Does the Price of Gold Make Goldcorp a Bargain?

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The price of gold has been in a free fall for the last year, which has made me think about gold producers. In particular, I’ve been wondering about Goldcorp (NYSE: GG), the Canadian miner that has long been a value investor’s favorite.

Goldcorp is cheap, but is it a bargain? The answer on the surface appears to be yes. Despite the downward spiral gold prices have been on, Goldcorp was still able to produce 578,000 ounces of gold in the first quarter and generate revenue of $1.1 billion. The company also reported a cash flow of $520 million.

Revenue good at gold companies

Not bad for a miner in an industry plagued by rising costs and plummeting gold prices. Goldcorp’s long-term revenue picture is also pretty good. Its revenue rose from $2.42 billion in December 2008 to $5.1 billion in March 2013. To be fair here, we must note that much of the rise in revenue can be attributed to rising gold prices, but it’s still pretty impressive.

We must also note that other gold miners like Barrick Gold (NYSE: ABX) have reported a similar increase in revenue. Barrick’s revenue nearly doubled between December 2008 and March 2013, going from $7.61 billion to $14.34 billion. Barrick's revenue has leveled off in the last year or so, as you can see from the chart. That could indicate that revenue has hit a ceiling.

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Revenue has also begun to fall at some gold miners, notably Newmont Mining (NYSE: NEM). Newmont’s revenue fell $1 billion in 2012; the company reported a revenue of $10.36 billion in December 2011 and $9.36 billion in March 2013. Since Newmont has had to basically write off its $4.8 billion Conga Project in Peru, it isn’t reflective of the industry.

Goldcorp has been able to avoid the kind of losses Newmont has taken in Peru, but a big question remains: How much of Goldcorp’s increase in revenue for the past few years was based on the rising price of gold?

This is the $64,000 question, and a glance at gold producer’s financials shows that its revenue increases seem to match the rise in gold prices. In other words, the industry’s profits are based largely on something that’s completely beyond its control -- the gold markets.

How low can gold go? A lot lower than you might think

That means we need to ask one question before we buy Goldcorp shares: How low can gold go? The answer to this question is a lot lower than the pitchmen peddling gold on cable TV would care to admit.

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Gold, as you might know, hit its historical high in 1980 at $860 ($2,431 in 2013 dollars) an ounce and has never returned to that price. If the situation back in the early 1980s is anything to go by, there might be no bottom to the gold market.

That means we could see Goldcorp trading at under $20 or even under $15 a share in the near future. It also means staying away from Goldcorp and other gold miners is a good idea for the foreseeable future.

The reason to stay away from gold miners right now is obvious, even though the price of gold is collapsing. The cost of gold mining is not; Goldcorp itself admits that production costs at its Los Filos mine in Mexico were $535 an ounce in the second quarter of 2013. Costs at the Musslewhite mine in Canada were $819 an ounce in the same period.

If history repeats itself and the great gold price collapse continues, we might hit a point where the price of gold is lower than production costs. If that happens, I don’t see how companies like Goldcorp could make any money.

Unless the current trends in the gold market reverse themselves, Goldcorp is no bargain. Instead, its stock may soon start falling faster than gold prices.

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Daniel Jennings has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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