Goldcorp’s Jeannes at Roundup 2015: Gold’s comeback is underway

VANCOUVER — When Goldcorp (TSX: G; NYSE: GG) president and CEO Chuck Jeannes talked about gold in a keynote speech at the Association for Mineral Exploration BC’s annual Roundup conference, people naturally perked up their ears. The company is the world’s biggest gold producer by market capitalization, and has been an industry leader when it comes to controlling operating costs and driving disciplined growth.

Goldcorp achieved record production of 886,000 oz. gold during the fourth quarter, and cranked out 2.87 million oz. last year. In the last six months the company has  brought into production the Cerro Negro mine in Argentina and the  Éléonore mine in Quebec, and it is now positioned to generate free cash flow for years to come assuming a gold price of at least US$1,200 per oz.

“Right now the multiples the market is affording our business is at a thirty-year low,” Jeannes said. “When I say our shareholders have abandoned us, that’s the biggest piece of proof. But that gives us great opportunity to improve moving forward, and I think you’ll see those multiples bounce back.

“Costs are on the way down, and we’ll see continued improvement going forward. I mean, we’ve seen almost a perfectly negative correlation between gold price and average grades. We can blame inflation and costs all we want, but we have to accept a lot of the blame because we allowed that grade to go down,” he continued. “We lowered our cut-offs and chased marginal ounces. You combine higher costs with the fact we had to keep investing capital to grow our business, and you see that over the past decade we haven’t made any money.”

Goldcorp’s all-in sustaining costs dropped 6% in 2014 to US$950 per oz., and the company is forecasting 2015 production of between 3.3 million and 3.6 million oz. at all-in sustaining costs ranging from US$875 to US$950 per oz.

Part of Goldcorp’s success has come from bringing newer, low-quartile cost mines into production while vending out older assets. Last year the company generated US$380 million in cash through the sale of two U.S. mines, namely Marigold and Wharf.

And while Jeannes commends the gold industry for its improved financial discipline and smarter allocation of capital he also believes supply-demand fundamentals will fuel a “steady improvement” in gold prices over the next five to 10 years.

On the supply side, Jeannes commented that the mining industry is currently reaching a state of “peak gold” characterized by plateauing production and a dearth of large gold deposit discoveries. Since around 2012 the industry has noted a steep drop in overall exploration expenditures as majors have cut  exploration budgets and juniors have struggled to find capital.

“The cost of discovering each ounce of gold we bring into reserves has gone up consistently,” Jeannes said. “When you combine less funding with higher costs you aren’t going to see the same number of ounces discovered. We had a peak in discoveries in 1995 and a small run in 2007, but since then the number of discoveries has declined significantly. Remember the average time to bring a deposit into production has grown over time and now sits near twenty years.

“I don’t think it’s coincidence that gold production is peaking today because we’re twenty years removed from the peak discovery period. If you look forward without new discoveries to offset the production decline, gold supply is simply going to be lower going forward.”

At the same time Goldcorp has observed an increase in physical demand for gold in China. Jeannes noted that as investors have bailed out of gold-based exchange traded funds (ETFs), there’s been a big bump in demand for physical gold on the Shanghai Exchange, which has resulted in a transfer of wealth from markets like New York and London to Asia.

He doesn’t believe it matters whether China’s annual gross domestic product jumps 7.4% or 6.8% because the country is growing and creating millions of new middle class consumers that like gold.

“They will tend to be much stronger hands in terms of holding those ounces than the hedge funds that buy ETFs,” Jeannes said, noting that he believes physical demand for gold in Asia provides a barrier to gold falling too far below US$1,200 per oz.

Even though Goldcorp remains optimistic on gold’s long-term fundamentals, he acknowledges that gold producers must re-establish strong margins that will result in improved returns for shareholders. By returning to positive free cash flows, miners can restore investor confidence and draw more capital to the industry, which will in turn flow down to fund exploration.

“In order to drive those returns for our shareholders, we’ll continue to lower costs, look at ways to innovate our business, and focus on high-margin ounces,” Jeannes said. “The gold sector is on its way back to relevance for investors. I feel that and I hear it when I’ve been out talking to people over the past few months.”

“We need to make sure we only invest capital when we know we’ll have a strong return, and run our business very responsibly,” he said. “I’m confident we aren’t the only company to figure this out, so I’m bullish on our sector as a whole.”

He commented that Goldcorp sees great value in junior explorers, who it believes are simply more effective than producers at generating discoveries.

“We’d rather come along and buy up your company,” he said with a laugh. It’s an apropos comment considering Goldcorp has just launched a $526-million, all-share bid for junior Probe Mines (TSXV: PRB; US-OTC: PROBF) to expand its gold holdings  in Ontario’s Porcupine district around Timmins.

Over the long run, Jeannes argued, it’s time that the mining business embraces change and innovation instead of resisting it. He lamented that the industry is still “drilling, blasting, and hauling” the same way it has for eighty years.

He admitted that even Goldcorp has had a hard time modernizing historic operations. The company’s Porcupine and Red Lake gold camps, for example, have been producing gold for over 70 years. But Goldcorp has adopted cutting-edge automation and ventilation processes at Éléonore, and is conducting a strategic review on other new technologies to adopt at tis operations.

“It’s the revolutionary breakthrough that we really need to change the industry,” Jeannes said. “You need time and investment, and we’re doing that. It’s not going to happen this year, or next year, but I’m excited to see what comes out of this effort.”

And that innovation extends into stakeholder engagement and the growing challenge of establishing a global social license to operate. Jeannes recounted his recent trip to the World Economic Forum in Davos, Switzerland, where he came face to face with a real lack of knowledge about the mining industry.

“I spent a lot of time explaining the importance of mining. How we are a modern, sustainable, responsible business. A lot of government leaders don’t know we’re even out there, and those that do think we just dig holes in the ground and that must be bad. I think in our business we’re really too insular,” he said. “The reality is we have a lot more people to convince in order to be given the broad social license we need to continue to conduct our business.
We have to operate in a way that benefits more than just our shareholders.”