Monday, June 28, 2010

Goldcorp Mine Closure in Guatemala

Just today the Guatemalan government announced that the company must temporarily shut its Marlin mine during a probe into supposed environmental and human-rights abuses. This news comes surprisingly after the government stated over the past few weeks that there would be likely no need to shut the mine. No exact day for the closure has been sent and the president stated that he would give the company adequate time to close the mine. Most likely the closure will occur in 15 to 30 days. The closure has been prompted by the Inter-American Commission on Human Rights, which received numerous complaints from NGOs and local communities. The mine produces roughly 250,000 ounces of gold per year and 4.1 million ounces of silver which is approximately 10% of Goldcorp’s annual gold production.

“Guatemala is not going to close one of the country’s most important industries because of accusations that are probably based on anecdotal and non-scientific evidence,” said Patrick Chidley, a Stamford, Connecticut-based mining analyst at Barnard Jacobs Mellet USA LLC. The mine employs over 1,900 locals and pays a total of $21 million in annual salaries.

There are some key factors that one must consider when trying to think of the impact that this closure may have. First, shareholders of a large stable gold producer will not be happy to know that production will be temporarily stopped. This government intervention ultimately introduces the notion that Goldcorp’s mine might be located in a jurisdiction prone to policies that are unfriendly to mining. Now this is not to suggest that Goldcorp’s multiple will drop just like that however that may change depending on how protracted this closure becomes.

Guatemala has to be very careful on how it reacts in this situation for several reasons. The nation has a relatively low GDP per capita (approx $2,600, for 2009), and scaring away foreign investment is not really a luxury the country has. If anything I believe the country will deal with this situation in a reasonable and diplomatic matter, without causing too much of a fuss. Goldcorp on the other side will try its utmost to reduce the severity of any closures. However unlikely it may be, it would be very regrettable to see both Guatemala and Goldcorp losing from this situation.

As it stands I would hold-off from buying any stock at this moment until we see how serious the situation is. The stock dropped 1.12% on June 24th 2010 after release of the news. However I would expect the stock to trade down a bit more unless of course gold has a very strong rally. For someone looking to get into the stock after a 12% gain since the beginning of the year this may be the perfect opportunity.

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