Goldcorp’s output down on Red Lake setback

Vancouver-based major Goldcorp (G-T, GG-N) stumbled out of– the gate to start the year, as adverse ground conditions and grade variability at its flagship Red Lake gold mine  in Red Lake, Ont., contributed to an 18% year-on-year fall in company-wide gold production to 524,000 oz.

Gold production at Red Lake fell to 114,200 oz. during the first quarter in a 39% decrease from its 186,000 oz. quarterly total last year. Cash costs were also on the rise increasing to a still-impressive US$251 per oz. — up from US$188 per oz. a year ago.

Despite lower production and cost inflation, Goldcorp increased year-on-year revenues by 11% to US$1.35 billion on a higher average realized gold price of US$1,707 per oz., which resulted in a gold margin of US$1,456 per oz. The company sold 545,000 oz. gold last quarter, compared with 627,000 oz. over the first quarter of 2011.

Goldcorp had trouble with grades and ground conditions at all three of Red Lake’s productive gold zones, including the High Grade, Campbell and Footwall zones.

“In the High Grade zone adverse ground conditions delayed access to the targeted higher-grade headings, and at the Footwall zone we experienced inconsistent grades within the mineralization,” vice-president and chief operating officer Steve Reid explained during a conference call. “Mining sequencing issues and localized dilution impacted the production at -Campbell.”

It remains unclear how a weak first-quarter performance at Red Lake will affect Goldcorp’s original 2012 guidance estimates. The company expects to produce 2.6 million oz. gold this year at total cash costs of US$250 to US$275 per oz., with Red Lake accounting for 650,000 oz. of the total

“We’re undertaking a review of the mine plan at Red Lake,” president and CEO Charles A. Jeannes commented. “We will also be looking at some flexibility within the rest of the portfolio over the balance of 2012 to assess the potential impact to our company-wide production. Our immediate focus is on determining how much of the production shortfall we can make up over the balance of the year.”

Goldcorp’s adjusted profit in the quarter totalled US$404 million, or US50¢ per share.  The result was an increase from the US$392 million profit, or US49¢ per share, the company posted the year before, but missed an average analyst estimate of US58¢ per share, according to a Thomson Reuters survey.

As a result of the production decline and a gold price that has settled closer to the US$1,660 per oz. level, Goldcorp’s shares have fallen near 52-week lows to $38.38 at presstime. The company has traded within a 52-week range between $37.57 and $55.93, on average daily trade volumes of 2.72 million shares per day. 

Goldcorp management are looking to take advantage of gold demand by fulfilling a five-year growth plan that would boost production by 70%.

“Despite ongoing volatility, the gold price performed well over the quarter, with stable investment demand creating a base of strength near current levels,” Jeannes said. “Recent news of fresh gold purchases by numerous central banks also -provide a very positive environment, which should support continued, strong gold prices through 2012 and beyond.”

At the end of March, Goldcorp held US$1.4 billion in cash and equivalents, with an additional US$2 billion in undrawn credit facilities and US$863 million in convertible senior notes maturing in 2014. The company forecasts average annual cash flows totalling US$3.7 billion over the next five years, and maintains an equity-debt ratio below 3%. Goldcorp has 810 million shares outstanding and a market capitalization of US$31.1 billion.

Red Lake will see US$38 million of exploration in 2012, with a focus on extending the High Grade zone and following up on hangingwall exploration successes.

“Drilling continues from the 41–99 exploration ramps, focusing on the High Grade zone at depth and testing for the possibility of a fault offset and extensions of the High-Grade zone beyond the current five-year reserve,” Reid explained. “We have six rigs in this deepest section of the mine, and we’ve intersected large carbonate veins as well as high-grade gold values in minable widths, suggesting either a fault offset or a new zone.”

Goldcorp’s short-term growth profile also includes 40% ownership in its Pueblo Viejo gold project in the Dominican Republic, where operator Barrick Gold (ABX-T, -ABX-N) owns the remaining 60%. Pueblo Viejo is anticipated to see its first gold pour in mid-2012 and produce 415,000 to 450,000 oz. gold per year over the first five years of commerical production.

Cerro Negro is a second Goldcorp development-stage gold project in Santa Cruz, Argentina. The company’s US$800-million build-out is underway and gold production is expected to start up in second-half 2013, with commercial production totalling 550,000 oz. gold per year for the first five years, at cash costs below US$300 per oz.

Goldcorp has two more advanced-stage gold projects in Canada slated for production in 2014. The company will spend US$1.4 billion in capital development at its Eleonore gold mine in Quebec’s James Bay region. Eleonore is expected to produce 600,000 oz. gold per year over a minimum 15-year life, at cash costs below US$400 per oz. gold. 

Goldcorp is spending US$420 million to expand operations at Red Lake by incorporating the Cochenour deposit into production through the development of a 5-km drift that will allow ore hauling to existing processing facilities at Red Lake’s Campbell mill. The Cochenour expansion carries a 20-year mine life and is projected to boost production by up to 275,000 oz. gold annually, at cash costs below US$350 per oz.

According to Reid, advancement is underway at the haulage drift, which is also opening up more opportunities to expand Red Lake’s exploration potential and eventual mine life.

“The effort is also beginning to generate some exploration excitement as we expected, given it drives through untested grounds in the heart of the Red Lake camp,” he stated.

Goldcorp expects to review Red Lake’s mining plan by the end of June, and could revise the 2.6 million oz. gold production estimate depending on how its production portfolio can be managed to offset first-quarter losses.

The company hit a second snag in April when the Chilean Supreme court suspended environmental permitting on a US$3.9-billion development plan at its 70%-owned El Morro copper-gold project, 80 km east of Vallenar, Chile.

Goldcorp is in an option agreement with New Gold (NGD-T, NGD-X) at El Morro.