Gold producer Goldcorp Inc. (GG) recently completed the sale of its Escobal silver deposit in Guatemala to US-based Tahoe Resources Inc. for a total consideration of $505 million. The total payment consists of 43.7 million shares for $5.8 per share, representing about 40% of Tahoe’s outstanding share capital, with the balance ($253 million) in cash.
Tahoe Resources recently begun operations with plans of becoming the leading low-cost producer of silver in America. The underwriters for Tahoe’s initial public offering were granted an over-allotment option, which − if exercised − will expand Goldcorp’s share in Tahoe. However, Goldcorp does not have plans to increase its ownership in Tahoe for now.
Canada-based Goldcorp continues to be the leader among the gold producers with a forecasted production increase of 57% over the next five years. The sale of Escobal is in line with Goldcorp’s strategy to strengthen its gold business by divesting non-core assets.
Goldcorp is benefiting from facility expansion, increasing gold prices and a dominant acquisition strategy. The company has the highest leverage to spot gold prices because of its completely unhedged position. The long-term rise in gold prices is a positive for the stock as Goldcorp is among the world’s lowest-cost gold producers, along with Barrick Gold Corp. (ABX), Kinross Gold Corp. (KGC) and Yamana Gold Inc. (AUY).
Goldcorp discovered the Escobal silver mine last year. The project contains an indicated mineral resource of about 100 million ounces of silver based on 4.57 million tons of ore at a silver grade of 684 grams per ton. Tahoe plans to continue the ongoing exploration drilling program at the project and conduct metallurgical and engineering studies to evaluate potential development scenarios.
We reiterate our Neutral recommendation on Goldcorp.
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