|
| |
|
Basic Business Fundamentals Indicate
that Gold Mining Shares Make Sense
|
|
|
I don't get it. Economic news is miserable and
yet the stock market continues to climb.
Take Friday, October 25th as an example. Boeing
Airplane Company announced that third quarter earnings fell
43%; JP Morgan's third quarter profit fell 91% as the nation's
second largest bank wrote off more loans to telecom companies
and lost money in investment banking; and, the travel industry
continued to take a beating exemplified by American Airlines'
management admitting to a $1 billion loss for the Company's
third quarter.
On a more macro level, the numbers for both
durable goods orders and consumer confidence were also announced
on the 26th and neither looked good.
As readers are aware, consumer confidence is
critical because it is the rank and file that continue to
keep the U.S. economy from falling flat on its face. If the
people lose faith, we could really be in trouble. Unfortunately
it appears that is exactly what is happening because the latest
number representing their sentiment had dropped to "80.6".
This is the lowest it has been since 1993 and it was the fifth
consecutive decline.
On top of all this, two of the most important
companies in America were downgraded recently by Standard
and Poors and Moody's. Both have lowered their ratings of
J.P. Morgan and Standard and Poor's cut its rating of Ford
debt to a record low.
People who take issue with my belief that we
are in serious economic trouble point to the fact that the
housing data, which was also announced last week, was positive.
I agree. After all, you can't dispute hard numbers.
But what about the fact that new home sales were only up 0.4%
after increasing 6.8% in August. This shows me that the housing
market is losing steam.
Now, any rational freshman business or economics
major will tell you that these results don't make for a promising
environment and that investors in the stock market would be
wise to sit on the sidelines with their money and wait for
things to improve.
Did this happen when the numbers came out last
Friday? Of course not - the Dow was up 126.65 points (1.5%);
the Nasdaq Composite increased 32.42 points (2.5%); and, the
Standard and Poor's 500-stock Index gained 15.15 points (1.7%).
Does this make any sense to you? It certainly
doesn't make any sense to me. The fundamental reasons for
buying conventional stocks are just not there right now.
Anyone who invests in companies for reasons
other than fundamental corporate values should have his head
examined. People are practically guaranteed to lose money
in the stock market when they lose sight of this fact. Investors
must do their own research and listen to the opinion of a
qualified veteran investment professional.
So what are the investment professionals saying
today?
Well, the ones who are making money for their
clients are telling them they should take a hard look at gold
and gold stocks because there is fundamental value in that
area today.
Well, the ones who are making money for their
clients are telling them they should take a hard look at gold
and gold stocks because there is fundamental value in that
area today.
Precious metals stockbroker Walt Raby, who has
been successfully advising his clients since the 1970's, titled
his October 2002 Newsletter, "Gold Is Back On the Throne".
The reasons he believes this to be the case are easy to understand.
He points out that the turbulence in the world today is higher
than it has ever been with the possibility that the Israel
- Palestine struggle could bring the whole Middle East into
a major war. He does not like the fact that America is the
biggest debtor nation in the world and that U.S. "borrowing
and spending seems to have no limits". And, he is very concerned
about the long term strength of the U.S. dollar.
Walt believes, as do a host of other professionals,
that the only safe place for investment dollars today is in
some form of precious metals, be that the commodities themselves
or the stock of companies in that industry.
Given both the economic environment that we
find ourselves in today and the high level of international
tension, I agree completely.
If your thinking is along the same lines as
mine, here is a company that a friend of mine, whose opinions
I value highly, is currently discussing in his newsletter.
Bob Chapman, publisher of The International
Forecaster, likes Goldcorp Inc. (NYSE - "GG" and TSE - "G")
The company produces gold from its Red Lake
Mine in northwestern Ontario, Canada and its Wharf Mine in
South Dakota. In addition it has an industrial minerals operation
in Saskatchewan, Canada.
Prior to the beginning of 2001 Goldcorp forecast
total production of 575,000 ounces at a cash cost of approximately
$100 per ounce. When the year ended, the results were substantially
better. The Company had produced 607,403 ounces at a cash
production cost/ounce of $85 and a total operating cost/ounce
of $114.
According to Bob, The Red Lake Mine has high
grade reserves of 3 million ounces with an average grade of
1.68 ounces of gold per ton, and an additional 0.9 million
ounces of resources grading 2.02 ounces of gold per ton. This
average grade makes the Red Lake Mine the world's second highest
grade gold mine. At current production levels these reserves
and resources will support a mine life of more than eight
years. To date the average discovery cost has been $11 per
ounce.
Total company reserves are 4.3 million ounces,
and include contributions of 0.7 million ounces of gold from
the Wharf Mine and 0.5 million ounces of lower grade ore at
Red Lake.
Goldcorp's success is an excellent illustration
of the fact that exploration is the best way to create shareholder
value. The company views exploration as its research and development
and maintains a strong commitment to it.
Comparisons to other major gold districts suggest
Red Lake is still relatively early in its history of discovery
and that more ounces of gold remain to be found. The exploration
history of other major gold districts suggests that this is
most likely to happen around existing mines. In recognition
of this, Goldcorp is the dominant landholder in the Red Lake
Camp and has a significant exploration budget in 2001 with
cash allocated to both the Red Lake Mine and regionally in
the Red Lake area.
Goldcorp management believes in the Company's
product - gold and that we are at a major cyclical low in
the gold price. They feel that tremendous upside potential
exists. The company firmly believes in providing its shareholders
with full exposure to positive movements in the gold price.
Consequently it is not hedged and management intends it to
remain that way.
The company has prudently managed its finances
and has remained free of debt with a rapidly growing treasury.
With such excellent results immediately coming from Red Lake
the company wanted to provide a return to its shareholders
as soon as possible. As a result, management declared a new
$0.10 per share dividend in February 2001. This is one of
the largest dividends in the North American Gold Industry.
Revenues for fiscal 2001 were $165.7 million
which was an increase of over $104 million as compared to
fiscal 2000. After losing money in fiscal 2000, the management
team turned it around and made $52.8 million during fiscal
2001. This represented a net profit margin of 31.9%.
Gold related companies provide an interesting
alternative investment for individuals who currently don't
take a lot of comfort in the fundamental aspects of many of
the companies which make up the various stock market indices.
If you fall into that category, remember to do your own due
diligence on all of your investments. As I have been saying
for years, this is the best insurance you have against loss.
If you want more information on Goldcorp, call
either the Company or Bob Chapman at The International Forecaster
(941-639-4756). Also, if you want to talk with someone who
is well versed in the precious metals industry, call Walt
or Jim Raby. These are two guys who have a lot of experience.
They can be reached at 1-800-431-4488.
********
|
