Summary
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Goldcorp's Chuck Jeannes speaks with Henry Bonner at Sprott Global and hints that the company is looking for acquisitions.
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Investors interested in the gold mining space will find that Goldcorp is overvalued, but that there are opportunities among potential acquisition targets.
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I name 4 that Goldcorp may be interested in and that investors may want to consider as well.
I recently came across an interview with Goldcorp's (NYSE:GG) CEO, Chuck Jeannes, in which he hints that Goldcorp's management is looking for acquisition targets. He suggests that the investing climate in the gold mining space is reminiscent of 1999-2000 at the trough of that bear market, and that this was an excellent time for companies to grow by acquiring undervalued businesses - especially considering that the gold price was undervalued. The recent bear market in gold has taken the price of the yellow metal down some 40% and gold mining shares down 75%-90% or more in some cases.
This has created an extraordinary opportunity for contrarian investors who don't buy the hype in the stock market and who see the rise in global demand for gold in the face of lower prices - especially outside the United States, and especially among central bankers.
Not only is the market environment ripe for those looking to acquire gold miners, but Goldcorp is in a position where it can and should make acquisitions. As I argued recently, not only is the company overvalued, but it has no near-term growth after Eleonore and Cerro Negro ramp up. It has one of the best balance sheets among gold mining majors, and it also has what I believe to be an overvalued stock, meaning that the company can issue debt and shares in order to buy some of its peers.
With this in mind, it makes sense to anticipate those companies that Goldcorp may want to acquire, and to consider taking positions in them. This shouldn't be a sufficient condition for owning shares in these companies, but it is a place to start looking as an investor.
Unfortunately, Jeannes doesn't discuss the kinds of companies he would be interested in acquiring. But given the position that Goldcorp is in and given Osisko's qualities, I think I can guess at the sort of companies Goldcorp would be interested in.
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The company needs to have a mine that is producing or near production. Goldcorp needs production growth, and while it might be tempted by a company with a large project around the feasibility study phase, I don't think it wants to deal with all of the pre-production issues if it doesn't have to.
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The company needs to have a large mine. Goldcorp isn't going to be interested in smaller mines that don't move the needle. It produces 3 million ounces of gold per year, and so anything with less than 200,000 ounces of annual production is simply not worth management's time, unless it believes that it can grow the project to that point.
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The project needs to offer good value. That goes without saying, although one point I should clarify is that Jeannes and his team are bullish of gold, and so it might make a decision based on a higher gold price. This means that it might end up "overpaying" for a company based on metrics using $1,200/oz. gold.
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Jeannes is cognizant of country risk, and while there aren't many quality projects in low-risk mining jurisdictions, I don't see him going to South Africa or Venezuela for opportunities.
With that in mind I've compiled the following short list of companies that I think could be on Jeannes' radar. While I don't think any of them - except one - offer deep value, they all offer good value at higher gold (or silver) prices, and they are all projects that can be expanded beyond the mine lives put forth in their respective feasibility studies.
1 - Tahoe Resources (NYSE:TAHO)
The first possibility I want to bring up is a silver miner. While Goldcorp is a gold miner, it does produce plenty of silver, and many of the bullish points that one can make for gold apply to silver.
Tahoe Resources owns a huge project - Escobal in Guatemala - that just went into production. It will produce about 20 million ounces of silver per year over 20 years, with industry-leading low production costs. Tahoe Resources is valued at just over $2.5 billion, which I argued is too high with the silver price at $21, and which I think is probably more overvalued now.
Nevertheless, Goldcorp already owns 40% of the company, which means that its cost would be just $1.6 billion plus whatever premium was offered. If Goldcorp were to attempt a hostile takeover of Tahoe Resources, its 40% ownership position would make this much easier than chasing after Osisko was.
The one issue that Tahoe Resources has is that the Escobal mine is located in Guatemala, which is not considered to be a safe place to mine. It has also faced community opposition. With Jeannes complaining about issues with the Dominican Government in connection to the Pueblo Viejo JV with Barrick (NYSE:ABX), this is a disincentive.
2 - Detour Gold (OTCPK:DRGDF)
Detour Gold has one of the largest-producing gold mines in Canada - the Detour Mine - although, keep in mind that this project is located in Ontario, which is a worse mining jurisdiction with a less favorable tax code than Quebec, which is where Goldcorp wanted to be with its Osisko bid. The Detour Gold Mine has a whopping 29 million ounces of gold, and management plans to bring production to 700,000 oz./year at its peak, while it has a valuation of just under $1.4 billion.
However, Detour Gold has high production costs. It does plan to bring its costs down, but so far this hasn't happened. Consequently, investors have been schizophrenic about its future prospects, with shares trading in a 52-week range from $3-$15/share (they are at $8.50 now).
This could be a deterrent, but remember that Goldcorp is interested in buying a project in anticipation of a resumption of gold's bull market. With that being the case, the current high production costs may not appear to be so in the future.
3 - Torex Gold (OTCPK:TORXF)
Torex Gold is not yet in production, but it is really close, and it has done most of the hard stuff that Goldcorp wants to avoid. It will be producing 300,000 oz. of gold per year for 9 years starting in 2017, with initial production beginning in 2015. This would be perfect for Goldcorp, considering that production ramp-up at the Morelos Project in Mexico would begin as it slows down at Eleonore and Cerro Negro. The 9-year mine life at 300,000 oz./year can easily be extended, given the project's nearly 6 million ounces of gold and exploration potential.
I argued, and still believe that the stock is overvalued, given the current gold price and the current mine plan. The stock has actually risen since I wrote that article in June, in spite of the fact that the gold price is down, and the valuation is over $1 billion. But again, Goldcorp is looking ahead to higher gold prices, and this is the sort of asset that one wants to own in preparation for this price increase.
4 - Allied Nevada Gold (NYSEMKT:ANV)
This is the one that I think offers good value now, and I think it is the best option for Goldcorp, seeing that its Hycroft Project not only has 200,000 oz. of production, but that it also has an expansion plan that Goldcorp can afford. This expansion plan would bring production to more than twice the current levels, while the project has more than $1 billion in value now and awesome gold price leverage.
Allied Nevada shares have been destroyed, as the company's large debt load has effectively raised its cost of production, in spite of the fact that it actually has a relatively low-cost operation that can have even lower costs. This debt would be far less burdensome for a multi-billion dollar company such as Goldcorp, and its impact on Goldcorp's effective production cost would be negligible.
Allied Nevada has just a $175 million valuation, although its NEV is closer to $550 million - still reasonable given that Goldcorp can finance the expansion plan. While this may be the least likely target of the four mentioned, I think it would be the most accretive.
The Bottom Line
Goldcorp already has the highest market capitalization of any gold miner in the world, and while it is overvalued, it deserves this. I wouldn't buy the stock at the current price for this reason, but that doesn't mean that this isn't a good company that is positioned to do good things for its shareholders. As per Jeannes' statements to Sprott Global, an acquisition makes sense, and investors who are interested in the gold mining sector are encouraged to consider the companies that I've mentioned here in lieu of Goldcorp. They don't necessarily offer the best value, but they do offer appeal to a large company on the hunt.