By IAN ROSS
Goldcorp Inc. billing itself as the world’s only gold producer to strategically withhold production on the belief that the price of gold is going higher over the next six years.
The company withheld 31 per cent of gold production during its third quarter - 27,132 ounces - and plans to do the same for the next fiscal period. They believe prices will continue to rise and generate higher earnings than if all the gold had been sold when produced.
Things are going so well for the Toronto-based miner, its outgoing president says the company is so awash in cash it could stop production for the short term and still thrive.
“With our cash reserves, we could stop selling gold and run more than two years, covering all our operating expenses and capital expenditures and all our dividends,” says Rob McEwen, who admitted he has broached the idea with the company’s board of directors.
“I definitely like the idea.”
The company has no debt, a $420-million treasury and pays a dividend 12 times a year.
Goldcorp Inc. grew dramatically in the 1990s after discovering new deposits at its Red Lake mine in northwestern Ontario. Its high-grade deposits have made Red Lake one of the hottest exploration areas in the world. The company is sinking a new Red Lake shaft, which had reached a depth of
1,900 feet by mid-October 2004.
McEwen, who announced his resignation as CEO in September 2004, after 18 years as Goldcorp’s head, remains bullish on gold for the long term.
“I think we’re in the middle of a long-term economic cycle that in the last 108 years has delivered two periods where gold produced superior returns and we’ve entered the third period in the summer of 1999 with another six years to go.”
He believes gold will eventually test US$850 per ounce by the time the current cycle is over.
With the U.S. economy awash in debt, McEwen says many investors are turning back to gold.
“Debt is the root of the cause. The U.S. dollar is the reserve currency of the world and it’s being debased very quickly. The debt the government is collecting is without precedent; it’s an enormous size.”
Consumer debt is at a record high, corporations have been bailed out, and there is no money being borrowed to build productive assets in North America, and the government is just spend-thrift, says McEwen.
“In times of economic stress, people turn to gold.”
McEwen says gold is seeing some pretty big gains.
Annual world gold supply and production have a negative growth curve, expected to be off by 12 to 15 per cent over the next couple of years.
There is also a practice called hedging - a forward sale of future production - which was prevalent in the 1990s when gold prices were falling and interest rates were high.
“With interest rates low and the price of gold going up, that’s a prescription for getting a bigger loss, if you hedge.
“Many (companies) have unwound their hedges in the last couple of years, yet there are still some large gold mines that haven’t gotten rid of them and it’s starting to cost them money and they’ve been trying to cover.”
