Goldcorp fattens its golden nest egg

Goldcorp (G-T) saw its second-quarter earnings nearly halved to US$9.2 million as it withheld a third of its production to rebuild its bullion hoard.

The earnings translate to US5 per share, and represent a 48% decrease from the US$17.6 million (US10 per share) it earned a year earlier. With fewer ounces sold, revenue between the two periods slipped 17% to US$40.5 million; operating earnings fell about 34% to US$16 million.

Goldcorp says that had it sold the entire quarter’s production, earnings would have come in at US$15.9 million (US8 per share), 21% lower than similarly adjusted earnings during the corresponding period of 2003. Adjusted cash flow would hit US$24.6 million, compared with year-ago cash flow of $21.9 million.

So far this year, Goldcorp has earned US$26.5 million (US14 per share) on revenue of US$88.8 million, compared with year-earlier earnings of US$31.8 million (17 per share) on US$96.2 million, as nearly four times as much gold (96,946 oz.) was held back from sale during the recent first half. Operating cash flow increased by US$6.1 million to US$8.4 million.

Adjusting for the holdback, the company’s first-half earnings amount to US$41.8 million (US22 per share), compared with US$35.3 million (US19 per share); cash flow jumps to US$37.2 million from US$8.8 million.

During the recent quarter, gold production from the company’s flagship Red Lake mine in northwestern Ontario fell by 10% from year-earlier levels to 116,800 oz., as grades slipped by about 20% to 68.2 grams per tonne. Accordingly, total costs climbed by US$16 per oz. to US$119 apiece. The quarter’s average gold recovery rate was 91.2%, up from 87.8%.

First-half production from Red Lake tips the scales at 257,028 oz. at US$114 per oz., up from the 247,199 oz. produced at US$104 per oz. in 2003. Grades and recovery rates were little changed, costs climbed on the back of a stronger Canadian dollar and increased production from higher-cost concentrate (10,352 oz. versus 1,463 oz.).

During the first half of 2004, Goldcorp spent US$11 million sinking a new shaft at Red Lake, bringing expenditures so far to US$ 51 million. The company expects to spend US$30 million on the project during the remainder of the year, and another US$19 million thereafter to finish off the job.

The shaft is currently at a depth of 381 metres, and the company figures to reach a depth of 762 metres by yearend, despite recently encountering some operational and equipment delays. In early July, the company excavated the first station off the shaft at level 8. The shaft is designed to reach an ultimate depth of 2,179 metres, with completion now slated for late 2006.

The new shaft is expected to increase the mine’s annual production by about 37% to 700,000 oz. At a gold price of US$400 per oz., the plan offers an internal rate of return of 48%, with payback coming in 1.2 years.

In South Dakota, the open-pit Wharf mine chipped in 21,817 oz. of gold a total cost of US$346 per oz., up from 19,494 oz. at US$372 per oz. So far this year, Wharf has produced 40,916 oz. at US$342 per oz., compared with the 35,898 oz. produced at US$367 apiece a year earlier.

Between the two mines, second-quarter gold production tallies to 138,617 oz. at a total cost of US$163 per oz., compared with the 149,354 oz. produced at US$137 a year ago. For the first six months of 2004, production rings in at 297,944 oz. at US$152 per oz., up from 283,097 oz. at US$137 per oz.

At the end of June, Goldcorp’s gold inventory totalled 117,737 oz., including 45,021 oz. deposited during the latest quarter. The company plans to withhold a third of its quarterly production during the balance of the year.

What gold it did sell went for US$393 per oz. during the second quarter, and US$403 per oz. during the first six months, both better than the corresponding year-ago periods.

“When we sold our gold in the fourth quarter of last year we made US$72 an ounce more than had we sold it when it was produced,” says Wheaton’s CEO Robert McEwen. “Our view is that gold is going higher and we’re executing a similar strategy.”

In mid-December of 2003, the company said it had sold off its entire stash of 266,730 oz. gold at an average price of US$388 per oz., generating a gross of US$103.5 million for the company, and a special dividend of US10 per share for shareholders.

“There’s been a serious correction in part of the gold market, and we have a lot of cash. This in my mind is an excellent buying opportunity, one I was waiting for in the fourth quarter when we sold a number of things in anticipation of a lower gold price,” adds McEwen. He failed to offer hints at any specific deal.

At quarter’s end, Goldcorp had cash and equivalents totalling US$302.9 million, and gold bullion with a market value of US$46.6 million. The company remains debt-free.