INVESTMENT COMMENTARY — Undervalued Goldcorp regarded as a winner

The recent exploration success at the Red Lake gold mine in northwestern Ontario could translate into a mid-term price of $20 to $25 per share for Goldcorp (TSE).

Such is the opinion of David James, gold analyst with Canacord Capital, who recommends the stock as a buy in a recent report.

Early last year, Goldcorp acquired all the shares of Dickenson Mines and, some months later, began a $10-million program of underground exploration and development at that company’s Red Lake mine. Before 1992, virtually no exploration had been carried out below the 30th level, owing to a lack of funds.

Last March, Goldcorp concluded that the known sulphide ore zones persist at depth. Around the same time, it announced the discovery of the high-grade Main Quartz Carbonate zone, which was cut by nine holes that averaged 9.08 oz. gold per ton (uncut) over 7.6 ft.

Three other holes proceeded to cut this new zone at depth, with intersections averaging up to 5.22 oz. over 4.8 ft. Also discovered were two other structures: the Highgrade Quartz Vein and Footwall zones.

Meanwhile, widely spaced holes on the 38th level confirmed the downdip continuity of the sulphide ores zones, with intersections averaging 0.25 oz. over widths varying from 7 to 10 ft.

Although only $2.5 million of the $10-million drilling program has been spent to date, Goldcorp estimates that Red Lake’s previous reserve figure has almost doubled to more than 2 million oz. The discovery cost is estimated at $2.50 per oz.

Moreover, exploration potential along strike, at depth and above the 30th level is considered excellent.

James contends that while the 1 million oz. discovered are still in the resource category, total net reserves now exceed 3 million oz., and he goes on to explain that Goldcorp has been undervalued.

The analyst cites six gold producers with similar reserve figures, pointing out that the group, as a whole, has an average reserve figure of 4.3 million oz. and a market capitalization of about $230 per oz. In light of these figures, James says, Goldcorp could justifiably command a market capitalization of about $200 million, or about $6 higher than the current price.