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Executives

Lindsay Hall - EVP and CFO

Analysts

Goldcorp, Inc. (GG) Scotiabank Mining Conference 2013 December 3, 2013 11:40 AM ET

Unidentified Analyst

Hi, our final speaker before the lunch break from Goldcorp Mr. Lindsay Hall, Executive Vice President and Chief Financial Officer. Most of the afternoon is going to be gold and precious metals focus so this will kick-off a shift from base metals (inaudible). Welcome.

Lindsay Hall

Good morning everybody. It’s really nice to join the Scotiabank Mining Conference, we come every year, we want to thank Tanya back for inviting us. It’s important us in the gold business that Scotiabank invest in these conferences and we attained because it’s important part of our business.

With me today is Jeff Wilhoit, our VP of IR. So it is a switch of a gear from your base metals into precious metals. So I’ll walk through the Goldcorp’s story and walk you through the highlights for the year.

I’ll be making forward looking statements, as always some of them will be true, some of them accurate when I say them, but when we get to, when the decisions are made and the results are known they may not come true. So, I just mentioned the forward looking statements.

I would say that when I look back in 2013, this is our last marketing event for Goldcorp. It’s been a busy 2013 year. And I can say that from our point of view, I wish the gold price would have cooperated a little bit, but I'd say from our point of view, when we started the year in 2013, we've achieved everything that we set out to achieve at the beginning of the year save two things. Two things went a little didn't work out the way we thought they were. One is that the first line on that the chart behind the safe production, we had two fatalities at Goldcorp. Our goal is not have any fatalities, we continue to educate and work with our workforce. But it is very important for us to Goldcorp that we have no fatalities in 2014, we'll put more emphasis on to that. So that was one thing that count where we are on force in 2013.

The only other thing that we decided in 2013 and we announced at the third quarter, we slowed down the progress with Cerro Negro our mine in Argentina and I'll talk a bit more about that, but that we had anticipated that would come on stream at the beginning of 2014. And as we saw from the third quarter we updated the guidance for 2014, the capital cost, just undertaking financial discipline and slowing down that mine.

Other than that we are very comfortable with the success we've had this year other than the gold price, which I wish I could influence more. But it don't have that ability just yet.

I would say that, some of the things that the gold prices and some of the other base metal companies as well as the mining companies pulling in their horns and reducing their spend especially on new projects in capital development and not building new mines has given us great cause to operate for what we call or get that operating for excellence. It’s a goal of any mining company level on precious or base metals to always work on reducing our cost. And with the slowdown in the entire industry that’s given us a lot of ability to get out cost savings.

So we work on even in our rising gold price to particularly as we saw in a reduced gold price and we’ve had some particular success and that we just highlight some of the successes that we felt in 2013 and we can see that continuing in 2014. The down draft we see in the business from some of our suppliers due to a shrinking business both base metals and precious metals gives us great opportunity to work on those input cost. And we’ve highlighted some of the activities that we have under taken with a goal to actually working getting those locked down well into the future so that in fact with the rising gold with a locked down input costs we’ll be able to capture that margin in a arising gold price that was not there for the period say from 2003 to 2012-13 when the gold prices ran up. So we are working hard on that and you will see more of us more of that in 2014 from Goldcorp.

As always we start with our strategy that our strategy has been intact since I have been the CFO, I have been the CFO since March of 2006. So it’s been quite a busy period of time building Goldcorp. Our strategy backed in and our strategy right now is still the same, good assets and good locations with a conservative balance sheet and that’s held us in very good state.

When you move to some of the actions that we under -- When you move to our balance the conservative balance sheet we have you can see at the end of the quarter, quarter three with in excess of a billion of cash and cash equivalents, we have an undrawn revolver of 2 billion, we also have a low debt-to-equity gearing or BAA2, BBB plus at S&P. So our balance sheet has held us in good state and we have been very proud to that balance sheet as gold prices increased during this period of time, we knew it would hold us in good state, when if in fact gold prices are reduce and you can see that our balance sheet is the best in the business.

