Hold on to this growing miner
Goldcorp is bidding an awful lot for Andean Resources. Is this a smart move?
There’s no doubt that Andean Resources’ (ANDPF) Cerro Negro project in Argentina is an attractive gold asset. The project isn’t scheduled to go into production until late 2012, but indicated reserves now come to 2.1 million ounces of gold and 20.6 million ounces of silver.
Production costs project out as relatively low, a key criterion for any Goldcorp acquisition, at $60 an ounce after silver revenue. Capital spending to get the mine up to production targets is a reasonable $275 million to $300 million, according to Goldcorp.
But, and it’s a huge BUT, the price that Goldcorp is paying is high -- unless there’s a lot more gold in the ground here than the current indicated reserves show. At the current indicated reserve level, Goldcorp is paying $1,400 per reserve ounce.
At the price it’s paying for Andean Resources, it looks like Goldcorp believes that it can triple or quadruple indicated reserves at Cerro Negro.
“We aren't buying Andean for a 3 million ounce resource,” Goldcorp CEO Chuck Jeannes told Reuters. “We wouldn't be surprised to see the indicated resource double in fairly short order.”
Some analysts, at least, agree. “Goldcorp is betting on the exploration potential of Cerro Negro,” UBS analyst Jo Battershill told Bloomberg. “I believe there are 10 million ounces there.”
My take? Goldcorp has a solid but very aggressive track record of growing by acquisition. The company had only $70 million in revenue in 2000 and used acquisitions to climb to $2.7 billion in revenue in 2009 as the second largest gold miner.
But Jeannes took over just 20 months ago as CEO from Kevin McArthur and I worry that he might be trying too hard to put a quick mark on the company.
I think the rising price of gold makes Goldcorp a hold but the risk does go up with this deal.
As of Sept. 10, I’m leaving my Jubak’s Picks target price at $51 a share by December 2010.
At the time of this writing, Jim Jubak didn’t own shares of any company mentioned in this post in his personal portfolio.
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
New legislation is allowing foreign companies to finally invest in the country's vast oil reserves.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.