Goldcorp Hunts for Growth in Africa
Goldcorp (NYSE:GG) is the largest gold mining company by market capitalization [tied with Barrick Gold (NYSE:ABX)], although it produces less than half the gold that Barrick produces. One of the reasons for this is that Goldcorp is a growing company. The company has two mines coming online this year that will increase annual production by over 20 percent — Eleonore and Cerro Negro.
But after these two mines come online Goldcorp doesn’t have any significant growth prospects. Furthermore, several of its assets are depleting rapidly, and the company either needs to expand these resources or find new ones.
Given the company’s activities this year it seems that management is opting for the latter. Earlier in the year the company pursued Osisko Mining, which was eventually bought out by Agnico Eagle (NYSE:AEM) and Yamana Gold (NYSE:AUY). More recently we learned that Goldcorp was in talks with Newmont Mining (NYSE:NEM) to buy its Ahaho and Akyem Mines in Ghana.
This is a departure from Goldcorp’s past strategy of buying and operating assets in the Western Hemisphere. However, there is a logic to Goldcorp’s interest in Ghana, and while talks with Newmont seem to have faded I think Goldcorp will and should continue to pursue this option. Africa has often been considered to be off limits for many investors, as they are concerned over the volatile political situations in many African countries. But some African countries are riskier than others. This last fact should seem obvious, but except in rare cases the market does not make this distinction. With this in mind there is an opportunity in African gold mines in low-risk mining jurisdictions, and Ghana is one of them.
Ghana is a politically stable country. Furthermore, Ghana supports mining, as is evidenced by the partnerships we see between the government and mining companies. Companies have to give up some of their profits, but they get a lot in return, making investment worthwhile in many cases.
With this in mind, I wouldn’t be surprised to see Goldcorp take its first step out of the Western Hemisphere into Ghana. Ghana has several undervalued and highly economical assets, and it wouldn’t surprise me to see Goldcorp buy some of them in order to generate growth. But which assets will Goldcorp buy?
First, I wouldn’t rule out a deal with Newmont Mining. Newmont has its own growth issues, which would make the sale of its Ghana assets seem counterproductive, but at the same time Newmont has a pretty sizable debt position of $6.8 billion, and by selling these assets Newmont could clean up its balance sheet. Right now these assets generate nearly $1 billion in annual revenue and about $150 million in annual profits, and so this would be a multi-billion dollar deal for Goldcorp, although the company can afford it.
But Goldcorp may look for options elsewhere. For instance, it may consider buying Asanko Gold (NYSEMKT:AKG), which just announced that it is moving forward with its Asanko Mine in Ghana. This project will produce 200,000 ounces per year starting late next year, and it will expand to 400,000 ounces per year by 2017. While Goldcorp has said that it doesn’t want to buy an asset that requires a large capital outlay, Asanko Gold has a sizable cash position, and this can be used towards the mine’s development. We might even see Goldcorp wait for Asanko Gold to build the mine before making its offer.
Ultimately Goldcorp has painted itself into a corner given its promises of growth to shareholders and the rich valuation that this growth commands. As a large company, it is becoming more difficult for management to find growth opportunities, and this is why it is making lofty offers for companies with large, long-life assets such as Osisko, and why the company is looking towards Africa.
But with this in mind, I think investors would be wise to avoid Goldcorp and look to the assets that it may consider purchasing. Management has been very clear that it has a specific kind of asset in mind. First, it must be large enough to move the needle on a company that will have 4 million ounces of gold production in 2016, which means that it probably needs to produce at least 250,000 ounces of gold per year. Second, it needs to be a low cost producer. Third, it needs to be in a safe jurisdiction. If you keep these attributes in mind you will not just pick winners, but acquisition targets as well.
Disclosure: Ben Kramer-Miller is long Yamana Gold and Asanko Gold.