Red Lake performance a priority, Goldcorp says

Difficulties in the first half of the year at its flagship Red Lake operations in northern Ontario that included adverse ground conditions in the High Grade Zone and lower-than-expected grades in other areas of the mine contributed to Goldcorp’s (G-T, GG-N) decision in July to revise its 2012 production guidance to between 2.35 and 2.45 million oz. of gold, down from its previous estimate of 2.6 million oz.

Second-quarter production at Red Lake amounted to 104,000 oz. at a total cash cost of US$568 per oz. Production continued to be 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. of gold. “Slower production rates (450-500 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, 228 km north of Dryden, 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 currently under development. The Cochenour/Bruce Channel deposit is down-dip from the historic Cochenour mine. To access the resource, the existing Cochenour shaft is being widened. At the same time, Goldcorp is building a  5-km underground drift that will allow efficient ore hauling from Cochenour to the existing processing facilities at Red Lake’s Campbell milling operation.  The drift also opens up exploration at depth of five km of untested ground in one of the world’s richest gold districts.

BMO’s Haughton noted that on the site visit Goldcorp focused on operational issues at Red Lake, in particular de-stressing the High Grade Zone; the exploration potential at Red Lake; and development progress at Cochenour. 

“Completion of the de-stress work at 45 level is expected by Q4 2012 to allow higher mining rates in the High Grade Zone for the second half of 2012,” Haughton wrote, adding that the complex de-stressing method is “designed to push the stress envelope away from the ore body to allow for safe mining access.”

In terms of 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 continued to receive 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 also indicated the presence of high-grade intercepts deeper 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 Chanel deposit as well as additional resources at Cochenour. “Drilling is expected beyond 2013 targeting the deeper portions of the ore body,” 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 existing Red Lake processing facilities, advanced to 51% of 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 70% growth rate to 2016 is supported by a robust pipeline of high quality projects including Pueblo Viejo, Cerro Negro, Eleonore 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$0.8 billion in debt. It also had access to US$2.0 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-$56.31 over the last year.