We said at this time last year, when we are undertaking our budgets for 2013 what we would do in the declining gold price throughout that stage again in Goldcorp’s budget cycle where we are looking at our budgets for the 2014 and in the next four or five years. And we have the same action plans and firmed up as we speak as those action plans that we had back at this time when we started 2013, and all those action plans that you see there we have actually executed on some or all of them as the gold price reduced.

You can see that we continued funding our growth projects at $1,400, but when we started to move from $1,400 to $1,200, we reduce our capital outlaid for the year from $2.8 billion to $2.6, we tightened up exploration, we are tightened up G&A, we undertook all those action plans that we cannot set out in our budget last year, if in fact gold prices went down and execute on them.

Moving to the third quarter, the third was a positive quarter for us, positive quarter for us and as we said at the time of our conference call the third quarter that we are expecting a better fourth quarter in terms particularly on some of the cost. So we are happy with this third quarter. And as we said we are expecting a strong fourth quarter than the year meeting all our guidance targets.

What we had in the third quarter too, which was very beneficial to us and it’s a continuing trend at Goldcorp continuing into ‘14 and ‘15 is in fact our all in sustaining cash costs. As you can see the movement from our all in sustaining cash costs from the second quarter to the third quarter, the enhancement on operating costs moving from $645 to $551 and our sustaining capital from $495 to $317.

That is an important metric for us, sustaining cash costs, because as you can see from the next slide this is becoming a very important slide to us and the gold business when the fact you see the all-in sustaining cash cost. And you can see our guidance is a red bar, and you can see those mines, you can see what we achieved in the second quarter. You can see what we achieved in the third quarter, significant reduction in all-in sustaining cash costs. And it’s a very good metric for us to look at the business very quickly, if in fact, you have a gold that drives down the, all-in sustaining cash costs down say to $950 to $850, you can anticipate or estimate a gold price of $1,000 and $1,200 and that’s some idea or the measure of the headroom that you have either to pay dividends or invest in new capital.

So in fact any of our mines that are above that red bar, they are highlighted in that chart, we worked very hard with them and getting their budgets plan for the next coming years ‘12, ‘14 onwards. And we have said to many of those mines, when we gave them operating instructions, or instructions to prepare the budget, if you can prepare an operating plan for five years at $1,200 on the revenue line as your goal price assumption shows cash flow positive then you should be looking at a closure plans.

So all those mines that we have above those bars are working hard to bring them much further underneath those bars and our goal is to have an average all-in sustaining cash costs lower than the $1,000. And I can tell you that from our point of view Goldcorp bringing on new mines and with the strength [to pin this] either on the foreseeable years will be well under that $1,000 in our all-in sustaining cash costs.

And that's the measure of any gold company that withstands the cycles of the gold business, high gold prices or low gold prices, you have to work through cycles. And then all-in sustaining cash cost is going to measure of how much headroom we have above the gold price actually to pay dividends and invest in new capital, new growth products.

That's for guidance for the year. We have tightened it up. So as I said at the start of the year we set out the guidance. And you can see in the third quarter we just tight that guidance, where we still anticipate well within our guidance that we said at the start of the year and we see no need, no change for that guidance, so we gave at the third quarter to meet for the year. So we're happy with the success of us executing on our finance plan for the year.

We also talk about dividends a lot in Goldcorp, especially this manner speaking of dividend you can see that we kept our dividend intact, our Board reviews our dividend policy every quarter. And that dividend is an important parameter of the health of any kind of corporation. We plan that dividend through all gold cycles, high price or low price. And you can see we've been consistent in that. And it's really important for us, because that dividend is the measure that we think we can grow and some of our investment decisions are made just on this chart, and it's a very important chart to me.

