Vancouver-based major Goldcorp (G-T, GG-N) hasn’t been immune to the pressures affecting the entire gold sector — capital cost escalation, resource nationalism and stagnant share prices among them.
Its shares are down overall this year at around $44, declining from highs above $55 last fall to below $33 this summer. And issues at its Penasquito and Red Lake mines have forced it to revise its 2012 guidance to 2.4 million oz. at total cash costs of US$625-650 per oz. (coproduct basis) from 2.6 million oz. at US$550-600 per oz.
However, the company has managed to pursue an aggressive growth strategy while avoiding the high-profile writedowns many of its peers have suffered as a result of costly acquisitions. And it remains a favourite among mining analysts.
“Offering growth at a reasonable price, Goldcorp remains our preferred senior producer based on its superior high-grade, low-cost growth profile,” Canaccord Genuity analysts wrote in a note in late July.
Goldcorp’s 810.6 million shares outstanding continue to enjoy a premium valuation in the market compared to other senior producers.
CIBC mining analysts have a 12-18 month target of $64 for the stock, based on an 11x cash-flow multiple for 2013 and a price to net asset value (NAV) multiple of 1.8x.
“This NAV multiple represents one of the highest multiples afforded any of our coverage universe due to the lower political risk associated with the jurisdictions in which Goldcorp operates, along with the unique blend of growth, production diversity, and trading liquidity that the company offers investors,” reads a July 27 note.
The company’s balance sheet is also “one of the best in the business,” according to its own chief financial officer, Lindsay Hall. Goldcorp is sitting on US$1.2 billion in cash and equivalents, as well as US$2 billion in available debt facilities and US$863 million in convertible senior notes due in 2014. The company recorded US$520 million in cash flow during the second quarter, and has no debt.
“The key issue in our business is discipline,” said Chuck Jeannes, Goldcorp’s president and CEO, in an interview in mid-August. “Looking at growth opportunities and making sure we are investing in new projects that take into account what we’ve seen over most of the last ten years: capital cost appreciation, operating cost appreciation, various levels of political risk and resource nationalization and a shortage of qualified personnel. All of those things go into our decision-making when looking at a new project — making sure we have robust rates of return, and taking into account what we know is coming.”
The company is currently executing a growth strategy that will see its annual production jump roughly 70% to 4.2 million oz. gold by 2016, with a focus on mine development in North America and a growing presence in some of Latin America’s most prolific precious metal locales.
Here’s a closer look at where that growth will come from.
Penasquito is Mexico’s largest open-pit gold mine and lies 12 km west of Mazapil, in Zacatecas state. The mine consists of twin open pits — Penasco and Chile Colorado — with a mill capacity of 130,000 tonnes per day and average annual production pegged at 500,000 oz. gold, 28 million oz. silver, 450 million lbs. zinc and 200 million lbs. lead.
Goldcorp hit commercial status at its 100%-owned asset in 2011, though the company has wrestled with obstacles that have triggered ramp-up delays and limited production guidance estimates to roughly 380,000 oz. gold in 2012.
During the second quarter, a drought hit regions of northern Mexico, which compounded water-supply issues Goldcorp has been grappling with during ramp-up. Mill throughput levels continue to be affected by water shortages, as rates are currently limited to between 98,000 and 107,000 tonnes per day, resulting in an annual production shortfall of roughly 40,000 oz. gold.
“We saw record gold production in the quarter, but limited water availability beginning late in the quarter is expected to curtail production for the full year,” Jeannes said on a second-quarter conference call. “We’ve seen prolonged drought conditions in parts of northern Mexico, which have reduced normal aquifer discharge. We believe the current throughput restrictions are manageable with a plan to secure new sources of water that we’ve outlined.”
According to chief operating officer Steve Reid (who left the company shortly after the conference call), Penasquito produced 104,000 oz. gold during the second quarter at cash costs of negative US$425 per oz. Average ore grades were higher than expected, and Goldcorp continued to realize solid recovery rates.
In order to alleviate water concerns Goldcorp is sinking 10 wells, which should be complete by November, in and around its pit operations. Two additional wells are also being outfitted in a nearby well field. The company added US$25 million to its second-half capital budget to account for the water-supply expansion.
“We’re already exploring for additional water more broadly across the basin containing the aquifer, where we hold the water rod,” Reid commented on the conference call. “And we’re also looking at ways to increase the efficiency of water used generally project-wide.”
Goldcorp will focus on making its tailing reclamation process more efficient, as roughly two-thirds of Penasquito’s water supply originates from recovery processes at operational tailings.
Goldcorp owns 40% of the massive Pueblo Viejo gold project 100 km northwest of Santo Domingo, the capital of the Dominican Republic. The US$3.8-billion project is a joint-venture with operator Barrick Gold (ABX-T, ABX-N), with Goldcorp’s share of proven and probable reserves totalling 114 million tonnes averaging 2.76 grams gold for 10.1 million oz.
Goldcorp announced first gold at Pueblo Viejo in mid-August, and expects attributable production between 68,000 oz. and 85,000 oz. gold during 2012 at cash costs between US$400 and US$500 per oz. During its initial five years of operation, Goldcorp estimates that Pueblo Viejo will contribute 435,000 oz. of gold to its production profile at average cash costs below US$350 per oz.
