Goldcorp: Difficult Quarter, But a Buy on Company’s Cost Control Efforts

Goldcorp: Difficult Quarter, But a Buy on Company’s Cost Control Efforts

by: David Urban August 2, 2011


Goldcorp (GG) reported strong second quarter earnings last week despite facing numerous challenges at its mines. A forest fire affected operations at Musselwhite, record rainfall damaged the tailings pit at Pueblo Viejo, and low pebble generation hampered Penasquito.

Despite the challenges Goldcorp recorded gold sales of 606,400 ounces during the quarter at a realized selling price of $1,516 per ounce and a by-product cash cost of $185 per ounce. Revenues for the quarter reached $1.3 billion with a by-product margin YTD of $1,331 per ounce.

The forest fire near Musselwhite caused the evacuation of personnel during the second quarter. There was no damage to the facility but power lines constructed to deliver power to the site were damaged, causing an estimated production shortfall of 20,000 ounces.

A rain event at Pueblo Viejo caused a buildup of rainwater, damaging the tailing facility and pushing back the opening to mid-2012. Capex will increase through the end of the year with the additional funds going to repair work at the tailings dam and the construction of a heavy fuel oil/natural gas plant to help mitigate rising energy prices.

Penasquito continues to ramp up but problems have popped up in the final phase which should be addressed in the second half of the year. Drilling continues at Camino Rojo and Noche Buena with three drill rigs operating at each site.

Additional problems occurred due to flooding in Tennessee which forced cyanide supplier Dupont to declare force majeure. Also, Cerro Negro continues toward production with eight drill rigs on site working on site in an effort to expand the deposit.

Due to the problems 2011 guidance for gold production was revised lower from 2.65-2.75 million ounces to 2.5-2.55 million ounces while exploration expenditures will rise to $225 million from an initial guidance of $170 million. Offsetting the production shortfall and rise in exploration expenditures, by-product cash costs on a per ounce basis are expected to fall from an initial guidance of $280-320 per ounce to $180-220.

Two positives in this quarter in addition to the lower than expected by-product cash costs are first a $27 million derivative gain for the first six months of 2011, showing Goldcorp’s ability to appropriately hedge costs.

The second positive development concerns the Marlin mine in Guatemala. Goldcorp may be able to construct a geothermal plant next to the ore body which would provide significant power for the project allowing for cost savings and additional green benefits.

Even with the delays at Penasquito and Pueblo Viejo, Goldcorp remains a solid buy at these levels. The additional capex can be funded through strong cost control which is producing by-product cash costs almost $100/oz below original 2011 guidance.

Mother Nature played havoc with Goldcorp’s operations in the second quarter of this year and the stock has sold off as a response. At the current price, Goldcorp’s long-term potential is undervalued and at current prices this would make a solid entry point for investors looking at one of the stars in the gold sector.


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