If you look at Goldcorp for 2013 and certainly into 2014, when you take our cash flow from operations and you reduce it for sustaining capital, you see we do have free cash flow. In 2013, 2014 and in 2015 we also have free cash flow even including our new capital spend. The important thing to point out here is that when we look at our reinvestment of our free cash flows and define free cash flows as cash flow from operations [less] sustaining capital that runs about $1 billion a year for us. The remaining cash is either we are invested in growth opportunities, fund growth profile, invest in organic growth; we have flexibility obviously with M&A and regular dividend growth.

So, we look at these opportunities each and every quarter and we anticipate what we think will be free cash flows. And the history of Goldcorp, we've been building new mines for a long period of time, last five or six years. We haven't announced the construction of any new mines in 2013. So, all the mines that we are in construction that will be completed, that we’ll have completed construction in 2014, so taking majority of our free cash flow and that’s simply a better economic return for our shareholders investing in new mines.

2014, we’ll work on looking at some of our portfolio of assets we have that we want to develop and we’ll look at feasibilities. But if you think of it in 2013, we’ve been spending 1.6 billion on investing in new mines. Those mines will finish construction in 2014. And without a construction decision in 2014 on any new organic growth that we may have, certainly 2015 is going to be a year where our board will have to look at increasing the dividend growth or finding other opportunities for investing our funds where we see fit. But today in 2013, we are making that same investment decision but that kind of guides us how we invest our free cash flow on that chart.

Moving to highlight some of the operations that we have around the world, you can see that we are very big in Canada and Mexico and will remain that way. We like the balance, we like the portfolio that we have, the countries we operate in. It’s a very good risk profile. It’s a nice plant of open pit underground, nice plant to new mines being built and looking at some of our older mines and how best to reduce the cost in some of our high cost mines, the older mines. So, we like that portfolio, that balance we have throughout the world. We’ve had it for some time and where our new growth is coming primarily in Argentina and Quebec, it still is the nice balance, even when you look through that production profile.

Red Lake is the mine that we’ve had since I have been around. It’s a great mine, it’s operated in Canada. We guide the market to approximately 500,000 ounces a year into the foreseeable future. We’ve had some exploration success on the NXT zone. We see that as zone we can mine in the future. We see that the stressing activities that troubled us in 2012 are no longer evident. We will always de-stress parts of the mine at Red Lake. But one thing on Red Lake is that it’s been operating, it’s got lots of hoist capacity, mill capacity and has a fair degree of flexibility of how and what pieces that wants to mine. And certainly it’s flexible down to any kind of gold price for the production and the profitability of ounce -- profitable ounces to be mined at any gold prices there. It has that flexibility and we’ll continue to use it and continuing decline in the gold price to keep Red Lake profitable and not chase ounces if in fact gold declines.

In the upside as gold increases, it has the great opportunity to expand in terms of additional veins to mine. So what we like about Red Lake, at any gold price it has great flexibility to operate at a profitable level and generate free cash flow.

And you see that one of our -- again our largest mine in Mexico is kind of mine that we’ve been -- we’ve built, we’re very proud of it, and we say this about Peñasquito. The best years Peñasquito are ahead of it in 2014, as we will in the fourth quarter of 2013, lowering the pit, better grades, we are optimizing the operation, we are moving a lot of dirt each and every day and if we can optimize the trucks, if we can optimize the blasting and the pressure utilization that will deliver more dollars and cents for the bottom lines for cash flow that it has in the past.

So, we are really excited about that. And we are getting some traction on our O4E movement in Peñasquito and seeing some real significant cost savings going on there that we’ll get to enjoy in ‘14 and future years. We’ve dealt with the water, we found the water. In 2014, we will connect the additional water fields at Peñasquito. So that’s picture of the water needs of Peñasquito now and into this forcible future, so that will be a 2014 exercise at Peñasquito.

I’ll remind the audience that we get water from many areas in Peñasquito. The existing water fields, the tailings facility, dewatering the pits. So we have many water alternatives at Peñasquito, but we needed this additional fresh water that carries us into the future of Peñasquito. So Peñasquito is all about optimizing the fleet and the pit and the blasting at site. And we are working hard on that and that will result in increased throughput and profitability into the foreseeable future. But the main thing about Peñasquito is that the best years are in front of us and we’ll enjoy that for a few more years to come or many more years to come.

