Red-Hot Resources

"Luck is not chance, it’s toil; fortune’s expensive smile is earned.”

Thursday, February 21, 2008

Stock #1 -- Goldcorp


Macro Picture:

Global gold production fell to a 10-year low of 2,444 metric tonnes in 2007, according to Gold Fields Mineral Service. This year, production will likely drop again. While China is producing more gold -- up 12% -- South Africa's output is falling off a cliff, down 8.1%.

Gold miners are exploring frantically, but the mother lodes are getting harder to find. This should drive consolidation in the industry going forward as the big companies gobble up the smaller fish to replace their reserves.

The most active gold ETF, the streetTracks Gold Shares (GLD) , held 630 tons of gold at the end of January -- more than the European Central Bank or China's central bank. What's more, a new gold ETF in India is planned for this year.

In the short-term, we are seeing consumer demand in India, the world’s biggest gold buyer, pull back because prices are too high. However, the longer prices stay high, the more people get used to paying high prices. I think most gold buyers would consider anything below $900 cheap for gold – an excellent environment for a gold producer like GoldCorp.

Company Fundamentals

For my money, Goldcorp is one of the best gold producers in the world. It is certainly one of the lowest-cost producers, and one of the fastest growing multi-million ounce gold producers. It has 42.82 million ounces in proven and probable gold reserves – all of which is unhedged.

Big Reserves. Goldcorp has 1 billion ounces in proven and probable silver reserves, 1.5 billion pounds in copper reserves, 5.9 billion pounds in lead and 13.8 billion pounds of zinc! Whew!

The company probably produced 2.2 million ounces of gold in 2007. That should rise to 3.5 million ounces by 2011 – an increase of 59%.

The company has a history of finding more gold and silver than it mines. Its gold reserves and resources have tripled in the last year. Its silver reserves and resources have increased 10-fold!

Low Costs. Its cash costs are some of the lowest in the industry. However, over the next five years, the company estimates its cash costs will rise to an average $200 per ounce – still very low by industry standards.

Pipeline of Great Projects. Goldcorp already has 13 world-class mines and a pipeline of great projects. One new project, Los Filos, starts production very soon. Another, Penasquito, starts production late this year, and is possibly one of the best major development projects among the senior gold producers.

I think a trader could buy GoldCorp on the dips. It currently trades at $39.11, and my target is $58.

UPDATE: And then there's this just out this morning ...

Goldcorp posts record fourth-quarter profit
Vancouver's Goldcorp Inc. posted record fourth-quarter earnings and a 9% improvement in revenue, driven by higher realized gold prices and increased production. The gold mining company earned $256.5 million or 36 cents a share in its latest quarter, up from $66 million or 11 cents a year earlier. Earnings from continuing operations jumped to 28 cents a share from 9 cents.


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