It appears that, despite some tumultuous months that have seen sharp fluctuations in share price, Goldcorp (GG) has positioned itself through its large-scale acquisitions to ride the current rise in gold price to post profitable results for the remainder of 2012.
In large part due to its need to stay competitive with Barrick Gold (ABX), the world's No. 1 miner of gold, Goldcorp made several substantial acquisitions in recent years that are beginning to pay off.
In 2006, Goldcorp and Glamis Gold announced a merger that was valued at $21.3 billion. With this merger Goldcorp became the third-largest gold miner in the world.
Although many financial experts questioned this massive merger at the time as it did not contribute to Goldcorp's immediate cash flow, Goldcorp's financial circumstances at that time now seem irrelevant. The current gold price indexes, which show a $1,100 increase in value from 2006-2012, will prove that this merger will allow Goldcorp to continue to build on its long-term financial strength.
At the time of the Glamis merger, gold was selling at approximately $620 per ounce. At the same time, Goldcorp was selling at approximately $15 per share. Its share value was due in large part due to the declining value of gold that bottomed out at around $400 for the period of 2002-2005 and was only beginning to make gains that eventually saw gold nearly quadruple in value over the next seven years.
Seemingly influenced by the continued rise in gold, Goldcorp made another key acquisition in August 2008 when it purchased Eagle Mines for $1.47 billion. This acquisition was made while gold prices hovered around $800 per ounce and had yet to hit the severe spike that was sustained throughout the recession.
Now that the recession has been officially defeated, where does Goldcorp go from here? Recent market trends have shown that the value of gold and, as a result, the share price of Goldcorp has been on a 52-week roller coaster ride that has seen share prices reach as high as $56 in September 2011 and a bottom out to its current share price of $41.
It is my opinion that, based on its recent acquisitions -- which have proven more profitable than originally projected -- the continued strength of gold prices, and the continued profitability of its past acquisitions, Goldcorp continues to be a strong buy for investors. As a result, Goldcorp should continue its price fluctuation by going through a more sustainable upswing in the coming months. This increase in share price should provide short-term investors with a significant opportunity to boost Goldcorp's short-term dividend profitability.
2011 was a year full of financial progress for Goldcorp as it reported 2011 net income earnings of $1.78 billion, which was up from $1.04 billion in 2010. Goldcorp also reported total assets of $23.9 billion, a $1.7 billion increase from 2010.
These positive revenue figures are in large part due to Goldcorp's 2010 acquisition of the Cero Negro project from rival Andrean for $3.6 billion in 2010.
This purchase was made significantly more profitable for Goldcorp when it announced that the resource estimate in these gold in silver mines doubled from previous projections, increasing the resource level of its mines to 4.3 million ounces of gold and 36.2 million ounces of silver.
The news has been positive for Goldcorp's rivals, as El Dorado Gold (EGO) has seen drastic rises in gold production in recent months. Also, El Dorado reported that its recently purchased Canadian gold mine will yield 1.7 million ounces of gold in the next five years. As a result, El Dorado plans to raise its Canadian production by 160%. Despite the skepticism in gold prices, this positive news has caused El Dorado's share price to spike recently as it has begun to rebound from its approximate 52-week low of $12.50 to its current price of $14.40.
Meanwhile, Barrick Gold, coming off its April 2011 acquisition of Equinox, is also experiencing gains. As a result of its continued desire to expand, which has been made in an effort to counter its recent downturn in value, Barrick has seen its share price reach a 52-week low of $41. However, as a result of its acquisitions, investors have begun to see increased value in Barrick and share prices have crept up to around $43.
What these companies show is that as the market for gold continues to stabilize, the initial sting of multibillion dollar acquisitions will continue to wear off. With the increased earning potential that has been discovered in these acquisitions, the outcome for these gold mining giants -- especially Goldcorp, with the increased profitability of its Cero Negro project -- is to experience steady growth in 2012.
Furthermore, if the news continues to improve and gold prices rise to the $2,000 per ounce value that many experts have projected, Goldcorp could go from a short-term buy to a long-term hold that will provide long-term payouts well above current projections.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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