Goldcorp to focus on creating value for stakeholders
Goldcorp Inc. (TSE:G, Mkt cap 23.51B, P/E – , Div/yield 0.06/2.28, EPS -1.65, Shares 812.26M) and Barrick Gold Corp have agreed to sell their interests in a Nevada gold mine for $275 million in cash, the Canadian gold miner has announced.
The transaction concerns the partners’ combined 100% stake in the active Marigold mine, which will be bought by Vancouver-based Silver Standard Resources in a deal expected to close in April. The divestment is in line with Goldcorp’s measures to ensure disciplined portfolio management while focusing on creating value for stakeholders, CEO Chuck Jeannes commented.
Goldcorp owns a 66.7% stake and is also the operator of the mine, which is located in Nevada’s Humboldt county, while Barrick owns a 33.3% stake in Marigold.
Goldcorp Inc & Barrick Gold Corp have agreed to sell their interests in a Nevada gold mine for $275 million in cash.
The gold miner did not say whether the sale had anything to do with its $2.6 billion hostile takeover offer for smaller sector player Osisko Mining Corp (TSE:OSK), which has brought the bid to court in an attempt to block it. The target company, which has a low-cost mine in northwest Quebec, is suing Goldcorp for allegedly misusing sensitive information that Osisko presented to the gold miner when they were discussing a friendly acquisition over five years ago. The smaller miner also insists that the offer filed by Goldcorp is too low.
In a statement, Goldcorp rejected Osisko’s allegations, saying that it has been involved in no improper activities related to the takeover bid.
The Quebec Superior Court, where the lawsuit was filed, has set a hearing March for 3rd to 5th to rule on its merits. As a result, Goldcorp has extended the expiration of its offer from February 19th to March 10th.
Goldcorp is well positioned to significantly increase production over the next few years.
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Michael Sprung Interviewed by Mark Thorburn of SmallCapPower
Mark Thorburn: Founded in 2005, Sprung Investment Management helps clients moderate swings and market volatility through a value investing approach aimed at preserving wealth and providing a real rate of return after fees and inflation. They are known for employing philosophies that frequently run contrary to current investment trends. SmallCapPower met CEO Michael Sprung in May 2013 where he told us more about his investment strategy, current market use, and favorite stock mix. Can you tell our viewers briefly about your fund?
Michael Sprung: Well we don’t really manage as a fund. All of our clients are separately managed accounts. They tend to be for the most part individuals and families. A lot of what we manage is family trusts.
Mark Thorburn: Can you tell us about the investment strategy at Sprung Investment Management?
Michael Sprung: Well, we’re basically value investors. What does that mean? It means that we don’t think we’re smart enough to know what’s going to happen next week, next month, or next year but if you understand the company and if you analyze it properly over a business cycle, you should get some reasonable expectation of what company can earn.
And then after that it becomes a function of what do you pay for it. Generally speaking then, we’re looking for companies that are better capitalized than typical in the industry. We try to find a diversity of companies across different spectrums and we try to tie that all together when we are putting it in to a portfolio as to what that particular investor’s objectives are.
Mark Thorburn: What is your current overall view of stock markets in Canada and that United States?
Michael Sprung: Well certainly going into this quarter, we were quite concerned that the markets were quite a bit overvalued. Well, not quite a bit but somewhat overvalued, I guess is a better term. I mean, when we look at the fundamentals, the P/E of the TSX for instance is hovering around 15 times, which is not far off its long-term average. But when we look at price to book values for instance, we’re about two and a half times which is considerably above the long-term average and the mean.
We thought that going into the year, markets particularly in the US for tracing quite well ahead of the underlying fundamentals supporting the market. We thought that for a number of reasons. The private economy is growing relatively slowly. We’re seeing employment gains but they’re very, very meager at this point in time.
On the positive side in the US we have seen somewhat of a correction in the housing market, a little bit more stability there. Also the consumer there has deleveraged themselves to a much greater extent than they have, say, in Canada. So there are some positive fundamentals occurring in the US but then you’re looking at the political intransient on the other side of the large deficit problems that they’re dealing with there.
