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Goldcorp, Inc. (NYSE:GG)

Q4 2006 Earnings Call

March 8, 2007 2:00 pm ET

Executives

Jeff Wilhoit - VP, IR

Kevin McArthur - President and CEO

Lindsay Hall - EVP and CFO

Steve Reid - COO

Analysts

John Bridges - JP Morgan

David Stein - Sprott Securities

Tony Lesiak - UBS

Chantal Gosselin - Genuity Capital

Haytham Hodaly - Salman Partners

Barry Cooper - CIBC World Markets

John Tumazos - Prudential Equity Group

Mark Smith - Dundee Securities

Steven Butler - Canaccord Adams

Steven Kinsey - Casa de Vil

Presentation

Operator

Good day, and welcome to the Goldcorp Year-end Results Conference Call. Your host for today will be Kevin McArthur, President and Chief Executive Officer of Goldcorp.

I would now like to turn the meeting over to Jeff Wilhoit, Vice President of Investor Relations. Please go ahead, Mr. Wilhoit.

Jeff Wilhoit

Thank you, Coleen, and welcome everyone to the Goldcorp 2006 annual and fourth quarter Earnings Call. As a reminder, we will be discussing forward-looking information that involves unique risks concerning the business, operations and financial performance and condition of Goldcorp.

Forward-looking statements include, but are not limited to, statements with respect to future metal prices, the estimation of mineral reserves and resources, the timing and amounts of estimated future production, costs of production, capital expenditures, costs and timing of the development of new deposits, and permitting timeline.

Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause the actual results to be materially different from those expressed or implied by such forward-looking statements. Accordingly, you should not place undue reliance on forward-looking statements.

And with that, I will now turn the call over to Kevin McArthur.

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Kevin McArthur

Thanks Jeff. Welcome everyone. 2006 was a pretty good year of records for Goldcorp. Gold production increased 50% to a record 1.7 million ounces. Net earnings increased to a record $408 million or $0.94 per share. And more importantly, cash flow from operations increased to a record $791 million or $1.82 per share, up from $466 million in 2005.

Our revenues nearly doubled to a record $1.7 billion and cash costs remained the lowest amongst our peer group at $33 per ounce compared to $22 per ounce in 2005.

The highlights of 2006 include the acquisition of the Eleonore gold property from Virginia Gold in March, the acquisition of the Placer Dome assets from Barrick in May, and the merger with Glamis in November.

As I now review the fourth quarter financial results, please keep in mind that I am including Glamis operating results for two months following the date of acquisition.

Highlights from the fourth quarter include gold production for the quarter was 588,000 ounces, our highest quarterly production ever, compared with 268,000 ounces in the fourth quarter of 2005.

Net earnings were $66 million or $0.11 per share during the fourth quarter, including a non-cash impairment charge of a $175 million on Amapari, partially offset by a realized after-tax gain of $88 million from the sale of Silver Wheaton shares. Adjusted net earnings amounted to $114 million or $0.19 per share.

Operating cash flows for the fourth quarter nearly doubled to a record $255 million or $0.43 per share. Total cash costs were $160 per ounce. This is net of byproduct credits, compared with negative $73 per ounce in the same quarter 2005. On a co-product basis, total cash costs were $275 for the quarter and $259 for the year.

Cash and cash equivalents at December 31, 2006 increased to $555 million from $342 million at September 30. The company also received $189 million from the sale of Silver Wheaton shares, and capital spending during the quarter amounted to $187 million. Dividends paid during the quarter amounted to $27 million.

Now, I'll take you through a few other factors that influenced our performance in the fourth quarter of 2006. First of all, depreciation increased by $49 million, as a result of the finalization of the purchase price allocation of the Placer assets and the impact of the preliminary purchase price allocation on the Glamis mines.

Depreciation per ounce increased from about $170 to $200 per ounce due to fair value adjustments on acquired mines, and we expect to see this figure remain fairly steady going forward.

Copper margins were lower by $30 million, approximately $10 million as a result of lower spot prices, and $20 million due to the impact of price adjustments on provisional concentrate sales. This was offset by a positive mark-to-market adjustment of $28 million on our copper forward position. This is included in other income as a non-hedge derivative gain.