Hall said he can almost count on significant cash-flow increases from Pueblo Viejo in 2013, with the only major remaining cost being a power supply expansion.
“An important part we don’t talk about too much is the necessary power plant we’re constructing. The autoclave requires a fair degree of consistent electricity, so we’re building the dedicated plant to handle the capacity,” Hall explained on the conference call. “We expect the transmission lines to be in place sometime in early 2013.”
Goldcorp increased its overall capital expenditures for 2012 to US$2.7 billion from US$2.6 billion, predominantly on the back of Pueblo Viejo’s development schedule.
Goldcorp acquired its wholly-owned Cerro Negro gold project in late 2010, with the $3.6-billion acquisition of Andean Resources. The high-grade vein deposit is located in Argentina’s Santa Cruz province, with Goldcorp aiming for production in the second half of 2013.
The project is slated to cost US$800 million and produce 550,000 oz. gold annually over its first five years at cash costs below US$300 per oz. Cerro Negro holds 14 million proven and probable tonnes grading 10.2 grams gold for 4.5 million contained oz.
Construction has been moving along, with portions of the Eureka vein having been stockpiled during ramp excavation. Goldcorp has stockpiled roughly 12,000 tonnes averaging 10 grams gold thus far, and the company has broken ground on decline ramps for the Mariana Central and Mariana Norte veins.
While Goldcorp generally operates in jurisdictions with low political risk, Argentina has been making life more difficult for miners operating there. The country recently passed new rules that require earnings to be repatriated and converted into pesos before miners can use the funds, and that require foreign companies to “in-source” labour and supplies.
“The only thing substantial I see happening in Argentina regarding rules is that under our original design scheme we thought we’d be using more outside contractors at the project, as well as purchase more goods and services outside the country,” Hall noted during the conference call. “We do have the infrastructure set up to deal with the import restrictions, though we’re sourcing more parts in country. There is a mining industry in Argentina, but it is taking us a little bit longer to find some parts, and ensure the same quality.”
The company has committed around US$500 million to Cerro Negro’s development thus far.
The import restrictions forced Goldcorp to tap the majority of its contingency funds during Cerro Negro’s development, though the bulk of the major equipment and materials required for initial production have recently arrived in the country. Goldcorp completed excavation for its plant facilities during the second quarter, and expects to meet its 4,000-tonne-per-day throughput goal.
An update on capital costs and timelines at Cerro Negro is expected in early 2013.
Goldcorp is on the verge of adding to its Canadian production profile with two projects scheduled for startup by the end of 2014, providing an 860,000 oz. per year gold boost.
That includes its 100%-owned Éléonore gold project, which Goldcorp acquired in 2006 with a $500-million takeover of Virginia Gold. Sitting on the northeast corner of the Opinaca Reservoir, in Quebec’s James Bay region, Éléonore holds the prized Roberto deposit — a clastic sediment-hosted, stockwork-disseminated gold deposit in an orogenic setting, where mineralization has been intersected to vertical depths of 1,400 metres.
Éléonore hosts probable reserves of 12.5 million tonnes grading 7.6 grams gold per tonne for 3 million oz. gold. Inferred resources total 12.3 million tonnes grading 10.6 grams gold for 4.2 million oz. gold.
Goldcorp’s US$1.4-billion underground development plan will roll out in two stages. The first will involve the sinking of the Gaumond exploration shaft and the excavation of a separate surface ramp. Goldcorp will use two shafts to simultaneously mine the upper and lower portions of the deposit.
Éléonore is expected to operate at a 7,000-tonne-per-day throughput rate at full capacity, and produce 600,000 oz. of gold annually at cash costs below US$400 per oz.
According to Jeannes, underground drilling in the exploration shaft is actually ahead of schedule, with activities starting on the 650 level a full quarter before projected startup. Deeper portions of the deposit were drilled to refine the company’s understanding of the orebody and gold models.
Goldcorp’s US$420-million Cochenour expansion is a key growth driver in northwestern Ontario’s Red Lake district, where the company currently produces between 500,000 oz. and 600,000 oz. gold per year. Cochenour is projected to add between 250,000 and 275,000 oz. gold over a 20-year mine life at cash costs below US$350 per oz.
Goldcorp is building a 5-km haulage drift to connect Cochenour with the Campbell complex at Red Lake.
“The shaft at Cochenour should be around two-thirds built by the end of the year, well on its way to meeting a production target towards the end of 2014,” Hall reported. “The exciting thing about it is we’re starting to get some drills in that drift and you’d think if Red Lake is one of the highest-grade gold deposits in the world, you’d have some exploration success in the drift.”
An updated study on its Red Lake expansion plans is due out in the third quarter, and will include a geological report on the Bruce Channel gold deposit, and overall capital cost review.
Cochenour hosts 9.3 million inferred tonnes grading 10.8 grams gold for 1 million oz. The estimate includes remaining gold from a historic deposit on the site, as well as new drilling focused on the upper portion of the Bruce Channel deposit. Goldcorp has maintained the resource does not adequately reflect the scope of the Cochenour deposit, which it estimates could contain as much as 5 million oz. of gold.
— The author is a staff writer with The Northern Miner, based in Vancouver.
This is an edited version of an article that appeared in the September 2012 issue of Mining Markets.
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