Goldcorp (TSX:G,NYSE:GG) reported an increase in production for the second quarter (2Q) but created much more buzz with its guidance update. The company closed Q1 forecasting 2.6 million ounces (m/oz) of gold at cash costs of $250-275/oz on a by-product basis and $550-600 on a co-product basis. Due to operational difficulties at two key mines, Goldcorp now projects lower gold production and higher cash costs in 2012.
The 578,600 ounces of gold produced in Q2 represents a 10 percent increase over Q1 gold production. Despite these results Goldcorp is expecting to fall short of its initial 2012 guidance due to problems at its Red Lake mine that extended throughout H1 and recent problems at its Penasquito mine that are expected to negatively impact production levels in H2.
Goldcorp’s Red Lake mine in Ontario, Canada was a drag on production in H1 2012.
In Q1, adverse ground conditions prevented access to high grade stopes in the High Grade Zone (HGZ). Production was also adversely affected by inconsistent mineralization in the Footwall Zones and lower than expected grades in the Campbell zone.
Goldcorp reported slight improvements in the Campbell zone during Q2. However, inconsistencies continued in Footwall and some areas of the HGZ remained inaccessible due to rock-destressing cuts at the 41 and 45 levels. This work, which aims to improve performance in the zone, was hindered by continued seismic activity. Goldcorp says the work at the 41 level is complete and the cut at the 45 level is expected to be completed during Q3.
“Over the balance of 2012, the company will evaluate the impact of the conditions on Red Lake’s long term production profile,” a company release says.
Guidance for the mine was reduced from 650,000 oz to 460,000-510,000 oz.
Goldcorp’s flagship mine, Penasquito, is in Zacatecas, Mexico. The commissioning of the High Pressure Grinding Roll supplemental feed system had an impact on production in Q1 but it was expected and for a good cause.
In a company release, President and CEO Chuck Jeannes said the commissioning of the final component of Penasquito’s processing line positioned the mine for strong performance over the balance of 2012.
The mine appeared well on track to be a source of 425,000 oz of gold this year. But, in June the negative effects of a prolonged drought manifested. Inadequate water supply limited mill throughput and as a result Goldcorp has lowered its production forecast for Penasquito.
The current water deficit reportedly limits throughput to 98,000-107,000 tons per day. At that rate, Goldcorp only foresees 370,000-390,000 oz coming from Penasquito instead of 425-000 oz.
The company is working to rectify its water problems by drilling additional wells and increasing the water reclaimed from the tailings facility.
“We are optimistic that sufficient water will be secured to accommodate the long-term throughput forecasts but until those sources are secured, we have reduced the forecast for on-going throughput and production,” Jeannes said.
Overall, Goldcorp now projects gold production of 2.35-2.45 million oz — down from a previous 2.6 million oz. Declines are also expected for by-product production of silver, zinc and lead. Coupled with this are expectations for higher cash costs. The H1 calculations have yet to be released but Goldcorp believes cash costs on a by-product basis could now range from $310-340 and on a co-product basis costs may increase to a range of $625-650.
“We are disappointed with reducing production guidance due to operational issues at our two most important mines,” Jeannes said.
Investors seemed to second that emotion as the company’s share price got hammered following the announcement. Some analysts expect that a negative market reaction could persist throughout the year. Some have also lowered their price targets. Goldcorp closed at $33.65 Tuesday in New York, down 8 cents from the previous session.
RBC Capital Markets analyst Stephen Walker lowered his price target for the company from $62 to $52. “We view this announcement as negative for the next quarter or two until the market resolves the uncertainty surrounding the production profile at Red Lake and Penasquito.”
Deutsche Bank Securities (DBS) reduced its 12-month price target from $50 to $45 but also reiterated its buy recommendation.
Analysts realize that this updated guidance is disappointing and for many investors it is likely frustrating. Goldcorp’s uncertainty about when conditions will normalize at these two mines has also not gone unnoticed. Still, analysts such as DBS point to positive growth prospects for Goldcorp.
Though Goldcorp is expecting higher than projected cash costs for 2012, George Topping, analyst for Stifel Nicolaus, believes that costs will moderate for the company next year.
Because the company has new mines set to open, Nicolaus says real total cost per ounce should fall for Goldcorp and Barrick Gold (NYSE:ABX,TSX:ABX). By comparison, he expects companies without such short-term production growth opportunities, such as Kinross Gold (NYSE:KGC,TSX:K) and Newmont Mining (NYSE:NEM) to continue to have costs that are “stubbornly high.”
Goldcorp will hold a Q2 conference call and webcast on July 26.
Securities Disclosure: I, Michelle Smith, own shares of Goldcorp.