So when we look at the sort of longer term earnings projections that we could see, we thought that the market was somewhat vulnerable to a bit of a correction here. Certainly, that has been the case in Canada where we’ve had the commodities correction, and commodities being such a big part of the Canadian market. They have pulled the Canadian market down quite sharply with that.
Mark Thorburn: Are you surprised by the strength shown by the stock markets in the US despite the fact that the US economy still seems to be growing below the long-term average?
Michael Sprung: Yes, we have been somewhat surprised by that. As I’ve said before, the US is up over 11% year to date. And yet, despite the problems they have in Europe, we’ve seen some gains in the European markets as well. The world index largely is the result of the strength of the US is up close to 10% so far. When we look at EAFE as a region which includes Europe, that pulls it down to around 8.5% and then if you look at the emerging markets, the indicator is there, the index is there just slightly in negative territory.
So the US has been bounding ahead over the rest of the world, particularly Canada and we think that that is somewhat of a vulnerable position.
Mark Thorburn: So what are your views on Canadian stock markets?
Michael Sprung: Well, we think this is an opportune time for value investors like ourselves, people that have a three to five year time horizon to be looking for opportunities in the market. The commodities correction has certainly hurt the TSX which the material section and the energy section combined comprise a large part of the Toronto market.
We think that there are opportunities in both of those areas. Over the longer term, it’s our belief that commodities will be in demand again.
Mark Thorburn: What do you make of six years of cheap money in the western world without any meaningful economic growth to speak for? What should investors do to secure a decent return from their investments in the coming years?
Michael Sprung: Well, I think you’ve raised a couple of points there. We don’t believe this is necessarily a new paradigm, but we do believe that it is certainly the modus operandi of today. With the economies as weak as they have been, governments are loath to allow interest rates to go up too much.
But on the other hand, we’ve seen governments issuing a great deal of debt and eventually the day has to come when investors want to be paid for the risk their taking in buying that debt. I think longer term, we’re building some longer term inflationary fears into the market that will also could cause investors to worry somewhat.
So, from our view the dangers probably lie more in the fixed income market than they do in the equity market. As we were saying earlier, the underlying economy itself seems to be somewhat moving ahead.
Mark Thorburn: What types of investment options are you finding attractive in the current markets?
Michael Sprung: Well, as we are noting, there has been quite a correction in the resource side of the market, both in energy and materials. Again, you want to look for stronger companies that have the wherewithal to last out a period, however long it may be, and seize opportunities that will come up. I think over the next year, you’re going to see a lot of M&A activity both in the energy and the materials area where the weaker companies are forced to sell assets or in fact are absorbed by the stronger companies. But as demand for those commodities begins to build momentum as the recovery hopefully takes hold, then I think you’re going to see quite a good potential return in both of those sectors.
Mark Thorburn: There are experts that are holding a dim view of the Canadian economy. Are we looking into a real banking and debt crisis in Canada?
Michael Sprung: Well, I don’t think that we’re necessarily looking into a banking crisis. It is true that the large proportion of loans by Canadian banks are in the mortgage sector, and yes, the Canadian consumer certainly has overextended if you look at debt loads relative to disposable income. We have far surpassed where the U.S. consumer was several years ago, but we have not had the correction or the deleveraging that they have seen south of the border yet.
So therefore, there is some vulnerability, I think, in the macro sense, in real estate. However, we think that this is going to be quite confined to particular pockets.
Mark Thorburn: The last time we spoke, you mentioned that you had exposure to precious metals through investments and large cap gold producers like Barrick Gold and Goldcorp. What are your views on gold currently, and do you still believe in holding some of these gold producers?
Michael Sprung: Our exposure to gold, generally, has been restricted to 5% of the portfolio approximately, and yes, we did and do have exposure still to Barrick and Goldcorop. Barrick in particular has been hard hit by a number of events, not just the decline in the price of gold, but also the problems at Pascua-Lama, which is probably one of their largest developments in Chile and Argentina and also by some threats from the government of Dominican Republic to demand a greater share of the proceeds from the mining that takes place there.
