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If gold is the can't-miss investment of the decade – and it is – then Goldcorp Inc. (NYSE: GG) is a can't-miss opportunity for investors.
We're talking about a company with huge, profitable gold reserves and no net debt, which means it's time to buy Goldcorp Inc. (**).
It was only a few short years ago that central bankers were the bane of gold and gold equity investors. This was the era when central banks loved to dump physical gold on the market at cheap prices. In fact, they loved it so much that they had to invent a selling quota system just to give everyone a fair chance to unload their precious metals.
But now things have changed. Non-stop money printing by central banks around the world and fears of sovereign debt contagion continue to drive the price of gold higher.
Indeed, gold has become the go-to investment of the past decade, turning gold producers into profitable growth centers.
And Goldcorp is in the perfect position to profit.
5 Keys to a Profitable Future
Gold prices are headed higher, but that's not all Goldcorp has going for it.
In fact, there are five things that set Goldcorp above other mining companies:
- It's the world's cheapest senior producer.
- It has the richest grade mine in large-scale production.
- The company maintains a completely un-hedged book of reserves.
- Goldcorp's portfolio is primarily based in stable nations.
- And the company has no net debt.
So let's take a closer look at Goldcorp's advantages.
First, there's one measure that I always make sure to take note of when I'm looking at a mining company, and that's the net cost to produce a unit.
No matter what it is, – ounces, pounds, or tons – net cost per unit is the end driver of growth and returns. It determines such things as the amount of free cash flow available for servicing debt or buying capital equipment.
And in this case it works to our advantage, because Goldcorp is the cheapest senior producer of gold. (Note: The term "senior" has to do with the volume of the product produced – not the age of the company.)
Goldcorp currently produces its gold at an average production cost of $188 per ounce, on a byproduct basis. On a co-product basis, the company had a cash cost of $504 per ounce.
In simple terms, this means Goldcorp produces gold for $504 an ounce on average when all mines are counted. However, it has so many other metal-based products that once you factor in the profits on the whole portfolio, the company is producing gold for less than $200 per total ounce.
The cheap costs are primarily driven by the Red Lake mine, which produces a significant percentage of the total ounces per quarter. Red Lake has consistently produced more than two ounces of gold per ton in the high-grade zone. This makes Red Lake the richest high volume production mine in the world. It currently produces nearly 200,000 ounces of gold per quarter, at a cash cost of $322 per ounce.
Goldcorp also has developed Mexican properties that are extremely "by product" profitable, such that the actual cost to produce gold is a negative $1,488 per ounce.
The revenue from the Red Lake mine has helped the company expand its asset base, without taking on upside profit sapping hedges. This has also allowed the company to grow its mix of projects without having to leverage its balance sheet.
Goldcorp enjoys a large and diverse mix of mining projects, with production spread out mainly in North America. That means that while the price of gold goes up, investors have a higher probability of capturing the move, because the assets won't be eviscerated by a change in government funding needs at the production location.
Finally, Goldcorp has no net debt. That is, it has more than $500 million in spare cash, after debt is taken into consideration. You have to love a company that is 100% unhedged to its product, has no net debt, $500 million in spare cash, and the lowest cost to produce in its peer group.
Goldcorp is one of those rare investment opportunities where you can buy a company that pays a dividend that is higher than a money market account, while holding unleveraged and unhedged assets.
So let's look to pick up some shares in the company by buying half our intended position right now at market. Then look to use limit orders during the next sector pull back to lower that cost. I would suggest putting in your limit order around $45 per share.
(**) Special Note of Disclosure: Jack Barnes has no interest in Goldcorp.
Barnes launched his own shop, RIA, in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008.
Barnes retired to the beach in the summer of 2009, and continues to write from there. He's now the author of the popular blog, "Confessions of a Macro Contrarian," and his "Buy, Sell or Hold" column appears in Money Morning on Mondays. In his BSH column last week, Barnes analyzed Pan American Silver Corp. (Nasdaq: PAAS)
News and Related Story Links:
First Quarter 2011 Earnings
- Money Morning News Archive:
Previous "Buy, Sell or Hold" Features.
Confessions of a Macro Contrarian.