Pueblo Viejo is a mine that we show as Barrick, Barrick is the owner operator DR. It’s a mine that was supposed to be ramped up in 2013, we expect full ramp-up in 2014. 2013 was the year that we amended the financial agreement that we have with the government at DR. That's been set, so we have a good idea of what's forward for us at pit PV. The nice thing about PV was never about the ore body, it was always about making sure that the autoclaves could function properly. And what we see in 2013, we've use the year of 2013 to get the autoclaves operating more efficiently, we see that behind us. So we think we can enjoy a ramp-up at PV that we expected in 2013 and 2014. So the financial parameters have been set. I think the autoclaves issues are behind us and in fact we can enjoy a good strong year from PV in 2014.

Talking about our pipeline, I’ve said when we allocate capital or making an investment of capital either to our new projects or the pipeline that we’re proud of is our development pipeline we call. And what -- the projects that we have that we’re looking at seriously in that project pipeline of the all the items listed in that chart. The one that’s most exciting Camino Rojo that’s 50 kilometers south of Peñasquito in Mexico, we acquired a couple of years ago. We’ll spend 2014 getting a feasibility study together and determining what we want to do with it.

There is a number of things we want to do with Camino Rojo. We want to make sure we get the water, we want to make sure with the [heroes] the local indigenous people, we need agreements to get -- to attach water, we have to find the water; all that's necessary work to be done before we’d announce the construction decision.

And one thing that is a little different in this gold environment, we have a gold environment of something like $1,200. You spend a bit more time investing upfront in the ore body to ensure that the ore body is what you think it is in terms of grade and you spend a bit more time for getting out the capital cost. You have less room for air. Our hurdle rates to allocate capitals and new projects haven't changed, whether gold price is at $1,600 or $1,200, still the same hurdle rate. But certainly you have to be a little sure, more sure about the ore -- gold, sorry, the ore body at this kind of gold prices. So we're spending our time and doing our right at Camino Rojo. That's one that's most exciting about our pipeline.

Moving along to the projects that we are finishing construction, and I’ll remind everyone in the room with that three projects Cochenour, Éléonore and Cerro Negro, these projects, we've been building over the last two or three years. 2014 is the last year that we'll be spending basically construction capital to complete these projects. They come on at kind of different times, but ‘14 is the last year of construction. So we've been funding these for last two or three years.

Cerro Negro, we announced in the third quarter that we'd slow down. We expected that we would have first production at the start of the year; we're going to have that mid-year 2014. Ore is being stockpiled. We are still continuing to develop the mine, we're building it as we see fit, we're building it financial discipline. And the issue with Cerro Negro is that it is a country in a state of a bit of a turmoil with the government elections recently behind us. And it seems that the governing party will not be in power probably post 2015. So, the period from today till 2015, maybe a little chaotic, but we're continuing to developing the mine. And I think that we think the ore body is performing as we always anticipated when we bought it. But we're being fiscally discipline i8n how we bring this mine along.

In the past, it was always assumed that the faster you build the mine, the better it was. Well, that’s not necessarily the case today, that’s not necessarily the case in Cerro Negro and that’s not necessarily the case where you have a fixed exchange ratio in a country that has a significant amount of inflation going in. So, we’re being very financially disciplined and building it smartly not stupidly in trying to rush it into production.

And you saw our announcements in the second quarter where we have reduced the market guidance for 2014 solely for Cerro Negro where in fact it will come a little later than we anticipated. Since we’re stockpiling it won’t affect us in 2015 or post 2014. But we certainly gave the market guidance. We updated the capital cost to reflect the inflation going on in the country today. So we are pretty happy with that capital cost estimate.

Éléonore is the underground gold mine in Northern Quebec. It hasn’t been much still any issue with Éléonore, it’s has really been that changed the tax laws a couple of times, but the province has to increase the tax when Éléonore gets up and running but it’s always been pretty smooth sailing in terms of building Éléonore, the production -- one of the production shafts completed, so we are getting excited and getting into the ramp development and developing the ore body and the top part of the ore body.

