Hi ml, I read this twice but didn't find much risk at all. Seems as though it was spun with a slight negative bias. Perhaps "ultra cautious" would have been a better choice of words...... <ggg>
Goldcorp on a (risky?) tear
Despite low costs for ore recovery, outlook for miner remains mixed
By OLIVER BERTIN Tuesday, September 16, 2003
In 1995, Goldcorp Inc. was a desultory gold mine deep in the bush, about as far away from the financial canyons of Bay Street as an Ontario mine can get.
But the surprise discovery that year of a rich vein of gold 1½ kilometres down transformed Goldcorp into one of the richest and most profitable gold mines in the world.
The gold is still coming out of the ground eight years later at the Red Lake mine, in northwestern Ontario. Vice-president Chris Bradbrook said Goldcorp produced 530,000 ounces last year at a remarkably low cost of $65 (U.S.) an ounce, and it hopes to produce one million ounces annually for $100 an ounce after it completes a new shaft in two or three years time.
So goes gold mining, an industry where prospectors can trip over a nugget of gold and turn their company around overnight. But it's also a volatile industry that depends on the price of gold, where companies have to keep finding gold because their mines will inevitably dry up.
"Is Goldcorp a high-risk investment?" asked financial analyst Kerry Smith of Haywood Securities Inc. in Toronto. "All gold stocks are high risk because they depend on the price of gold. But [the company's costs are so low that] if gold goes down to $100 an ounce, they will be the only company still around."
Finding more gold can be a hit and miss game. "They could easily find another million ounces of gold," he added. On the other hand, they may not, he acknowledged.
The volatility of the gold mining business helps to explain the wide range of opinions on Goldcorp in the analyst community.
A Bloomberg survey shows that analysts are split fairly evenly among buys, holds and sells. Estimates of future profit, target price and price-to-earning ratios range widely.
A Multex survey of 18 analysts shows that target prices for the stock for 2003 range from $9.50 to $18.50. The stock closed yesterday at $18.72 (Canadian) on the Toronto Stock Exchange and $13.69 (U.S.) in New York. A Bloomberg survey shows that share profit forecasts range from 33 to 56 cents for 2003, and 35 to 63 cents in 2004.
Given those numbers, the P/E ratios are bound to come in all over the map. Analysts currently peg P/E ratios in a range of 35 to 49 in 2003 and 25 to 53 in 2004.
"It all depends on the price of gold," said Brian Christie, a financial analyst with Canaccord Capital Corp. in Toronto. "There are a lot of people using a lot of different assumptions right now."
P/E estimates for Goldcorp's peers in the gold mining business also vary widely. When compared with other mid-tier gold mining companies, Goldcorp's P/E is in the middle of the pack. But Goldcorp is relatively expensive when compared with other industries.
All gold mining stocks tend to rise and fall with the price of bullion, and most observers see gold trending up over the medium term from yesterday's close of $374.50.
Robert McEwen, Goldcorp's chairman and chief executive officer, told the company's annual meeting in June that he believes gold is in the middle of a sustained bull market that will see prices reach $400 an ounce this year and $800 an ounce in six to eight years.
Financial analysts cast a bleary eye at the $800 figure -- "he's a bit of an optimist," said Haytham Hodaly, an analyst with Salman Partners Inc. in Vancouver. But Kerry Smith of Haywood Securities Inc. in Toronto expects gold to go through $400 by year end, depending on the economy and a long list of macroeconomic issues.
Mr. Christie also sees $400 gold over the short term and through 2004, settling down to $360 over the long term, while Mr. Hodaly uses $350 for his long-term calculations.
Goldcorp may have low recovery costs at the moment, but analysts differ in their views of the company's prospects when the current deposit at Red Lake runs out -- which is still many years away.
Several analysts noted that Red Lake is Goldcorp's only high-producing mine. "They've done a good job, but the high-grade reserves will run out," Mr. Christie said. "They have to get more mines. It's just a one-mine company."
The company expects to close its Wharf mine in the United States in a few years because the costs are rising to levels that are no longer economic. That would leave Goldcorp with Red Lake, an industrial products mine in Chaplin, Sask., and a small interest in numerous small operations.
Whatever the numbers, most of the analysts consulted have a high opinion of the company and its management.
"They seem to be doing the right things," said Steven Butler of BMO Nesbitt Burns in Toronto.
"Goldcorp's not as sensitive to gold prices as the others. It has low costs. It has a very strong balance sheet and superior margins."
But he rates Goldcorp as a "hold" because of its valuation compared with other mining stocks.
Mr. Hodaly considered the valuation and the timing when he put a "hold" rating on the stock.
"It's a good company but it's trading at close to its full value," he said.
It's also a long-term prospect. "There's no reason to rush out and buy it," he said, adding that the company will start to grow in two or three years when it completes a new, deeper shaft at Red Lake.
Larry Strauss of Griffiths McBurney Partners and Mr. Smith rate the company as a "buy." Mr. Smith points to the strong balance sheet, the good returns, the strong cash flow and the lack of debt. Gold prices are high and moving up, the reserves are high grade, and he believes there's a good chance that more gold will be found.
Like other analysts, Mr. Smith is also impressed with management. Unlike many mining executives, Mr. McEwen, the chairman and CEO, has a marketing -- not a geology -- background. "He has marketing savvy," Mr. Smith said.
"He's done a good job for shareholders," Mr. Hodaly added. "It's a first-class project."
Goldcorp
Goldcorp operates the Red Lake gold mine in Ontario. It also has a mine in South Dakota and industrial mineral operations in Saskatchewan.
Market Data 
Markets 
AI
