Goldcorp Inc. (GG) recently issued its second-quarter 2012 gold production figures and updated its full year guidance. The company lowered its full year target due to weak production from the Red Lake mine in the first half of the year and lower expectations from the Peñasquito mine for the second half.
The market did not react favorably to Goldcorp’s slashed guidance. The stock fell almost 10% after the production and guidance figures were released.
Production and Cost Highlights
Goldcorp’s gold production clocked 578,600 ounces in the second quarter, a jump of 10% sequentially. Although, the company has not finalized its operating costs for the quarter yet, it expects total cash costs of approximately $370 per ounce on a by-product basis. For the first half of 2012, the company expects by-product cash costs to be roughly $310 per ounce.
Goldcorp’s cash costs on a co-product basis are expected to be $620 per ounce in the second quarter. It expects cash costs on a co-product basis to be approximately $635 per ounce for the first half of 2012.
Mining Highlights
At Red Lake, Goldcorp’s production in the second quarter continued to be weighed down by operating delays in the High Grade Zone due to increased seismic activity. Production from this mine slid 38.6% in the first quarter due to this reason along with inconsistent mineralization in the Footwall Zones.
These issues continued into the second quarter and led Goldcorp to slash its Red Lake production guidance for the year considerably. The company now expects Red Lake to produce between 460,000 and 510,000 ounces this year, as against the earlier forecast of 650,000 ounces.
Insufficient water supply in June affected mill throughput at Peñasquito in the second quarter. The area is experiencing protracted drought conditions, which have led to below average water recharge in the well field and lower water production from the pit de-watering program.
Although the company is trying to resolve the situation by drilling more wells and ramping up the quantity of water reclaimed from the tailings facility, it expects that the problem will persist for the rest of 2012. The bottleneck is expected to affect plant throughput to the tune of 98,000 and 107,000 tons per day for the remainder of the year.
As a result, Goldcorp now forecasts gold production of 370,000 to 390,000 ounces this year at Peñasquito, compared to the earlier estimate of 425,000 ounces. In addition, silver production is expected to be in the range of 23 to 24 million ounces in 2012.
Updated Guidance
Operating issues at the two mines have led Goldcorp to lower its production guidance for the year. It now expects to produce 2.35 to 2.45 million ounces of gold this year, down from its previous forecast of 2.6 million ounces.
Also, as production levels are expected to fall, costs will inevitably rise. Goldcorp now projects total cash cost of $310 to $340 per ounce of gold on a by-product basis, up from the earlier estimate of $250 to $275 per ounce. On a co-product basis, it expects cash cost of $625 to $650 per ounce versus the previous estimate of $550 to $600 per ounce.
Recommendation
We currently have a long-term Neutral recommendation on Goldcorp. The company, which competes with Barrick Gold Corporation (ABX) and Newmont Mining Corp. (NEM), retains a Zacks #3 Rank, indicating a short-term Hold rating.
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