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Economic Reality

March 20, 2005
  • Due diligence.
  • Research.
  • Homework.
  • Fundamental analysis.

Did one or more of the terms above make you cringe? If so, you're just like the rest of us. Oh sure, we all talk a good game; "You gotta do your homework!", "Make sure you research the company fundamentals.", "I've done my DD on this company." - - but do we really? Think of your last five stock purchases. What did you truly know about the companies in question? Did you do any real checking or did you rely on the Yahoo-posted P/E and some guy on a message board (or an economic website...) who claimed to know what he was talking about? Chances are you spent 10-15 minutes glancing over the numbers and decided to make a play. Diversity, right? "Even if this stock doesn't go up at least I'm spreading my money around." Well, you can spread your money around between 50 guys selling "authentic" rolex watches on the streets of New York and it's not going to make you any richer. The corporate world is just as full of crooks and thieves as a bad part of the city - - they're just wearing ties.

What you take from this review should be no different. I make no promises, nor do I claim to have all the answers. What I will be doing is laying out some juicy nuggets of information that I hope will pique your interest enough that you'll suck it up and crunch some numbers yourself.

So - with that all said, let's dive right in.

OPINION ---> If you own only one stock, make it Goldcorp (GG). <--- OPINION

STOP! I know some of you are already about to click away from the page, but I believe that would be a mistake. Give me the chance to finish, ok?

Why Goldcorp? Well, I must admit that it's a catchy name, and it's in my favorite industry, gold....but it just ain't that easy. Let's take a look at some fundamental bits that hopefully aren't too brain-numbing:

  • Profit: The company is profitable. It's not Yet Another Great Idea (YAGE) that is sucking down investor dollars faster than Bill Clinton goes through interns.
  • History: Profit is not a new thing to Goldcorp. They have a long history in the industry and a proven track record of wise management decisions.
  • Debt: There is none. Zip. Zero. Nada. Don't be fooled by phrases like, "Zero net debt" - this means only that the company has less in debt than in assets. Goldcorp has no debt and an open credit line. I imagine they will use it soon - perhaps in acquisitions - but my point is they're not already in debt. They have full purchasing power, and when the right opportunity arises, they're going to take full advantage of it. Oh...I almost forgot. They're also sitting on a 300 million dollar mountain of cash.
  • Cost: Goldcorp is one of the lowest production-cost gold producers in the world. Officially, it cost them $115 an ounce to pull it out of the ground in 2004. So, for the 628,005 ounces they dug up and processed this past year, it cost them $72,220,575. Assuming an average gold price of $420 (that's a rough estimate for 2004), that is $191,541,525 in profit (($420 - $115) x 628,005). But gets better...
  • Smarts: These guys are smart. Just as a prudent worker will save a little bit from each paycheck, Goldcorp saves a little bit from each trip to the mine. Why? Because they believe in their product. They believe gold is in a long-term bull market - - so why sell all of your gold as soon as you mine it when you can hold some back and wait for a better price? As of December 2004 their gold inventory stood at 221,220 ounces of gold. Don't forget - - this gold is already paid for! The $115/ounce is already on the books and done. [Author's note: I have not confirmed this directly with the company - but I would assume that executives smart enough to make this play would not be stupid enough to play accounting games by not putting the mining cost on the books until years later] In a previous article I stated my belief that gold will reach $520 by the end of 2005. If we assume a sale price of $480 (because they're not going to get the ultimate top) that's an additional $106,185,600 in profit! Since there has been no press release stating they've sold their stash, we can only assume it has continued to grow in the last 3 months. Perhaps to as high as 250,000 ounces.
  • Fairness: While it is the goal of any company to make money, most companies these days refuse to share their wealth with the stockholders who actually own the company. Instead, they either hoard it for themselves, or waste it on ridiculously risky investments or acquisitions, all the while putting out impressive sounding press releases that are completely devoid of substance. "Our stock price is going to go to 8-bajillion dollars a share this year! Get in on the ground floor!" Not Goldcorp - they pay a dividend every month! That's right folks, each and every month they pay out $0.015 a share for an annual dividend of $0.18 per share. What's more, they have promised that as the price of gold goes up, so will their dividends!

So - - how about it? Have I grabbed your attention? Are you willing to do the additional homework? Their website is a wonderful resource - everything I have stated here is available there as well....and a whole bunch more!

I would like to end with two more quick bullets. The difference here is that these use a little bit of guesswork. Educated guesses, but still not cold hard facts.

Goldcorp recently merged with Wheaton River. Wheaton River recently surprised the gold-investment sector with record survey results showing proven and probable gold reserves totalling 5.1 million ounces. (For those keeping score, at $420 an ounce that's $2,142,000,000)

The official statistics show earnings of $0.27 per share and a P/E of 56. Let's assume for a moment that even with the price of gold rising and a merger with another profitable company (Wheaton) that pulled down $0.22/share last year, the earnings stay flat (hahahahahahahaha!!! Sorry...). Don't forget about that quarter million ounces of gold sitting in the vault! That $106,185,600 translates into an additional $0.56 a share for a P/E of 18.26! It would be extremely difficult to work out true numbers for next year as we don't know how many shares will be outstanding after the merger is completed - but suffice to say, I think $0.27/share is a worst-case estimate...I expect earnings to be much higher. Perhaps as high as $0.60/share - - PLUS the saved gold bonus for a total of $1.16/share! That's a four-fold increase over last year!

Sounds pretty good, huh?

So what's the catch? As far as I know, there isn't one. That's not to say it doesn't exist - only that I have done my due diligence and I have yet to find one.

I'll sign off now - I suppose I could do a technical analysis, but to be honest, I don't think that really matters (and I'm a pretty good chartist!). I believe that at the end of this bull market Goldcorp will be standing at the top with the best of them....with the masses crying in their pillows because they didn't pick it up for less than $20/share.

20 March 2005

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DISCLAIMER/DISCLOSURE: Yes, I own Goldcorp (but not near as much as I'd like to - some of us don't have a fortune, we're trying to build one). No, they didn't pay me to write this - in fact, they have no idea I've written it and for all I know I'll get a "cease and desist" order because I screwed my facts up (I doubt it). I'm not writing this for a "pump and dump" scheme - I can't afford the sheer number of shares it would take for such a plot to be worthwhile. My motivation here is simple - I think this is the Microsoft of the gold world....I'm just spreading the good news.

Nearly 40 percent of all gold ever mined was recovered from South African rocks.
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