The price of gold and the dollar index are inversely proportional. With the U.S. economy showing signs of recovering and fears about the eurozone and sovereign debt crisis abating, investors are gradually reducing their commodity hedges and putting their money into equities and other growth assets. As this transition occurs, I think profitable commodity businesses can slip through the cracks and become undervalued. Too much attention is paid to the price of the commodity itself, while investors neglect closely examining the intrinsic value of the businesses that actually provide these raw materials. Given the current market conditions, I think this is exactly what we are seeing with Goldcorp (GG). Indeed, I believe there is a lot to like about its business that warrants its consideration as an attractive value opportunity.
Unlike big diversified mining companies such as Vale (VALE), Rio Tinto (RIO) and Freeport-McMoRan (FCX) that face a plethora of risks associated with the trend of falling commodity prices, I like Goldcorp because it really is a classic value play. As opposed to Vale, Rio Tinto and Freeport-McMoRan which have seen their share prices fluctuate given the instability of iron ore, Goldcorp truly specializes in one thing – mining gold, and it does this extremely well.
Consider that despite being a much smaller producer, Goldcorp has surpassed long time market leader and much larger Barrick Gold (ABX) as the world’s biggest gold miner in terms of market capitalization. Goldcorp has a market cap above $36 billion while Barrick Gold’s total value is around $35.6 billion. What jumps out at me about Goldcorp is what happens when I dive deeper into this comparison. To continue reading, click here.