Another stellar year for Goldcorp (February 23, 2004)

The exceptionally rich Red Lake gold mine in northwestern Ontario bestowed its blessings on Goldcorp (G-T) for one more year, generating record profits and yielding another million ounces of resources.

Goldcorp’s 2003 earnings soared 38% to US$98.8 million (US53 per diluted share) on revenues that jumped 42% to US$263 million, while the net profit margin rose slightly to 37.6%. The higher profits are attributed to both higher realized gold prices — up 18% to US$367 per oz. — and the selling of the company’s gold hoard in the fourth quarter.

The flagship Red Lake mine produced 532,028 oz. gold in 2003 at a total cost of US$111 per oz., compared with 525,930 oz. in 2002 at a cost of US$94 per oz. In South Dakota, the open-pit Wharf mine contributed another 70,817 oz. last year at a total cost of US$363 per oz., off from 2002’s output of 81,989 oz. at a cost of US$310 per oz.

Commenting that it wanted to make its move before the end of the year in order to minimize taxes, Goldcorp announced in December that it had sold off its entire hoard of 266,730 oz. gold at an average price of US$388 per oz., generating a gross US$103.5 million.

The sale contributed US$40 million to fourth-quarter pretax income, or US22 per share, which, on an after-tax basis, amounted to US13 per share. A resulting special dividend of US10 per share was paid out in January, in addition to the regular monthly dividend of US1.5 per share, or US18 per share annually.

However, Goldcorp states that it remains bullish on gold and so has resumed holding back about 10% of its production. It had already held back 20,791 oz. gold by the end of the fourth quarter, or 13% of production.

Red Lake’s total reserves and resources at year-end stood at 6.78 million tons grading 1.09 oz. per ton (37.4 grams gold per tonne), or 7.4 million contained ounces — representing about 1 million additional oz. discovered during the year. The 7.4-million-oz. total includes 4.4 million oz. classified as high-grade (i.e. non-sulphide) reserves in the form of 1.98 million tons grading 2.22 oz. gold (76.11 grams gold).

Wharf’s reserves, meanwhile, totalled 9.8 million tons at 0.033 oz. gold (1.1 grams gold), or 322,000 contained oz. — enough to keep the operation going until its planned closure at the end of 2006.

Red Lake’s reserve and resource grades dropped in 2003 relative to 2002 owing to a greater contribution from the Footwall zone, which is “only” grading 1 oz. gold per ton. On the plus side, the Footwall zone is proving to be far more continuous than previously thought, and so is evolving into a much greater contributor to reserve tonnage.

Continued drilling into the lower portions of the mine’s key High Grade zone, which remains open at depth, has extended it by more than 500 ft. (152 metres) below the currently planned base of a 7,150-ft (2.2 km) shaft due for completion in late 2006.

Drilling into these lower reaches has returned intersections such as hole 37L034JW, which cut 2.92 oz. gold (100.1 grams) over 72 ft. (21.95 metres) at a vertical depth of 7,165 ft. (2,184 metres).

After last year’s surface preparations, shaft sinking got underway in January, and has now reached a depth of 285 ft. from surface. The project is budgetted at US$100 million, of which about US$70 million will have been spent by the end of this year.

Other exploration drilling at Red Lake has extended the mine’s sulphide mineralization in two target areas: the depth extensions of ore mined from 1948 to 1996; and the Far East zone, which is east of the main mine area.

This year’s US$14-million exploration program at Red Lake will entail 355,000 ft. of diamond drilling and 3,700 ft. of underground development. This work will target both high-grade and sulphide mineralization at depths as great as 10,000 ft. (3,048 metres).

Goldcorp also reports that it has almost finished building a virtual-reality research facility at the mine that will use technology developed by Mirarco Mining Innovation of Laurentian University in Sudbury, Ont.

Goldcorp closed out 2003 debt-free, unhedged and holding cash, gold bullion and marketable securities totalling US$410 million, up US$72 million from a year earlier.

The company now has 189.3 million shares outstanding, for a market capitalization of US$2.5 billion. Trading at US$13.13 at presstime, shares have been trending downwards since early December when they peaked above US$18.

While almost all gold stocks have declined since December, Goldcorp fell a little harder as shareholders digested two news items that seemed to directly go against the company’s incessant message of gold bullishness: the sale of the gold hoard below US$400 per oz.; and the multi-million dollar exercise of options by CEO Robert McEwen.

With so much of his personal wealth tied up in one stock, McEwen elected to take some money off the table by exercising options on 5.525 million Goldcorp shares at an average price of US$5.15 each, injecting US$28.4 million into the company’s coffers.

He promptly sold all the shares on Dec. 16 at around US$16.40 for a pre-tax profit of about US$62 million (C$83 million). The unloaded shares represented about 39% of his total interest in Goldcorp, which was reduced to about 7 million shares and 2.3 million options, or about 4.5% of the firm’s outstanding shares.

Shareholders could draw some comfort in the fact that 2004 started off with a bang, with the Red Lake mine producing a monthly record of 57,296 oz. gold in January from ore grading a whopping 3.12 oz. gold (107 grams gold).

For all of 2004, Goldcorp expects to produce 595,000 oz. gold at a cash cost of US$106 per oz., of which Red Lake will contribute 525,000 oz. at a cash cost of US$86 per oz. — based on a U.S.-to-Canadian dollar exchange rate of 1.30.

By 2007, when the new shaft is ready, annual production from Red Lake is set to grow to more than 700,000 oz. gold at a cash cost of roughly US$70 per oz.