Goldcorp's Earnings Reveal Demand Weakness
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Goldcorp (NYSE: GG) is an international company that "engages in the acquisition, development, exploration, and operation of precious metal properties." Goldcorp's headquarters is in Vancouver, Canada, and the company has a market cap of $29.3 billion with a stock price of around $37-$38.
Over the last ten months, the stock prices of gold mining companies have been spiraling downwards. Most gold companies have declines by 20 percent or more. Barrick Gold's (NYSE: ABX) stock price is down by almost 30% over the last 52 weeks. Barrick reported net earnings of $.75 per share for the second quarter, versus $1.16 per share one year earlier. Meanwhile, Gold Fields Limited's (NYSE: GFI) stock price is down by 20%. Gold Fields Limited's South Deep Joint Venture recently entered into talks with the National Union of Mineworkers regarding a new operating model. Newmont Mining (NYSE: NEM) is down by 21%. Newmont reported adjusted earnings per share of $.59, compared to $.90 last year. Over the last 52 weeks, Goldcorp's stock price has declined by 24%.
On September 7th, 2011, gold prices hit an all time high of $1,923.70. It was no coincidence that Goldcorp's stock hit a 52 week high of $55.31 on September 8th. As of July 25, 2012 the price of gold was $1,605.44, which is a 20% decline from its September 2011 high. While the stock prices of gold companies move independently, their stock prices generally move nearly in unison, with the price of gold.
When gold prices hit their September highs, they had been on the rise since 2001, when the average price of gold was $271.04 per ounce. No commodity could be expected to continue to appreciate forever, and after a ten year bull run, investors should not have been overly surprised, when gold prices finally corrected. It should be noted that when gold prices began to tank, the stock market began to rally. I believe that gold helps to diversify an investor's portfolio, and that long term investor's should have a percentage of their portfolio invested in gold. I say that because "Gold is protection, insurance against inflation, currency debasement, and global uncertainty." When investors decide to invest in gold they need to consider how they want to invest. While this article will focus on gold company stocks, many gold investors prefer to use "coins from the U.S. mint or SPDR Gold Trusts ETF (GLD) as tools to invest in gold.
In late July, Goldcorp reported second quarter earnings. Unfortunately for Goldcorp, year-over-year earnings comparisons were poor. The company had earnings per share of $0.41, which was a 27% decrease from earnings per share of $0.52 in the second quarter of 2011. Revenues were $1.1 billion, which was an 18% decrease from revenues of $1.3 billion, in the second quarter of 2011. The lower year-over-year earnings reflected a reduction in the amount of gold that the company sold. In the second quarter, Goldcorp sold 532,000 ounces of gold, which was a 14% decrease from the 606,400 ounces, that it sold in the second quarter of 2011. During the second quarter, Goldcorp's average realized gold price (per ounce) was $1,596 versus $1,516 in the second quarter of 2011.
Despite the poor second quarter earnings report, Goldcorp's stock price has rallied. The stock price rose by 3.5% on July 25th and then moved higher by an additional 5.58% on July 26th, after the second quarter earnings announcement. Goldcorp's stock rally was not spurred so much by their earnings, as by investors that were "hopeful that deteriorating global economic conditions would spur stimulus moves by central banks in the United States and Europe." While Goldcorp's stock price increased by 9.08%, it was not alone, as other gold company stocks also rallied higher. For instance, over the same two day period Yamana Gold's (AUY) stock price increased by 9%, while IAMGOLD's (IAG) stock price increased by 7.5%, and AngloGold Ashanti Limited's (AU) stock price increased by 5.3%.
While the recent rally in gold stocks might seem encouraging to some gold company investors, I am not ready to turn bullish on gold company stocks. For years, "miners have been chasing the metal. The general expectation was that the mining stocks would eventually catch up to gold prices. But now it looks like the metal is retreating to meet the miners." It now seems that overall demand for gold is down. Demand for gold in jewelry and technology declined in response to higher prices. Central banks have also reduced their gold purchases. As I mentioned earlier, Goldcorp sold 14% less gold in the second quarter of 2012 than it sold in the second quarter of 2011. Now with the demand for gold declining, and with decreased gold prices, there is uncertainty in the gold mining industry. As a result, some of the big mining companies will not be "undertaking new projects or acquisitions until things get better or worse."
Over the last ten months, the price of gold has fallen by more than 20% from its September 2011 highs. Consequently, the prices of most gold stocks have also fallen. In the case of Goldcorp, the stock has fallen by 24% from its 52 week high. Over the last week, gold stocks had an impressive rally. The rally was based on hopes that large central banks will launch stimulus projects that could lift the price of gold. It is my opinion that making investments based on rumors about central bank stimulus projects is extremely risky. I also feel that the demand for gold is just not high enough to force price increases. Goldcorp's second quarter earnings showed a marked decrease in both revenues and earnings per share. I think that investors will pay close attention to the company's earnings, and that the stock is unlikely to move higher.
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