The latter one is not necessarily unique to Barrick. A lot of companies face this when they deal with governments but once the mine is developed, they get a little bit hungry for a little bit greater share and over time, the ongoing profitability of those mines becomes more important than allowing them to close or go into hibernation.
The problem in Chile is a little bit more troubling, but nonetheless, our view is that Barrick has been so hard hit that, basically even if they were to lose Pascua-Lama, the net asset value of the company is greater than the market value reflects today.
Mark Thorburn: As a value investor, is it possible to find value plays in the smaller end of the market? If so, what would you look for in such securities and can you share any that you may like?
Michael Sprung: We from time to time have dipped our toe into the small cap or micro cap sector of the market, and I guess to us, that would be looking at companies probably with market caps of $200 million or less. We still have today some exposure in that area, but again, often what you want to do is balance something that you’re buying in that sector that perhaps has a lot more potential on the upside but maybe with something more stable within the same industry group.
Let me give you a couple of examples. Within the infrastructure area, we own Churchill Corp. To stabilize that, I guess that volatility to some extent, the other company owned in that sector is Stantec.
Mark Thorburn: What advice do you have for viewers for the remainder of 2013 and beyond?
Michael Sprung: Well I think the most important thing for investors today is to have a discipline and a philosophy and stick to it. Where I think retail investors get whipsawed the most is being scared out of their own stocks and that can happen quite easily. You buy a stock, you see it go down, you worry about whether you did it for the right reasons or not. Well, we do that too, but we re-evaluate. What were our assumptions going in? How have they’ve changed? Is there anything fundamentally different in this business than before? Is this a buying opportunity to add more? In most cases, it’s either that or we decide to stick with our guns because we’re looking through the cycle. As long as you have a diversified enough portfolio that not all of your eggs are in one basket that’s not all going down together, that’s something that I think investors really have to keep in mind.
SmallCapPower is the leading resource for small cap investors. Their website gives visitors unparalleled engagement and access to smallcap companies, research analysts, subject matter experts, investment professionals as well as fellow site visitors. Please visit their site: SmallCapPower.com
Michael Sprung: Top Stock Picks on BNN Market Call, Friday Apr 26, 2013
The Bank of Nova Scotia (TSE:BNS) Market capital 67.70B, P/E 10.78, dividend/yield 0.60/4.23%, EPS 5.27, shares outstanding 1.19B, owned by clients, last purchase Oct 29, 2012 at $53.76.
The Bank of Nova Scotia is a diversified financial institution. BNS has four business lines: Canadian Banking, International Banking, Scotia Capital and Global Wealth Management. In January 2012, the Company closed its acquisition of 51% of Banco Colpatria, based in Bogota, Colombia. In April 2012, through Scotia Capital Inc., BNS acquired Howard Weil Incorporated, an energy investment boutique that provides equity research, institutional sales and trading, and investment banking services. In April 2013, Scotia acquired a 50% interest in Colombian pension fund manager Administradora de Fondos de Pensiones Horizonte SA.
A consistent performer, BNS is well managed, well capitalized and is judiciously employing a well-balanced diversified strategy. The recent acquisition of ING is already contributing beyond expectations. International diversification provides some exposure away from potential slower growth prospects in Canada and the US.
Encana Corporation (TSE:ECA)Market capital 14.06B, P/E – , dividend/yield 0.21/4.30, EPS -3.89, shares outstanding 736.30M, owned by clients, last purchase Dec 19, 2012 at $19.99.
Encana Corporation is the third largest natural gas producer in North America. ECA’s operations include the transportation and marketing of natural gas, oil and natural gas liquids (NGLs). It operates in two divisions: Canadian Division and USA Division. The Canadian Division includes the exploration for, development of, and production of natural gas, oil and NGLs and other related activities within Canada. USA Division carries out the same activities within the United States. During 2011, the Company sold its North Texas natural gas producing assets. During 2011, the Company acquired a 30% interest in the Kitimat liquefied natural gas (LNG) export terminal in British Columbia.