In 2014, we’ll complete the second production shaft that goes to the bottom of the ore body and do more exploration at the bottom of the ore body just to firm up the economics on the bottom part. It was too expensive to drill the bottom part from the top part, and we’ll drill it from the second production shaft in 2014. So that’s all pretty exciting. And it’s always gone pretty well but one would expect the Northern Quebec, we’ve got a good relationship with the indigenous people, key people up there. So that’s gone very smoothly. And obviously Quebec is a rich mining area and the workers, the productivity the ability to get quality machinery and everything up there has worked out pretty well. And all the infrastructure is there, the power, the water. So it’s been clear sailing on Éléonore. So we are pretty excited about that. And as you know, that ramps up in two stages, first 300,000 and then the second 300,000 outside of our 2017 guidance. Remember our guidance accounted 2.6 million to 4 million ounces to 2017. The second stage of Éléonore is actually passed at 2017, so that comes in two stages.

In Cochenour, lastly on Cochenour, that’s the ore body situated in the Red Lake Camp, I want to [extend] the excitement around Red Lake, the mining in the ore, this is just another ore body that makes three ore bodies we have at Red Lake; the Red Lake High Grade zone, the Campbell zone and the Cochenour zone. And we are starting to see some real excitement with the Red Lake Camp in the sense that 2014 will be finished the drift to get this over to the ore body. The mining people that operated Red Lake will start to look at how to attach the ore body and how to ramp down to the ore body, get the ventilation in place. So we are starting to see some real improvement going on in terms of how to attach the ore body maybe a little quicker than we anticipated.

But again if you’re at Red Lake and you are looking for a flexibility of the mine, this is just another ore body that gives them flexibility and for us to decide which ore body they want to mine on any given day or all three on given day Red Lake, Campbell or Cochenour. So the excitement is starting to grow in the Camp. So we are looking forward to 2014 as -- calendar 2014 will be finished kind of connecting the drift to the ore body, the ventilation will be completed and in fact we’ll start getting more drilled down in the six-kilometre drift that we’ll have finished constructing in 2014 and see if there is any exploration success in that drift, remember Red Lake is one of the highest [paid] ore bodies in the world.

Lastly on gold, obviously we’re in the gold business obviously it’s been a tough year in the gold price. We do remain bullish on gold simply for these reasons. And there is many out there. But in fact one of the reasons that I look very comfortable with the gold price maybe not immediately, but important thing to keep -- to see increasing the gold price will be central bank buying, central bank used to sell on the [bygone] here, they’re buying as one of the central bank keeps buying another strong fundamentally for gold. The physical buying coming out of China and India is still strong. And we feel that those two items will [chop] the decline in the ETFs, for the most part the [DETF] decline has already happened, so that's taken over the gold price, the (inaudible) financial future that's already been flattened so that's been taking over the gold price.

So we still see a robust market for -- a good market for the gold price in the future with those two physical attributes, the physical buy and gold trumping the financial side. But as we know we’re in the gold business, sometimes it acts as a commodity, supply and demand mean something and sometimes it acts as a financial asset, but sometimes there is some head phase with the tapering and what not.

But we’re still bullish and what we are looking at Goldcorp we think that walk down the input cost, we’ll bring on our new projects low cash cost and capture that margin in a rise in gold price environment and we’ll see that's happening in the future and we’re marching to that as a strategy.

So with that, I’ll turn it over for the -- three seconds that I have left to questions.

Question-and-Answer Session

Lindsay Hall

And we probably got time for one question out there.

Unidentified Analyst

I had a question, Lindsay.

Lindsay Hall

Yeah, tune in.

Unidentified Analyst

I just wanted to ask you on your M&A philosophy because you are one of the very few companies with the strong balance sheet that can take advantage of opportunities in today’s markets on some of the depressed pricing. Can you just talk to us a little bit about your M&A philosophy in terms of what sort of what you are looking at jurisdictions or is it grade-related or is it development versus production?

