INTERVIEW-Bullish Goldcorp puts money where mouth is.
August 09, 2002 01:41 PM ET
By Alden Bentley
NEW YORK, Aug 9 (Reuters) - Canada's Goldcorp GG.N G.TO , a profitable mid-size producer possessing one of the mining world's best cash cows, is unabashedly bullish on bullion and literally putting its money where its mouth is, the company's top executive told Reuters.
CEO Robert McEwen said Goldcorp is holding back some of its 600,000 ounces of annual production in inventory, and went into the market in the second quarter to buy extra gold in lieu of operating cash it keeps on hand.
"Right now it's a short-term placement for funds that I think has better upside than cash," McEwen told Reuters in an interview.
The price of gold rallied to a 2-1/2-year high above $330 an ounce in early June. At midday Friday on the COMEX division of the New York Mercantile Exchange, gold futures for December delivery fetched $316.60 an ounce, up $4.40 from Thursday's finish and a dime below the session high.
McEwen said that with short-term dollar deposits returning only 1.5 percent per annum, the "opportunity cost of going out of cash is small," while gold has the potential to return 3 percent a day, using a powerful rally on Wednesday as an example.
"You are not going to annualize 3 percent a day, but I'm not worried about that," he said.
McEwen said the company had 4.9 tonnes of gold in vaults at its Toronto depository at the end of June. "We have more gold than 30 sovereign states that are issuing currency," he claimed.
"We believe in the product, we believe it's going up, and we're blessed with what is considered the richest gold deposit in the world," he said, referring to the Red Lake mine in western Ontario from which Goldcorp mined 500,000 ounces last year at $62 an ounce -- among the very lowest cash costs of production in the industry.
The company does not hedge any production by pre-selling unmined gold forward to lock in prices. Instead, it prefers to live or die by the price of gold, like the world's largest producer Newmont Mining NEM.N .
It's full exposure to the spot price has put it in the forefront of the gold sector rally this year. Its 44 percent gain outperformed even market darling Newmont.
"I believe we're going to see a day similar to what we saw in 1999, when gold spikes up $70 to $80 and it gets outside the bands that were constructed around these hedge positions, and counterparties come back and say 'margin call' and that is going to start a squeeze," McEwen said.
Since Goldcorp restructured from a holding company to an operating company in 1993, its share price has experienced a 33 percent compound annual return, McEwen said, compared to small losses for the big three North American producers, Newmont, Barrick Gold ABX.TO and Placer Dome PDG.TO .
"At least two-thirds of the industry engages in hedging and we've seen previews of what happens when you get your hedge wrong," he said, mentioning the massive loss incurred by overhedged Ashanti Goldfields and Cambior Inc. during the gold price spike to $340 in 1999.
McEwen reduced his personal stake in Goldcorp from 44 percent to 6.5 percent since 2000. But he said he was not waiting around to be swallowed by one of the major producers.
He would not rule out a takeover, given the rapid consolidation of the bloated gold industry.
"Certainly when we opened up the share structure, people thought 'Well, Placer is going to come after us and AngloGold is looking to diversify,'" he said, referring to the South African producer which lost a heated takeover battle for Canada's Franco-Nevada Inc. to Newmont this year.
"It's all about how do we build share value here, and how do I take a chunk of money that I have in there and make it worth more," McEwen added.
On the New York Stock Exchange on Friday, Goldcorp was up 55 cents at $9.25 a share.
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