Goldcorp earnings up

When asked what it did last summer, Goldcorp (G-T) has both an interesting and a lucrative story to tell. It made money from mining gold, holding gold, and from dabbling in the stock market.

Goldcorp posted third-quarter earnings of US$16.3 million, or US9 per share, on revenues of US$49.6 million. For the first nine months of the year, the company has made US$46.3 million while taking in US$127.6 million in revenues. By comparison, in the third quarter of 2001 it turned a US$10.6-million profit on revenues of US$32.3 million, and was US$40.6 million ahead on revenues of US$120.6 million after nine months.

It also booked a US$12.2-million gain on marketable securities during the quarter, having bought a stake in another gold producer worth about US$121-million. Goldcorp sold securities to a value of US$133.2 million in the quarter, and it was those transactions that piqued the interest of market watchers, because it appears Goldcorp tried to gain a position in a major gold producer.

In an Oct. 23 conference call, responding to a question from analyst George Topping of Sprott Securities, Robert McEwen, Goldcorp’s chief executive officer, said the company had been on the lookout for “strategic situations where we can grow, whether it be production, reserves . . . We took a position in a company where we thought there was an opportunity; we looked at it much closer and decided that that opportunity didn’t exist.”

McEwen said the position amounted to less than 4% of the target company’s shares, which implies that the total market capitalization of the company was between US$3 billion and US$4 billion. The only North American gold producer in that ballpark is Placer Dome (PDG-T).

It has been widely assumed that Placer’s Campbell gold mine in Red Lake, Ont., and Goldcorp’s adjoining Red Lake (Dickenson) operation could benefit from a combination. Both are low-cost underground mines, and Campbell’s mill includes an autoclave system that could be valuable in treating some of the more refractory ore at Goldcorp’s mine, which makes up a large part of the resource tonnage but very little of current production (only about 6%).

Placer has been seen as the biggest potential takeover target in the gold business since last year’s merger-mania. Some of the speculation surrounding a bid for Placer was hosed down by Placer’s own bid for Australian gold miner AurionGold, which was recently declared a success. However, the AurionGold purchase, which carries a large hedge position along with it, could have soured any potential bidders that wanted to avoid taking on large hedge books.

But Placer’s stock price has remained low, fuelling speculation that several other gold producers could possibly attack at once in order to stage an asset strip. This scenario has local buyers taking out Placer’s assets in Australia, South Africa and Canada. Goldcorp, whose stock is at a premium, has been seen as a possible buyer for Campbell, and the combination headed by Kinross Gold (K-T), as a possible taker for Placer’s other Ontario operations, Musselwhite and Dome.

Campbell, long one of the richest and lowest-cost underground gold mines on the globe, has faltered in recent years because of ground problems. But its high-grade mineral inventory remains quite significant: reserves of 1.9 million tonnes grading 16.7 grams gold per tonne and additional resources of 7.6 million tonnes at 11.6 grams.

It is unlikely Goldcorp expected to get 3.8 million oz. at just over US$30 per oz. Instead, the company may have been looking for the leverage that a 3.5% shareholder could exercise in a takeover battle, or for negotiating clout with its neighbour.

Having sold out of the share position, though, Goldcorp probably has put any other plans for Campbell on hold. It remains on the lookout for other acquisitions, according to Halina McGregor, its chief financial officer: “We have a very strong balance sheet for corporate development purposes — we’re looking at other alternatives.”

The company’s Red Lake mine had a successful quarter, producing 140,158 oz. gold and running up a cash production cost of only US$63 per oz. That included 8,732 oz. of gold in sulphide concentrates, which are shipped to Barrick Gold‘s (ABX-T) Goldstrike mine in Nevada for autoclave processing — rather than across the road to Campbell.

Red Lake produced 395,532 oz. in the first nine months of the year and is on-track for production of 525,000 oz. at US$65 per oz. by year-end. During the quarter, both mill head grade and mill throughput were higher than budgeted.

The Wharf mine in South Dakota produced 22,824 oz. in the quarter at a cash cost of US$209 per oz. Reclamation has started on the Golden Reward pit, and Goldcorp has increased its provision for reclamation at Wharf by US$3.5 million.

The company’s Saskatchewan Minerals division, which produces sodium sulphate, brought in revenues of US$2.3 million and generated an operating profit of US$500,000.

Goldcorp retained 15,326 oz. of its production and bought a further 19,990 oz. on the gold market during the quarter, bringing its total gold holdings to 178,911 oz. The gold, carried on the books at US$41.4 million, had a market value of US$57.9 million. Only unrealized gains show up in Goldcorp’s earnings.

In the recent quarter, the unrealized gain was US$766,000, and for the three completed quarters of 2002 it is US$398,000.

The company has US$235.5 million in cash, and its total current assets, including cash, are US$303.2 million. It has US$43.6 million in current liabilities, and apart from US$18.2 million in closure provisions and US$35.7 million in future taxes, it has no long-term liabilities.