As bullish as I am on the gold price, I think substantially more money can be made by purchasing well-run gold mining companies. Prudent investors should consider going through the rubble of the gold mining sector in order to find companies that have the following qualities:
- Relatively low production costs
- Meaningful foreseeable growth
- A proven track-record of value creation
- A strong balance sheet
One company that satisfies these criteria is Goldcorp (NYSE:GG). Goldcorp started as a junior mining company that was developed by former CEO Rob McEwen into a multibillion dollar juggernaut that at one point in 2013 traded with the highest market capitalization of any company in its sector. The company is now run by a very capable management team led by Charles A. Jeannes, who has been with the company since 2006.
Goldcorp owns or partially owns 11 producing gold mines in the Western Hemisphere. It produces about 2.5 million ounces annually, which costs the firm about $1,150 per ounce when we include all of the company’s expenses. Some of its largest producing mines include Red Lake in Canada, Pueblo Viejo — a joint venture project with Barrick Gold (NYSE:ABX) – in the Dominican Republic, and Penasquito in Mexico.
It is also developing two very large mines — Eleonore in Canada and Cerro Negro in Argentina — which will bring the company’s total production up to 4 million ounces annually in the next couple of years. Furthermore, these new projects should bring down the company’s average production costs.
Admittedly, Goldcorp is not the cheapest gold miner among the other major producing companies. Although its share price is down to $23.19 per share from its 2011 high of $56, the shares have a higher P/E ratio, a higher price-to-sales ratio, and a higher price-to-cash flow compared to many of its peers. In fact, Goldcorp has a larger market capitalization than Newmont Mining (NYSE:NEM), which produces twice as much gold, and it has a market cap that is almost as large as Barrick Gold, which produces three times as much gold.
However, Goldcorp’s management has demonstrated an ability to grow rapidly and consistently. During the 21st century, Goldcorp has increased its revenues 20 times while it has increased its stated book value over 10 times. While cash flow and profits are down this year, 2012 cash flow and profits were 20 times greater than they had been 10 years prior.
Furthermore, the company has been paying regular monthly dividends since 2004. The dividend is larger than that of the S&P 500 and it is growing at a faster rate — since I first bought the stock in 2009, it has raised its dividend from 18 cents per share to 60 cents per share annually.
Goldcorp is generally a low-risk investment. The company has an exceptionally strong balance sheet with just $2.3 billion in debt versus $20.7 billion in equity. Furthermore, it does not operate in high risk areas such as the Middle East or South Africa, where mining companies have faced opposition from governments and laborers.
This unique combination of attributes makes Goldcorp a solid investment for those who are bullish on the gold price, and I believe that the shares offer excellent value at a 60 percent discount off of their 2011 highs. While it is difficult to know whether the pain in the gold mining sector is in the past or not, I think now is a good time for investors to begin to accumulate shares in this excellent company.
Disclosure: Ben is long shares of Goldcorp.
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