Goldcorp: The top buy in gold

Production costs of just $258 an ounce leave fat profit margins for this gold miner.

By TheStockAdvisors Dec 19, 2011 9:43AM
Anthony Bradshaw/PhotographerBy Nathan Slaughter, Street Authority Market Advisor

There are many reasons why gold-loving investors might want to choose Goldcorp (GG) over bullion, not the least of which is the sharp disconnect between gold prices and gold stocks.

Indeed, gold has advanced more than 20% over the past year, while shares of many of the companies that produce and sell it have actually lost ground. And while Goldcorp has outperformed its peer group and delivered a modest 2% gain, that still doesn't sync with what's happening on the bottom line.

Goldcorp sold 571,000 ounces of gold last quarter at a hefty price of $1,719 per ounce. That's a nice 39% increase from the $1,239 an ounce it received this time last year.

Even better, production costs haven't budged and remain at just $258 an ounce (for a fat profit margin of $1,461 for every ounce sold).

As a result, the company was able to leverage the 39% increase in gold prices into an 88% surge in earnings.

Yet while Goldcorp's underlying profits have risen twice as much as gold, its shares haven't kept pace. In fact, they're actually lower now than they were three months ago.

That's fine -- these imbalances tend to correct themselves sooner or later. In the meantime, even if gold prices don't gain another penny, Goldcorp will still churn out $700 million or so in cash flows every quarter.

And that brings us to the second reason I prefer GG over physical gold. To paraphrase Warren Buffett, gold bars don't do much while they're sitting in the vault except stare back at you.

But Goldcorp actually pays you to hold it, in the form of regular monthly dividends. And on Dec. 5, the company announced plans for a sizeable 32% dividend hike. This increase (the third in the past 13 months) brings the annual payout to $0.54 per share, for a yield of around 1%.

That may not sound like much, but it sure beats having to pay for storage and insurance costs.

Goldcorp is positioned for industry-leading growth over the next few years. Thanks to a combination of expansion and new mine development, management is forecasting annual gold production to soar 60% and reach four million ounces by 2015.

Even if gold prices level off, that increased volume will keep cash flow and dividends moving forward.

For now, the firm's massive reserve base equates to 7.8 ounces of gold for every 100 shares held. At current prices, a $5,000 investment could get you the equivalent of almost $13,000 worth of gold reserves.

With the thinnest costs and the strongest growth outlook, Goldcorp is my top buy recommendation for gold investors.

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Tags: GGgold
Dec 21, 2011 12:39PM
With an increasing gold price and increasing production  (is forecasting annual gold production to soar 60%) no where for goldcorp to go but up.

Also they pay a small dividend while you wait.
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