The Market's Gift to You: Goldcorp Under $50

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 (NYSE: 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 (NYSE: 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 (NYSE: 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 (NYSE: 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 (AMEX: 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.

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.


Read/Post Comments (4) | Recommend This Article (16)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 29, 2011, at 6:06 PM, jargonific wrote:

    How does GG earn its capital and back paper with gold? Been reading that in some cases the paper versions of Gold are not being recommended right now. There are buys on physical gold, but note too that there will be options expiring..

  • Report this Comment On July 29, 2011, at 7:10 PM, XMFSinchiruna wrote:

    jargonific,

    References to paper gold are not references to miners, but most often to bullion ETFs like GLD, unallocated gold certificates, futures contracts, derivatives, and other financial instruments based upon gold.

    GG and all other unhedged miners have access to the real deal ... they do then turn it in for paper money, but plenty of it. :)

    Here's some background for you on that topic:

    http://www.fool.com/investing/general/2010/04/05/is-your-saf...

  • Report this Comment On July 29, 2011, at 10:06 PM, EllenBrandtPhD wrote:

    Chris, Thanks for the story.

    GG supporters far outweigh detractors and will continue to do so.

    Bur the issue isn't GG per se, but the entire XAU and TSX Gold indices being egregiously undervalued relative to the price of Gold and Silver.

    For instance, many of the major index components are trading at about the same place they were this time last year, while the Price of Gold is 39 percent higher and the Price of Silver up even more dramarically.

    In fact, historians of the sector say that when Gold was at 1500 - about a week ago! - the important and much watched XAU to POG ratio was at its lowest point in close to 30 years. Now POG is over 100 higher, meaning the XAU to POG ratio is probably at its lowest in 32, 34, 37 years??

    No less a figure than Pierre Lassonde, who knows as much about Gold as anyone alive, commented publically a couple of days ago about this astonishing decades-low ratio of XAU - and TSX Gold - to POG.

    One upshot is that any analyst downgrading major index components, like GG, is acting absurdly. GG and the others somehow deserve LOWER targets than they did when Gold was at 1100 and Silver was at - what? - 12 or 14?

    And most veterans of this sector now believe we will end this year at 1750 or so Gold, with targets of 2100 at the end of 2012, and the achievement - finally! - of the proper inflation adjusted Gold price target, 2400, at the end of 2013.

    Let's hope every loyal Gold stock manager and Gold stock owner starts talking loudly about the XAU to POG ratio's abysmal unfairness in the days, months, and weeks ahead.

  • Report this Comment On July 30, 2011, at 12:24 AM, skypilot2005 wrote:

    Brigus Continues to Intersect High Grade Gold at the 147 Gold Zone at the Black Fox Complex

    Thursday July 28, 2011

    http://finance.yahoo.com/news/Brigus-Continues-to-Intersect-...

    Sky Pilot

    Official Web Link Assistant to Sinch

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