Red Lake performance is a priority, Goldcorp says

Goldcorp’s (G-T, GG-N) difficulties in the first half of the year at its flagship Red Lake operations in northwestern Ontario — including adverse ground conditions in the High Grade zone, and lower-than-expected grades in other areas of the mine — contributed to the company revising its 2012 production guidance this July to between 2.35 million and 2.45 million oz. gold, down from its previous estimate of 2.6 million oz. gold.

Second-quarter production at Red Lake amounted to 104,000 oz. at a total cash cost of US$568 per oz. Production was affected by slower-than-expected de-stressing activity in the High Grade zone to address increased seismicity, the company reported on July 26, as well as lower-than-anticipated grades in the Footwall zone. Goldcorp noted, however, that de-stress work in the High Grade zone during the second quarter was completed on the 41-level, and that it expects to complete similar work on the 45-level later in the third quarter.

For the full year the Vancouver-based miner expects the Red Lake mine should produce between 460,000 and 510,000 oz. gold. “Slower production rates [450 to 500 tonnes per day, versus previous rates of up to 600 tonnes per day] at the High Grade zone due to increased de-stressing efforts is the main reason for the lower Red Lake gold production outlook,” David Haughton of BMO Nesbitt Burns in Toronto wrote in a research note on Sept. 6, following a recent site visit to the mine. The mining analyst forecasts Red Lake will produce 465,000 oz. gold at US$540 per oz. this year, and 500,000 oz. gold for 2013 and 2014, until the Cochenour project starts contributing ore to production from 2015.

The Red Lake mine, in the town of Red Lake, consists of three main components: the Red Lake and Campbell mines, which were integrated into one operation in 2006, and the Cochenour project, which is under development. The Cochenour-Bruce Channel deposit is downdip from the historic Cochenour mine. To access the resource, the existing Cochenour shaft is being widened. At the same time, Goldcorp is excavating a 5 km drift that will allow efficient ore hauling from Cochenour to the processing facilities at Red Lake’s Campbell milling operation. The drift also opens up exploration at depth of 5 km of untested ground in one of the world’s richest gold districts.

BMO’s Haughton noted that Goldcorp focused on operational issues during the site visit to Red Lake, and particularly on de-stressing the High Grade zone, the exploration potential at Red Lake and the development progress at Cochenour. 

“Completion of the de-stress work at the forty-five level is expected by this year’s fourth quarter to allow higher mining rates in the High Grade zone for the second half of the year,” Haughton writes, adding that the complex de-stressing method is “designed to push the stress envelope away from the orebody to allow for safe mining access.”

As for exploration, Goldcorp is focused on continued exploration drilling in the deeper sections at the High Grade zone, and on the Cochenour property. Other exploration targets include the High Grade zone offsets and footwalls, the Party Wall zone, the Deep Campbell zone, the Far East zone, the upper Red Lake sulphides and surface open-pit opportunities.

Goldcorp reported that during the second quarter it received successful drill results from Red Lake’s 4199 exploration ramp. The company explained that numerous intercepts confirmed the extension of consistent high-grade mineralization between levels 52 and 55, and that drilling had indicated deeper high-grade intercepts at the 57-level. Goldcorp also noted that new drill results in an unexplored area west of the High Grade zone had outlined a potential new zone above the 52-level, which remains open vertically and to the west.

At Cochenour, exploration drilling from the haulage drift is continuing with two drills in operation, and diamond drilling with three drills at surface is underway to define the top portion of the Bruce Channel deposit, as well as additional resources at Cochenour. “Drilling is expected beyond 2013 targeting the deeper portions of the orebody,” Haughton writes. “Higher grade is possible at depth with the view of lifting the gold grade above the current 11 grams gold per tonne inferred.” 

Development progress at Cochenour, meanwhile, remains on track, and Haughton says Goldcorp expects to complete a Cochenour project study with costs and timing in the third quarter of this year. During the second quarter Goldcorp continued to widen the historical shaft, with 108 metres completed of a total depth of 342 metres. The Cochenour-Red Lake haulage drift that will transport ore from Cochenour to Red Lake processing facilities advanced to 51% completion.

Haughton has an “outperform” rating on the stock, and ranks Goldcorp as BMO’s top pick for growth among senior gold producers. “The company’s seventy-percent growth rate to 2016 is supported by a robust pipeline of high-quality projects, including Pueblo Viejo, Cerro Negro,

Éléonore and Cochenour,” he writes. Haughton also forecasts that 2012 is the company’s “peak year of free cash-flow burden.”

At the end of June Goldcorp had US$1.2 billion in cash and US$800 million in debt. It also had access to US$2 billion in undrawn debt facilities.

Haughton has a price target of $57.50 per share. The company has traded in a range of $31.54 to $56.31 over the last year. At press time its shares were trading at $42.02 apiece.