Goldcorp
Inc. (G:TSX; GG:NYSE 16.02) has had a tough year. After reporting a
year-end loss of $4.1 billion due to writing off and down various projects-a
supposed clearing of the decks for the new CEO David Garofalo-the recent
results were not so positive. Production was down year-on-year, due to
shortfalls and problems at its two largest mines, Pe�asquito and Cerro Negro.
There are some positives, however. �l�onore, which had had some early
production setbacks, improved performance. And the pipeline remains strong,
with numerous studies expected over the next 12 months; Goldcorp recently
acquired Kaminak and its high-grade Coffee project. The company is
forecasting flat production for the next three years, so the hurdle it has
set itself is not so high, and we are likely to see the company focus on its
existing projects rather than new acquisitions.
Hold off on new buys?
Costs have been cut, including major cuts at the head office. With $360
million in cash, and $2.8 billion in debt, a priority is to de-lever, another
reason not to expect new acquisitions.
Overall, despite some recent mine problems, Goldcorp has good assets in
good countries. It trades at a 4% premium to its peers on an NAV basis,
though is inexpensive on other metrics. If it can get all its main operations
to run smoothly for a few quarters, we could see Goldcorp recover nicely.
Goldcorp is a buy at this level, the best buy among the major miners.
Problem solved, buy ahead?
Royal Gold
Inc. (RGLD:NASDAQ; RGL:TSX 77.94) has finally resolved its major problem
and erstwhile drag on its stock. Centerra Gold Inc. (CG:TSX; CADGF:OTCPK) has
acquired troubled Thompson Creek, including the Mt. Milligan mine, a stream
on which represents about 30% of RGLD's reserves. RGLD has agreed to
restructure the stream, decreasing the gold and increasing exposure to the
copper; the economics are essentially unchanged.
RGLD wants to reduce its reliance on Mt. Milligan, so we may see a major
new stream (or royalty). Even if the economics are not overly attractive, the
market would respond well (as it has with other companies buying major,
long-life if low return streams), particularly since it would diversify
RGLD's asset base and revenue sources.
Despite the strong recovery-a triple this year-RGLD is still trading at a
20% discount to its royalty peers. We are holding, and would look for
opportunities to buy on price weakness.
Back from the brink
Freeport-McMoRan
Inc. (FCX:NYSE 10.48) continues to make strides towards repairing its
balance sheet, by cutting costs, reducing capex for its oil unit, with
ongoing equity sales, and asset sales. Most recently it announced agreement
to sell its interest in the giant Tenke Fungurume in the DRC for $2.65
billion.
With about $19 billion in debt, the company has a target of $10 billion.
After one more equity raise and the completion of pending asset sales, if
copper stays where it is, CEO Richard Adkerson says there is no need for more
copper sales. Recent losses have been due to special items and carrying costs
of its oil & gas assets; operational performance has generally been
strong. If the company sells an interest in its Indonesia operations or its
oil & gas unit, this would be "a strategic decision rather than a
financial imperative," said CEO Adkerson. The fact that he brought this
up suggests (to me) that such moves are under consideration. We think the
market would respond well to either of these possibilities.
More major sales ahead?
It was the acquisition of two oil companies that brought Freeport to the
situation where it is today. As for Grasberg, it is a fabulous, long-life
mine, but operating conditions in Indonesia are worsening-Newmont Mining
Corp. (NEM:NYSE) recently exited the country and is not alone-and there is
major capex ahead. Freeport has obtained a short-term license allowing it to
export ore. More importantly, it is currently operating without a long-term
contract. Freeport is reluctant to keep making heavy capital expenditures
without a contract, though stopping the capital spend would have major
ramifications. A long-term solution would be to bring in a major partner
(Rio?) who would assume much of the capital spend-saving Freeport's balance
sheet-while Freeport kept a smaller part of the operation. This won't happen,
however, before a new agreement with the country is in place.
Even after such a transaction or transactions, Freeport would remain a
solid copper company with world-class operations. It is a great buy for
patient long-term investors, particularly on weakness. This is a good price.
Disclosure: 1) Adrian Day: I, or members of my immediate household or
family, own shares of the following companies mentioned in this article:
None. I personally am, or members of my immediate household or family are,
paid by the following companies mentioned in this article: None. My company
has a financial relationship with the following companies mentioned in this
article: None. Funds controlled by Adrian Day Asset Management hold shares of
the following companies mentioned in this article: Goldcorp Inc., Royal Gold
Inc. and Freeport McMoRan Inc. I determined which companies would be included
in this article based on my research and understanding of the sector.
2) The following companies mentioned in this article are sponsors of
Streetwise Reports: None. The companies mentioned in this article were not
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