Goldcorp to enter gold bullion loan business

In a bid to lower the perennial discount evident in all gold funds, Goldcorp Investments plans to add more lustre to the fund by arranging gold bullion loans.

The move is designed to use a portion of the funds 197,790 oz of gold to generate income. First developed in Australia, gold loans are not a new financing tool. Since the early 1980s, more than 1.8 million oz of gold has been loaned by banks and institutions to developing gold mining companies, Hubert J. Lum, vice president of Goldcorp, told shareholders at the company’s annual meeting.

The gold miners sell the gold to get cash for capital expenditures and pay a fee ranging from 1.5%-5% on the value of the gold. Also, the gold bullion must be replaced by the debt holder from future mine production. The meeting heard that with more than 20 mining projects coming on stream in Canada during the next two years, a large amount of capital financing will be required. Goldcorp President Robert R. McEwen said that assuming 150,000 oz of gold was lent, Goldcorp could expect earnings of $1.4 million or 8 cents per share. After the meeting he told The Northern Miner that no deals have been concluded with any companies.

As a form of insurance, Goldcorp plans to lend only bullion to mining companies which have secured a guarantee of gold replacement from a chartered bank. This, Mr McEwen says, usually costs the borrower an additional 1.5%-3%.

The move, Mr McEwen hopes, will help reduce a part of the discount between the net asset value of the fund and the share price. In March the discount was 17.3% and by April 30 had declined to 12.6% — primarily because of strengthening gold prices and gold mining shares.

Stronger gold and share prices have resulted in the net asset value of the fund increasing from $185.1 million at the end of 1986 to $215 million at Mar 31. At the end of 1985, the net asset value was $148.1 million. During the year, gold bullion holdings were reduced from 66.6% of the fund to 59.7%. The difference was moved into Canadian, South African and American gold equities.