcorp (NYSE: GG) is our favorite major gold company. The acquisition of Glamis Gold in late 2006 vaulted Goldcorp to the forefront of global gold producers. The company now has growing gold production, low cash costs, solid earnings generating ability, large reserves, strong balance sheet, and one of the most respected management teams in the industry. In terms of cash position, it has the best of the senior gold producers, sitting on USD454 million.

In the third quarter of 2008, the company reported higher output with higher costs versus year-earlier totals. Specifically, output reached 550,500 ounces at a total cash cost of USD346 per ounce, compared to 524,000 ounces at a cash cost of USD160 per ounce a year earlier. The realized selling price was USD865 per ounce for the quarter. Net earnings increased to USD297.2 million, or 42 cents per share, from USD75.8 million, or 11 cents per share, in the same period last year.

Overall, Goldcorp has been doing an excellent job of controlling costs, and we expect that this will continue in coming quarters. Costs will rise in line with the industry’s norm, but we believe the company will keep a lid on them.

Goldcorp announced a friendly offer of USDD1.5 billion cash and stock in June for Gold Eagle Mines, which owned the Bruce Channel discovery zone—now a Cochenour-Willans mine property—which is located adjacent to Goldcorp’s Red Lake mine. According to industry sources, the mine has a solid gold deposit that will fit in well with Goldcorp’s resource base. The acquisition was completed Sept. 25 after Gold Eagle shareholders approved the deal, upon which Goldcorp paid USD701.3 million in cash and 15.6 million common shares.

Management has calculated a purchase price of less than USD650 per ounce and that the mine has close to 7 million ounces of gold to mine. Development time will be between four and five years.

Elsewhere, the company is on time and on budget with its expansion projects and should increase gold output from 2.4 million ounces this year to 4 million in 2012. Its strong balance sheet will allow for easy project financing, which will add straight to the bottom line. Goldcorp remains a buy at current prices.

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