|More on Gold Gold Price News|
|How to Invest in Gold|
DENVER ( TheStreet ) -- Goldcorp ( GG) is one of the biggest gold producers in the world but its shares aren't gaining traction this year despite a 17% rally in gold prices . The company has a $32 billion market cap and produced 609,500 ounces of gold in the second quarter at total cash costs of $363 an ounce. Goldcorp reported adjusted earnings per share of 27 cents, 2 cents below expectations. But despite solid numbers the stock has only risen 7% year to date. Goldcorp recently participated in the consolidation trend in the mining industry by buying Andean Resources for $3.4 billion, a company Eldorado Gold ( EGO) had been courting for years. Andean has indicated resources of 2.54 million ounces of gold, which will help Goldcorp's goal of expanding 50% in the next five years. I sat down with CEO Chuck Jeannes at the Denver Gold Forum to see if Goldcorp's recent acquisition was a desperate move for growth. So you recently bought Andean Resources for $3.4 billion, a 35% premium. Did you overpay? Jeannes: No not at all. This is one of those once-in-a-decade kind of opportunities that comes around. It's a very high-quality deposit which in our business means extremely low cost, both capital cost and operating cost, and it's got the opportunity to grow significantly over many, many years ... so we think actually the price we paid is accretive to Goldcorp's shareholders particularly on cash flow per share ... happy about the deal. How quickly will it be accretive to your earnings? Jeannes: Once the project is built and in production which will be late 2012, so 2013, 2014, 2015 we
will see very significant accretion. Was this a desperate move at all to rejuvenate your resources? Jeannes: Goldcorp has the best growth profile of any of the senior companies. Before the Andean acquisition we were growing 50% over the next five years to 3.7 million ounces. We have the lowest cash-cost profile so this was an opportunity we didn't need but makes us a better company. Now you brought up growth. On your Web site it says that your growth strategy is organic growth but clearly you are now in acquisition mode. So are you changing your strategy? Jeannes: No, and we've always had what I think is an appropriate mix between growing organically, meaning exploration at the sites we already own and then adding new projects through acquisitions. And I think it's been proven in our industry ... that you can't do just one or the other. Companies that try to grow only through exploration have been unsuccessful at doing that and at the same time you shouldn't just be serial acquirers. Try to find assets that grow over time; that's a good mix.
Now it seems in terms of your competition you sort of battle it out for the No. 2 two slot with Newmont Mining (NEM). Barrick Gold (ABX) is still a couple billion of dollars above you guys, what are you doing to one-up these other big companies? Jeannes: Well those are share price metrics that you're talking about and we pay attention to the share price because it's interesting. But at the end of the day our job is to run the business in the best way we can
and provide the ounces of gold that we say we're going to produce at the cost we're going to produce. If we constantly look for ways to improve our business the share price will come. Let's break down your last quarter. You had record high cash flow, grew revenue, but your adjusted net earnings disappointed coming in at 27 cents a share, 2 cents lower than expectations. Why did you report that loss? Jeannes: Well, there was just a timing issue with respect to production from the Alumbrera mine in Argentina so it wasn't a reoccurring issue, something that will pick up in the fourth quarter. But we made the ounces at the cost that we were expecting. Cash flow as you mentioned was actually above expectations but the earnings number moved around just because of the timing of receipt of payment. Now your cash costs are rising though so how are you combating that? Jeannes: Actually they're going down. Actually last quarter they rose a little bit. Jeannes: They rose a little bit quarter by quarter. I tend to think over the longer-term. Over the next five years our cash costs are trending down from $350 this year, which is our guidance and which we are fully on track to meet, down to below $300 an ounce over the five-year plan. That's primarily due to adding the new large Penasquito mine in Mexico that we're just completing the construction on. You also saw a little decrease in gold production in the second quarter, down about 4%. Why? Jeannes: We are actually right on track. I mean our production for the year was guided at 2.6 million ounces. We're going to make 2.6 million ounces so how it comes in quarter-by-quarter basis isn't all that important to us. How are your operating costs? Jeannes: Very good. As I said, we guided $350 an ounce for the year. I think we are at $346 for the year so we're trending slightly below what we had expected. And what about your finding and development costs for new projects? Jeannes: We're actually budgeted at $1.5 billion in capital expenditures for this year and we're right about on schedule. Actually we've been very good at reaching our capex budgets over the last few years. All right, so basically it sounds like you're perfect! What are some of the risks, what are some of the struggles you are facing right now? Jeannes: Well, I don't mean to say that it's easy. Our focus is on execution, on delivering every day the ounces we said we were going to at the cost we said we would plus we've got a lot of new projects. We've got a lot of people around the company building and spending a lot of time and effort to get these on track, on schedule. As I said we're growing over 50% over the five years and that means bringing on several new projects so a lot of work going on. And there's always risks when building new things, but we have a pretty good development team.
OkK. Let's go to the broad macro picture: How high do you think gold can go long and short term? Jeannes: Well, I'm being made to be a bit of a bear in that I predicted we'd be at $1,300 gold by the end of the year and now I think that that's probably pretty easy. But this was back at the beginning of the year when we were much lower than where we are today. On a macro basis I tend not to make predictions. I certainly see $1,500 in the next year or two. The bottom line is that I'm quite comfortable that the gold market is going to stay strong for an indefinite period. I try to be simple about it and look at just supply and demand fundamentals. On the supply side, mine supply expected over the future years is flat or even dropping and on the central bank sales we've see those actually turn into net
purchases so the supply side is pretty tight. On demand, investment demand has been driving the market ... whether you're buying because you want a hedge against inflation or because you want to bet against currencies not only the U.S. dollar but you're looking for a safe-haven investment. If I look around the world at the deficit spending and debt levels and the macro-economic environment I don't think those things are going to change any time soon. So then what does $1,300 gold mean for Goldcorp? Nothing? Is it just a number? Jeannes: It means that we're increasing our margins I think people buy our stock in order to have exposure to gold price increases ... every year for the past eight years our cash margins have gone up. In other words we've provided that leverage that our shareholders are looking for. And that's one of our main goals to make sure that we contain our costs so as the gold price goes up our cash margins go up.
-- (symbol) by Alix Steel in New York. >To contact the writer of this article, click here: Alix Steel. >To follow the writer on Twitter, go to http://twitter.com/adsteel. >To submit a news tip, send an email to: email@example.com.