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Morningstar gives four Gold stocks to add to your radar screen..
Goldcorp has enjoyed enviably low extraction costs because its Red Lake Mine in Ontario has 2 ounces of gold per ton of ore as opposed to the 0.01-1.3 ounces found in the mines owned by larger North American companies like Newmont NEM, Placer Dome PDG, and Barrick ABX. Low extraction costs translate into healthy cash flows, higher margins, and higher returns on invested capital. Goldcorp’s average ROIC is an impressive 30% since 2001, which is outstanding in the gold mining industry. Under new CEO Ian Telfer, Goldcorp has set its sights on using the cash generated by operations to acquire its way into the 2 million-ounce-per-year category. We expect to see a lot of action and growth here, though we would keep a close watch on acquisition prices.
Freeport McMoRan FCX
Freeport-McMoRan Copper & Gold stands head and shoulders above its mining peers because of its flagship Grasberg mine in Indonesia. The mine boasts the largest single gold reserve and the second-largest copper reserve in the world. Like Goldcorp, Freeport also enjoys enviable margins, and ROICs have topped its cost of capital even in 2003/2004–years adversely affected by a landslide.
Royal Gold RGLD
Royal Gold is a cross between a bank and gold company. As a holder of gold royalties, Royal Gold has exposure to gold price movements, but is insulated from mining costs. This great position results in awesome returns by gold-mining standards.
Barrick does not earn its cost of capital currently. But we will still keep this company on our radar screen because of its disciplined approach to exploration and development. By keeping a constant exploration budget going during the late 1990s, Barrick has lined up an admirable queue of projects that will provide significant growth in the coming years unlike the gold mining industry in general. Although the company’s partially hedged output will restrict its ability to capture the value of increasing spot gold prices, we think Barrick is one of the better gold stocks in our mining universe.
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