Goldcorp
From Tuesday's Globe and Mail
A dollar in hand today is worth more than a dollar to be gained later. Most investors appreciate the mathematics behind this idea.
How much more that future dollar is worth today depends on a couple of factors: The length of time before the future dollar arrives, and the risks underlying that delivery, which are mathematically represented by the discount rate.
With that in mind, what kind of new math are Goldcorp investors counting on? Goldcorp, as most investors who still care about gold know, is one of the brighter lights — one of the few lights, indeed — in a universe dominated by black holes.
Its reputation is richly deserved. The company's main asset, the Red Lake Mine, is a nice ore body. Gold reserves (proven and probable, using a gold price of $275 (U.S.) an ounce) are about 3.6 million ounces. Moreover, most of that — about 85 per cent — comes from the so-called high-grade zone, where the grade ranks at an enviable 1.7 ounces per ton (although the company achieved 2.2 ounces in its latest quarterly report). That grade makes for very low recovery costs, $57 an ounce in cash costs in the first half of this year (total operating costs of $91). It gets better. The reserve forecast as well as the grade estimates have been rising.
Goldcorp is also something to behold financially. Unlike most of its poorer (destitute in many cases) cousins, it has no debt and a good balance sheet. The flow of cash is accelerating.
It's a good story, one that Goldcorp tells with great zeal. There are regular free lunches with investors. There's the promotional material, with its abundance of exclamation marks. There's even a contest promising cash prizes to attract attention.
Goldcorp has been so persuasive in telling its story, in fact, that the company now enjoys a market cap of $940-million. And here is where the numbers come in.
Goldcorp's total reserves (from Red Lake and from its lesser Wharf mine) last stated at 4.27 million ounces. At a price of $275, that gold is worth just under $1.2-billion. Subtract costs of, say, $120 an ounce over the life of the mines (which may be generous), and its worth about $660-million.
Now, discount it over the expected life of the mine assets, and no matter what rate you use, it's worth less. Considerably less.
There are three possible conclusions to this story: Goldcorp investors figure the price of gold will rise substantially, which puts them in very rare company; or they figure the reserves will rise drastically (indeed, the company has issued a press release promising another press release tomorrow that, presumably, will reveal more good news about Red Lake); or they own the world's most expensive gold mine.
Goldcorp's reserves are economical at very low gold prices; at current levels, its stock price isn't.
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