Lindsay Hall

Well, as you know everyone wants great grade in the great country.

Unidentified Analyst

Absolutely.

Lindsay Hall

We got that. Hard to find, but I think the answer of the question, the balance sheet obviously is in great shape. And I think that we've been very successful as the gold went up. We were very successful in spinning off some of our higher cost mines or undervalued mines or mines that we didn't value as greatly as somebody that bought them. So we've been disciplined and on forming Goldcorp's inside of the (inaudible) six we've been acquisitive, we can't run away from that.

In this environment simply put, the bade is really around the shop, Timo who handles the buy, sell and merge at Goldcorp, he has got many files open, but at this gold price obviously we are looking at operating mines probably more or so than exploration mines. In the past, we've bought exploration mines and built them. Maybe with some of the mines out there now -- some of the companies [unaddressed], some of the properties come up bit more interesting to us, but it's just this.

We make the conscious decision how to allocate shareholder capital and that one Charles had talked about organic. We’re finished building our new mines currently. We have a great production profile going to 4 million ounces, but in fact there is a mine out there, operating a mine out there that has better ounces that gives 4 million. And we think that some of those ounces in the 4 million are high cash cost, I showed you the bar chart anything above 1,100 is all into semi cash costs with high to us. We will look at perhaps replacing those ounces with lower cost ounces with a mine that perhaps is in a good location and has long mine life and something we're very comfortable operating. But we have great expertise in Goldcorp with underground or open pit, so we're in different.

But certainly we look at that, but that's no change from our strategy since day one when we started building Goldcorp. So, but at this environment, we're bit more shall I say the competition or something nevertheless and perhaps at $1,700, $1,800 an ounce of gold.

Yeah. We're still happy with the Americas, it's got a [pit for] and I think, but our focus is bringing Cerro Negro and Éléonore on, let's not lose sight of it. We haven't announced any construction of any new mines currently. So, but that’s the focus we still have. But again we have files open on everything, but it’s something we -- it’s just part of the business that we undertake and we think we’re not bad at it.

Unidentified Analyst

Thank you.

Unidentified Analyst

And I have one. On slide 25 you just looked ahead your sensitivities, I found that one interesting. Can you maybe flip ahead….

Lindsay Hall

Long time since I looked at that, but.…

Unidentified Analyst

It’s interesting because what it shows there, I guess your base price is a little bit outdated, but if you look at this and say okay gold goes down 10% and in this case it’s $205 million hit to your free cash flow. But what’s driving maybe gold going down is strengthened U.S. dollar and then if you sum up the bottom for there, $152 million free cash flow gain Canadian dollar or Mexican peso 39 and then you are assuming that that’s going to impact fuel and electricity. Could you see an environment where maybe gold goes to 1,100 bucks, but then just because of everything else happening and recalibrating you actually see margin expansion?

Lindsay Hall

Gold at 1,100 and a margin expansion?

Unidentified Analyst

Yeah, because of the changes in FX, the changes to consumables and I guess the cost of doing business in general?

Lindsay Hall

Sure, it could just in the sense that I think the dilemma is just that we do see in the industry -- I would say everyone, every gold mining company or every base metal company that’s coming up here seeing reduced cost. If you slowdown the entire business, cost will go down, naturally the suppliers have excess capacity and they have to give you price for excess gold stays cross to 1,100.

You might see some margin expansion, some of the high cost operators, not ourselves, high cost operators will try and get it below 1,100 or [recheck] mine plans to get it below 1,100 they will fight to survive. Certainly in our case we are just obviously not fighting to survive, but to answer your question, yeah it could.

Unidentified Analyst

I’m going to have to stop you there. That concludes the morning session. Thank you very much everybody. Just want to let you know that lunch is being served upstairs on the fourth floor. And that the presentations will resume at 12:45 with the Barrick Gold. Thank you very much.

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