Some may find it enormously tempting to presume -- because the gold mining stocks as a group have failed to outperform gold bullion over recent years -- that in fact they never will. In my opinion, that would be a giant mistake!
Over the past five years, the well-known SPDR Gold Trust (NYSEMKT:GLD) bullion proxy has indeed soared past the disappointingly flat performance of the Market Vectors Gold Miners ETF (NYSEMKT:GDX). Before this secular bull market for gold has finished running its course, however, I maintain that the shares of quality gold producers will yield powerful outperformance of the metal itself. I expect outstanding performances like the 95% advance thus far for my top pick for gold in 2012 -- Primero Mining (NYSE:PPP) -- to grow entirely more commonplace as the gold price charges through $2,000 per ounce and aims for far higher heights. The alarming pace of cost escalation that has so ravaged top producers like Barrick Gold (NYSE:ABX) looks set to stabilize to some degree, and struggling underperformers like Kinross Gold (NYSE:KGC) have turned some painful lessons into a new way forward.
Through all the hard knocks of the past several years, one major gold producer has consistently stood out from the competition. That miner is Goldcorp (NYSE:GG), and today I wish to share an excerpt from a special report I've recently prepared for The Motley Fool that outlines what I consider one of the gold industry's premier investment opportunities. I strongly encourage investors to access the full report -- which includes a year of free updates to help navigate forthcoming developments -- by clicking here.
When it comes to layering reliably low-cost operations and a stunning growth outlook atop one of the gold industry's elite asset portfolios, Goldcorp simply has no equal. Particularly within this extremely constructive price environment for gold and silver, Goldcorp's peer-leading cash margins suffice to fuel continuous mine construction, keep the cash coffers stocked to support periodic acquisitions, sustain a highly successful exploration program, and even deliver a modest monthly dividend.
Following a rather legendary 1,350% advance over the 10-year period through April 2011, Goldcorp's stock has taken a bit of a breather. Nature's fury intervened in 2011, with severe flooding delaying start-up of the important Pueblo Viejo joint venture with Barrick Gold. Now in ramp-up mode, Pueblo Viejo is expected to supply Goldcorp with at least 415,000 ounces of gold at a very low cost over each of the first five years in production. In 2012, a trio of specific setbacks forced the miner to revise 2012 production guidance downward by about 8% to a range of 2.35 million-2.45 million ounces of gold. These challenges have applied the near-term brakes to the stock's previously stunning upward trajectory, yielding a more attractive entry price for long-term investors focused upon the potential for Goldcorp to surpass 4 million ounces of annual gold production by 2016.
With nearly 60% of the related capital budget already spent or committed, Goldcorp is well on its way to executing another transformational growth spurt over the next several years. Sporting ample liquidity of $3.2 billion, powerful cash-flow growth on the horizon, and a competitive average cost for mine construction beneath $170 per ounce, this proven mine-builder is strongly positioned to absorb any likely cost escalation associated with a build-out of this magnitude under current business conditions. If Goldcorp achieves its target, the company will have completed a 70% explosion in growth, and proven that the stock's persistent growth premium was well-warranted. It would represent an accomplishment that's unlikely to be repeated by a producer of its scale. In the entirely plausible event that this build-out encounters a hiccup or two along the way, the predictably short-term-oriented nature of market reactions to such setbacks stands to reward the long-term investor with timely buying opportunities.
In addition to the company's laudable record of well-crafted acquisitions, Goldcorp consistently has rewarded shareholders over the years with the industry's most efficient form of value creation: the organic growth of mineral reserves and resources discovered through exploration. The company's district-scale landholdings surrounding top mining camps like Red Lake in Ontario and Peñasquito in Mexico offer tremendous promise for exploration upside. For 2012, Goldcorp approved a gargantuan exploration budget of $226 million, and highlights of this effort to date include the discovery of a new gold zone and further extension of the known high-grade ore zone at the company's prolific Red Lake mine. Importantly, continued advancement of the five-kilometer tunnel connecting the Cochenour and Bruce Channel deposits to Goldcorp's existing mill complex at Red Lake provides an exciting platform for deep exploration of the prospective property in between. The gold ounces added to Goldcorp's underground treasure through mineral exploration represent significant drivers of shareholder value not only for their typical proximity to existing mine infrastructure and milling capacity, but also for their remarkably low discovery cost of just $14 per ounce!
Bullish price outlook
Although Goldcorp's low-cost production and looming expansion build a compelling investment thesis at current gold prices, we have a potential multiplier effect to consider with respect to the continued bullish outlook for prices of gold and silver. We mustn't overlook silver, since Goldcorp holds nearly 1.2 billion ounces of the stuff in reserves, and the metal's price retains a variable but unbreakable connection to the price of gold. The U.S. Federal Reserve's pledged commitment to zero-bound interest rates through at least mid-2015 – combined with further expansion of the Fed's balance sheet through the latest round of quantitative easing – are strongly supportive of further buoyancy in precious metal prices.
Bank of America Merrill Lynch sees gold prices reaching $2,400 per ounce by 2014, while Goldcorp CEO Chuck Jeannes has forecasted a shorter timeline for that same price objective. On the more bullish end of the spectrum, Goldcorp founder and former chairman and CEO Rob McEwen believes the monetary metal will ultimately touch $5,000 per ounce. No matter which of those bullish price scenarios one is more inclined to foresee, the clear implication for Goldcorp is an outlook for powerful share price leverage to further gains in price. The precise mechanism for that leverage is the cash flow growth prescribed by the miner's peer-leading cost profile and strong production growth trajectory.
Fool contributor Christopher Barker owns shares of Goldcorp (USA) and Primero Mining. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. 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.