“Taking a contrarian stance can pay off in a big way for investors who are willing to
take a little risk,” Ian Wyatt writes below. If betting against the prevailing wisdom
sounds like your cup of tea, today’s recommendation, from Wyatt’s $100k Portfolio,
will be right up your alley. Here’s his unlikely hero:
“The story of Rob McEwen is now legendary. He is the former chairman and CEO
of Goldcorp, Inc. (GG, NYSE), the innovative gold miner based in Vancouver,
British Columbia. McEwen bought the struggling company in 1989 in a takeover bid.
By the turn of the century, he had successfully righted the Goldcorp ship. But McEwen
was far from satisfied. He wanted to be able to find gold faster. [So] he challenged the
world’s top geologists to find new mining prospects for his company in a 55,000-acre
area of Ontario known as Red Lake. [He] would show them all the information his company
had about the Red Lake area, and with that data they could help unearth the six million
ounces of undiscovered gold. The reward? $575,000 in cash.
“More than 1,400 scientists, engineers and geologists accepted the invitation, and
began searching for the missing Red Lake gold. Eventually, a geologist named Nick
Archibald from West Perth, Australia responded to the challenge. Using little more
than geological-modeling software and database mining tools, Archibald was able to
strike gold without ever setting foot in Canada. Thus, one of the most fertile mines in
the world was born.
“Prior to the discovery, Red Lake was producing roughly 53,000 ounces of gold per
year. In 2001, after Archibald struck gold, the mine produced more than 500,000
ounces. ... Goldcorp is now the largest gold mining company, measured by market
capitalization. The $24 billion company has 11 mines in six different countries,
strong cash flow, and roughly one seventh the debt load of its chief competitor. It
has mines in predominantly stable regions of the world—Argentina, Canada, the
Dominican Republic, Guatemala, Mexico and the U.S. That removes some of the
potential risks associated with operating mines.
“Most importantly, it’s the only gold miner positioned for meaningful growth in
the coming years. ... It has the lowest mining costs, the healthiest balance sheet, the
best growth outlook and the highest market value. The following table compares
Goldcorp to its two largest competitors—Barrick Gold (ABX) and Newmont Mining
(NEM):
“The company’s ample liquidity, low debt and strong cash flows have positioned
it for steady growth in the coming years. Goldcorp produced 2.4 million ounces of
gold last year. This year, the company expects to produce as much as 2.8 million
ounces. And expansion plans call for production of 3.8 million ounces next year—an
impressive growth rate of 36%!
“The fact is that Goldcorp is producing gold at a lower cost than its rivals. The
company’s production cost is 11%-25% less than its biggest competitors’. This
distinct advantage is especially important after the recent decline in the price of
gold. ...
Risks
“In the short term, capital expenditures may continue to weigh on Goldcorp’s
earnings. First-quarter earnings declined year over year. For 2013, EPS is expected
to decline to $1.53 from $2.03 last year. But the short-term earnings-per-share drop
is a product of the capital investments that Goldcorp is making in its three new
mines. More than half of that capital will come off the books by year’s end—allowing
the company to blossom just as its production ramps up considerably next year.
Taking the Contrarian Stance
“Gold miners are a wounded sector right now. While the S&P 500 has risen 18% in
the last six months, gold stocks have gone the complete opposite direction and fallen
41%. In most cases, that makes gold stocks a sector investors might want to avoid.
In the case of Goldcorp, however, it presents a spectacular buying opportunity.
“With stocks up considerably, many sectors and stocks appear to be fully valued.
The S&P 500 is at all-time highs, and the index is trading at 19 times trailing
earnings. While the valuation of the market as a whole is in line with historical
norms, there may not be a ton of upside.
“Goldcorp, on the other hand, is trading at 16.4 times trailing earnings, a discount to
the market as a whole. While investing in a beaten-down sector can be scary, it can
also be financially rewarding. Taking a contrarian stance can pay off in a big way for
investors who are willing to take a little risk.
“In searching for the right stock in a beaten-down sector, you want to own the
company that’s strong enough to weather poor market conditions. [And] most
analysts agree that Goldcorp is the best of breed among the major gold producers.
The average price target among the 22 analysts who cover Goldcorp is $40.33. At
its current share price of roughly $29, that would be a 45% gain. Given that the
company plans to nearly double its current output of 2.3 million ounces of gold per
year by 2017, I agree that a 45% gain in the next couple years is a real possibility.
“Goldcorp has also become more shareholder friendly. The company has increased
its dividend by nearly 50% over the last two years, and the stock currently provides
shareholders with a 2% dividend yield. ... Recommendation: Buy Shares of Goldcorp
(GLD).”
Ian Wyatt, $100k Portfolio, www.100kportfolio.com,
866-447-8625, 5/13/13