If I Were a Hedge Fund Manager, I'd Buy Goldcorp - the Whole Company, That Is!

20 January 2011

This is getting ridiculous. The price of gold has almost tripled since this time 5 years ago (you could buy gold for about $500 US in January 2006).

Now let's look at the world's fastest growing major gold mining company....

No secret, Goldcorp is making out like a bandit. With production costs below $300 per ounce, the profit margin on each ounce of gold sold is up on the order of 500% over the past 5 years. Further, Goldcorp is now producing far more gold each year, and will continue to do so for as far as the eye can see. This is not true with such respected major gold mining companies as Newmont Mining, Barrick Gold or Gold Fields, for example.

So where is Goldcorp's (Canadian dollar) stock price? How about below its May 2006 level? That's right. You heard it here first! You would have paid $45 for a share of Goldcorp in May 2006, at which time gold had moved higher, to a point where it was briefly over $600 per ounce (about half today's price of $1345.70.

What does a share of Goldcorp set you back now? If you were on the ball, you could have picked it up today for $39.84.

So to recap (over the past 5 years): Goldcorp's gold production is up massively. Margins are up something like 500%. And the stock price is down somewhat more than10%.

Does this make sense to you?

It certainly doesn't to me.

If you had told me these facts 5 years ago, I would have told you that this would not be possible. But here it is. On a golden platter, if you will....

Of course, markets can be irrational any time they want, as often as they want, and for as long as they want. But Goldcorp is sure one heck of a screaming value at $40 per share in January 2011. At this price, I'd be willing to put 100% of my portfolio in the company, and I would sleep like a baby (Goldcorp does happen to be one of my largest stock positions).

Now I am not complaining. It's none of my business what the market does. I'm just a shareholder looking at fundamental value.

But if I were a hedge fund manager with a few billion dollars in my back pocket? Heck, I'd just go and buy the whole company, close my hedge fund, retire, and live off the cash flow for the rest of my life! No matter how long I lived, Goldcorp would take care of me virtually forever.

Note: $29.7 billion (CDN) would buy all of Goldcorp today. Annual revenues at $1400 gold? This year's 2.3 million ounces of production will amount to $3.2 billion before expenses, which are somewhat below $700 million. You've got it. the profit margin is on the order of 78%.

Good business?

It's a gold mine.

Future prospects?

Again, Goldcorp is the fastest growing major gold miner in the world.

The gold price?

Likely to be over $2000 in a couple of years, which, with production growth, will bring total annual revenues well over $5 billion. You could be looking at $6 billion per year in 2 years. (These are all back of the envelope calculations.)

If I were a hedge fund manager, looks to me like I'd get my money back in about 6 years, maybe 5. (Perhaps 8 years if things don't go my way.) After that? Gravy... as far as the eye can see - for decades to come!

I'm going to be buying more Goldcorp shares. Lots more....

And when I get my own hedge fund? Look out!
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