The Market's Gift to You: Goldcorp Under $50
Jul 29th 2011 2:37PM
Updated Jul 29th 2011 2:38PM
It may sound funny, but I've been known to cheer when the mining stocks I own encounter temporary setbacks affecting production.
Given my underlying thesis that gold remains securely locked in a long-term bull market trend, a minor delay in getting gold out of the ground to me just means that the gold is likely to fetch higher prices down the road. For shareholders, it's a bit like holding exposure to gold in an underground vault. Markets, meanwhile, are notoriously short-term biased, so they're prone to presenting long-term investors with attractive entry points in the wake of these common hiccups.
Goldcorp (NYS: GG) hit a few snags during the second quarter that forced about a 170,000-ounce downward revision to estimated 2011 gold production. That may seem like a lot of the yellow stuff, but it represents only about a 6% revision from prior guidance of around 2.7 million ounces. A flooding event in the Dominican Republic forced joint-venture operator Barrick Gold (NYS: ABX) to delay commissioning of the Pueblo Viejo mine until mid-2012, while forest fires in Ontario took a small toll on output from the Musselwhilte mine. The new Penasquito mine accounts for the bulk of the revision, with ramp-up delays creeping into the final stretch. Goldcorp expects to have the issues resolved before the end of the year, with the operation reaching full capacity early in 2012.
As a result, Mackie Research cut its price target for Goldcorp by 4%, to just over $72, while of course maintaining its buy rating given the implied 47% gain from the current share price. Reflecting the preeminence of Penasquito among Silver Wheaton's (NYS: SLW) choice portfolio of silver streams, TD Newcrest shaved $1 from its $46 target price for the most profitable company in the world.
Before Fools decide whether they share the market's disappointment with Goldcorp's revised production targets, let's have a look at how the company fared financially through such a supposedly challenging quarter. The miner's adjusted net income surged 111% to $420 million, and cash flow expanded 84% to $717 million. Goldcorp produced nearly 600,000 ounces of gold at a cash cost of just $185 per ounce, yielding an expanded margin of $1,331 for every ounce sold. That cost came in well below the prior-year level thanks to skyrocketing credits for by-product copper, silver, lead, and zinc; even as rising cost pressures across the industry pushed the co-product cost upward to $553 per ounce. The miner bettered its 2011 cost guidance by $100 per ounce, setting a new standard for low-cost leaders like Yamana Gold (NYS: AUY) to follow.
Fools take note: Goldcorp referenced "strong potential upside" from regional exploration targets around the El Morro project in Chile. I remind Fools to consider the implications for my top 10 pick New Gold (ASE: NGD) , which holds a 30% stake in the project.
When you combine Goldcorp's unbridled financial success with an unaltered outlook for 60% production growth over the next five years, I believe the stock's dip back beneath $50 offers long-term investors a glistening opportunity to consider some exposure to the greatest of gold's major miners.
- Add Goldcorp to My Watchlist.
- Add Barrick Gold to My Watchlist.
- Add New Gold to My Watchlist.
- Add Silver Wheaton to My Watchlist.
- Add Newmont Mining to My Watchlist.
At the time this article was published Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Goldcorp, New Gold, and Silver Wheaton. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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