Goldcorp’s growth profile could eclipse Red Lake fumble

VANCOUVER — Vancouver-based major Goldcorp Inc. (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 230-km-northwest of Dryden, On. 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. in the first quarter, a 39% decrease from its 186,000 oz. quarterly total last year. Cash costs were also on the rise with gold by-product prices increasing to US$251 per oz. — up from US$188 per oz. a year ago.

Despite lower production and cost inflation, Goldcorp actually increased year-on-year revenues by 11% to US$1.35 billion on a higher-averaged realized gold price of US$1707 per oz., which resulted in a gold margin of US$1,456 per oz. The company sold 545,000 oz. of gold last quarter, compared with 627,000 oz. over first-quarter 2011.

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

“At 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,” explained Vice-President and Chief Operating Officer Steve Reid 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. of gold this year at total cash costs of US$250 to US$275 per oz., with Red Lake accounting for 650,000 oz.

“We’re currently undertaking a review of the mine plan at Red Lake,” commented President and CEO Charles A. Jeannes. “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 short-fall we can make-up over the balance of the year.”

Goldcorp’s adjusted profit in the quarter totalled US$404 million, or 50¢ per share.  The result was an increase from the US$392 million profit or 49¢ per share the company posted the year before, but missed an average-analyst estimate of 58¢ 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$1660 per oz. level, Goldcorp’s shares have fallen near 52-week lows in Toronto to $38.38 per unit at press time. The company has traded within a 52-week range of $37.57 and $55.93 on average daily trade volumes of 2.72 million shares per day.

Jeannes and Goldcorp management are looking to take advantage of a sustained strength in gold demand by completing an aggressive five-year growth plan that would boost company-wide 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,” he said. “Recent news of fresh gold purchases by numerous central banks also provides 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-to-debt ratio below 3%. Goldcorp has 810 million shares outstanding and a press time market capitalisation totalling US$31.1 billion.

Red Lake will see US$38 million worth of exploration in 2012, with a focus on extending the High Grade zone and following up on hanging wall 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 off-set and extensions of the high-grade zone beyond the current five year reserve,” Reid explains. “We currently 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 off-set or a new zone.”

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

Cerro Negro is a second development-stage gold project in Santa Cruz, Argentina. Goldcorp’s US$800-million build-out is underway and gold production is expected to start-up in second-half 2013, with steady-state production totalling 550,000 oz. of gold per annum 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 Éléonore gold mine in the James Bay region of Québec. Éléonore is expected to produce 600,000 oz. of gold over a 15 year life at cash costs below US$400 per oz. gold.

Goldcorp is spending an additional US$420 million expanding operations at Red Lake by incorporating the Cochenour deposit into production via development of a five-kilometre underground 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 expected to boost production by between 250,000 and 275,000 oz. of 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 additional opportunities to expand Red Lake’s exploration potential and eventual mine life,

“That 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 states.

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

The company hit a second snag to end 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-N), which retains 30% ownership in El Morro.