Goldcorp Inc. (TSX:G)(NYSE:GG) was once a favourite for those looking for exposure to the gold mining space. However, over the past year, while its competitors saw significant increases in share price, Goldcorp floundered, leaving many investors confused and frustrated.
To make matters worse, shares dropped by 7% at the end of March because investors were displeased with a recent announcement. Essentially, Goldcorp is gaining 50% exposure to the Cerro Casale project in Chile. In total, it’s spending approximately US$1 billion to buy 25% from Barrick Gold Corp. plus an additional 25% from Kinross Gold.
But why are investors displeased with this? There are a few reasons.
First, the region is undeveloped and, for the most part, companies have found it difficult to discover deposits of any significance. Second, investors are concerned that the gold industry is moving back into mega projects that once harmed the industry earlier in the decade. And finally, it still has to spend US$280 million in investment and deferred payment obligations to Barrick.
What no one is really talking about is the US$185 million acquisition of Exeter Resource, which also has exposure in Chile and is incredibly exciting for Goldcorp. Based on an analysis conducted in 2014, Exeter was going to produce approximately 122,000 of gold equivalent ounces with the mine existing for over a decade. It was anticipated that the all-in sustaining costs (AISC) would be approximately US$676 per ounce, so the potential for high-margin gold is there. And none of this takes into consideration the tens of millions of ounces of gold buried much deeper underground.
Unfortunately, investors are, in the short term, punishing Goldcorp for the first major acquisition and not rewarding it for the second acquisition. However, I expect both of these deals to provide lucrative returns for investors. It’ll just take some time for the overall market to realize that.
But here’s the thing … none of this matters if you are not bullish on gold, because Goldcorp, being a miner, should follow the spot price quite closely.
Gold tends to be the type of commodity that rises and falls based on fear. If there is concern that there will be economic uncertainty, investors will move more of their assets into gold because it’s a “safe haven.” From an industrial perspective, there just aren’t that many uses for gold, and jewelry only goes so far.
What major event could harm the economy and send money to gold? One is Brexit, which could have an impact on the European economy over the next couple of years. Then there are the Italian banks that are in need of some serious help. If they don’t receive it, they could pull the entire E.U. down. And then there’s the potential geopolitical risks in the Middle East with Donald Trump launching missiles.
All in all, Goldcorp is an interesting opportunity for those who are bullish on gold. It has made a series of smart acquisitions that could result in growing margins in the next few years. And if it can keep its AISC down, I expect investors will reward this company. Taking a small position could be prudent.