At current natural gas price levels, Encana is selling at a severe discount to peers yet it holds enviable positions in key emerging plays such as Montney, Horn River and Duvernay in Canada and Tuscaloosa, Eaglebine, San Juan, and Uticaa in the US. Management has focused lately on more oil and liquids plays and with current gas prices the balance sheet is improving.
Barrick Gold Corp’s Pascua Lama Mine is located on the boarder between Chile and Argentina
Barrick Gold Corp. (TSE:ABX) Market capital 19.41B, P/E – , Div/yield 0.21/4.23, EPS -0.68, shares outstanding 1.00B, owned by clients, last purchase March 4, 2013 at $29.77.
Barrick is the largest gold mining company in the world. It has four regional business units located in Australia, Africa, North America and South America. Barrick also holds interests in oil and gas properties located in Canada. Its copper business unit contains producing copper mines located in Chile and Zambia and a mine under construction located in Saudi Arabia.
A recent ruling from a Chilean court to halt work on Pascua-Lama gold and silver project marks a growing backlash against the industry in one of the world’s most mining-friendly areas. The Pascua-Lama mine straddles the Andes mountain range between Chile and Argentina and was slated to go into production in 2014.
Barrick has been severely impacted by the recent decline in gold prices along with the well-publicized problems at Pascua-Lama and in the Dominican Republic. Today, Barrick’s share price appears to reflect more than a total write down of Pascua-Lama. Management is now focused on prudent capital allocation. When conditions stabilize, the stock has significant upside potential from current levels.
See Michael talk about these stocks on BNN, please click here.
BNN Market Call – Market Outlook & Top Stock Picks
Michael Sprung’s Market Outlook on BNN Market Call
Barrick Gold (ABX TSX) Last purchase November 2012, $37.60
Barrick is the world’s largest gold producer. Its new project will propel production beyond 8 million ounces per year in the next few years. Management is focused on capital discipline. The recent pullback provides a good entry point.
CIBC (CM TSX) Last purchase December 2011 $71.10
Industry-high profitability and capital combined with increased potential to leverage retail and business products, as well as increase dividends. An attractive buy.
Cenovus Energy (CVE TSX) Last purchase August 2012, $33.40
Industry-leading operations at Foster Creek and Christina Lake SAGD projects with significant long-term production growth profile. CVE is well priced especially if crude differentials narrow through improved market access.
Precision Drilling (PD): Owned by clients, last purchase June 15 2012, $7.64
The pullback in oil prices has resulted in many companies in the oil patch to scale back capital expenditures. Investors are concerned that this trend may continue in firms that are dependent on greater cash flow. This fear has been particularly reflected in the oil service companies and PD is no exception. Selling below book value, PD offers tremendous value for patient investors.
Barrick Resources (ABX): Owned by clients, Last purchase June 15, 2012, $39.39
Disappointment at the board level with the share price performance has caused the board to replace the CEO with Jamie Sokalasky, a long term Barrick employee. In addition, the retreat in the price of gold has been reflected in the price of the producers’ stocks; Barrick being no exception. Barrick is the largest gold producer and is selling at reasonable multiples. We anticipate that the recent changes will result in a renewed focus on shareholder returns
Progressive Waste Solutions (BIN): Owned by clients, Last purchase July 15, 2012, $18.42
Recent weaknesses in the North East division have overshadowed more stable results in the Canadian operations. The stock price has over reacted to these problems and fears that competitive pricing pressures will continue to impact results for some time. BIN is well positioned to benefit from a pickup in economic activity. The company is well managed and will further expand operations strategically. At current levels, the stock price is compelling.
Why does our value investing approach work? The prices of well-established, high-quality stocks tend to rise over time as the companies create value for shareholders. Stocks touted by brokers and the media often rise to extreme highs in expectation that they will meet or exceed their short-term earnings forecasts. However, they can decline dramatically when they fail to meet those forecasts.