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Tuesday August 07, 2012
Out-of-favor gold favorites
by Jack Adamo, editor Insiders Plus  Goldcorp (GG) and Newmont Mining (NEM) are out-of-favor gold mining stocks that have had problems with specific mines; as such it is no coincidence that they've reported terrible year-over-year earnings. Their problems will take a few quarters to resolve. However, if I’ve chosen well, we’ll see all of these companies turn around significantly over the next few years and the interim drawdowns we’ve experienced will be forgotten. Goldcorp, a company with a great long-term operating record, continues to struggle with production problems, as it has for several quarters. Diluted EPS were down 50% year-over-year, yet the market thought that was good enough to push the shares up 7.7% this week. The reason? The company made progress on some of its recent obstacles, among them the Red Lake mine in Ontario, one of the world’s richest gold mines. Red Lake’s gold concentration is in the 16 grams per tonne range, among the highest I’ve ever seen. The Porcupine mine, also in Ontario, saw second quarter gold production increase 20% year-over-year to 74,900 ounces, driven by higher grades and recoveries. At that rate, its production could be on a par with Red Lake in a couple of years. I can’t say that will happen, but it’s great to see that while Goldcorp works through its problems at Red Lake, it has strong backup from other sources. In addition, new projects will soon come on line. At Pueblo Viejo in the Dominican Republic, initial production is expected in August. Construction is essentially complete and on schedule. At the end of the second quarter, more than 16 million tonnes of ore were stockpiled, containing approximately 1.9 million gold ounces. Given that there’s a possibility that we’re heading into another up-leg in the price of gold, and that Goldcorp is making good progress putting its ducks in a row, I’m putting it back in the buy column. Goldcorp Inc. is a buy up to $40. Meanwhile, shares of Newmont Mining tumbled after reporting second-quarter profits fell to $0.56 a share, from $1.04 a share a year ago. Sales slipped 6.5%. Newmont also trimmed its full year gold production estimate very slightly, citing lower production at its Tanami operations in Australia. On the costs side, its capital expenditure target for the year was narrowed to $2.7 to $3 billion, from $3 to $3.3 billion, due to a delay in its Conga project in Peru, but that’s not the kind of drop in expenses you want to see. The delays have been due to protests against the mine. These are not labor strikes; they are protests by the surrounding community over fears of polluted water. Gold mining, like a lot of mining, is very water intensive. The company is answering the concerns by building more dams to protect local water supplies. That will delay the opening of the mine and hurt results for a few quarters, but it isn’t the end of the world. The whole industry is having a bad year, but lower output, along with rampant money printing throughout the world, should boost gold prices next year. By then, progress will have been made in some of these problem areas and we should see a very nice rebound in the prices of our miners. In the meantime, our shares are still in the black and paying a nice dividend of 3%. Newmont Mining Corp. is a buy up to $48. Learn more about this financial newsletter at Jack Adamo's Insiders Plus. Related articles:
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