Lower copper sales were offset by higher gold and silver sales during the quarter. Gold sales increased by 178,000 ounces, including 156,000 ounces from the Glamis mines in November and December.

Silver sales increased by 2 million ounces to 6.2 million ounces as a result of significant increased production at La Coipa, and the acquisition of the Marlin mine. The Glamis acquisition has paid immediate dividends in the first quarter of consolidated operating results, as production improved 30% on a full quarter-over-quarter basis, primarily as a result of significant improvements at Marlin, and another excellent quarter at El Sauzal.

Corporate G&A, excluding non-cash stock option expense, increased $14.5 million due to higher audit tax and Sarbanes-Oxley compliance, as well as increased corporate activities. Our fourth quarter G&A includes $2 million as a result of consolidating Silver Wheaton and Terrane Metals. We expect G&A to be approximately $15 million per quarter in 2007.

Stock option expense of $6.8 million for the quarter and $22.7 million for the year has now been classified into corporate G&A in accordance with accounting rules.

Exploration expense remained steady at $9 million for the quarter, as ongoing exploration activities continue. Exploration expenditures are expected to total $120 million in 2007, with approximately half of that capitalized and half expensed as the company has launched a new organic growth initiative.

Interest expense increased moderately to $18 million for the quarter, as a result of higher debt balances. However, the company has repaid $205 million of debt since year end with a total debt balance of $770 million as of today.

Foreign exchange gain of $17 million for the quarter compared to a loss of $10 million in the third quarter, primarily as a result of the impact of the weakening Canadian dollar on the company's future income tax liabilities.

Effective tax rate for the quarter was 19%, down from 29% in the prior quarter, due to lower tax rates applicable on the sale of the Silver Wheaton shares, as well as a $39 million tax recovery relating to the reduction in long-term corporate taxes in Canada.

Included in this morning's reported earnings of $0.11 per share, are a number of unusual items as follows: the $175 million non-cash write-down on Amapari; the $88 million gain on sale of Silver Wheaton shares, net of tax; the $18 million gain on copper hedges, once again net of tax; and $21 million in foreign exchange gain on future income tax liability.

Excluding, these items, adjusted earnings would have been $0.19 per share. Adjusted earnings also include the impact of a reduction in long-term tax rates in Canada, which as I said amounted to $39 million.

I would like to point out again, the record cash flow from operations at $0.43 for the quarter and $1.48 for the year, speaks volumes about the company's ability to generate very strong cash flows as a result of our very low total cash cost structure.

Turning to the operations; Red Lake mine produced 171,500 ounces of gold in the fourth quarter at a total cash cost of $239 per ounce. Production is on the increase due to the mine's ability to maximize Campbell mill throughput with underground ore from the Red Lake complex. Sinking of the number three shaft was completed on January 9, 2007, and the loading pocket and the initial section of the 43 level conveyor drift was excavated. Raise boring of ventilation raises to support the new infrastructure is in progress.

Expansion of the Red Lake mill began in 2006, in order to increase capacity from approximately 800 tons per day to over 1,200 tons per day. The project entails upgrading the grinding circuit, modifying the existing pumping equipment. It was 85% complete by year end, and will be ready for commissioning by midyear of 2007.

The combined processing capacity of the two mills will now be over 3,000 tons per day designed to accommodate the increased rate of ore delivery expected from the completion of the number three shaft.

We expect to have the shaft in operation by year end, which opens up multiple avenues for productivity gains over the coming years. We are also freeing significant resources for advancing our exploration activities. These were limited by shaft development work and other work over the last couple of years. Our exploration budget for 2007 amounts to $26 million of Red Lake.

Turning to the two Canadian joint ventures, Porcupine and Musselwhite, production remains steady. Gold production at Musselwhite for the fourth quarter was 38,400 ounces, down slightly from the third quarter.

Our exploration drilling has indicated the existence of gold in the mineralizing system, well north of the mine and drilling on this target continues in 2007.

The gold production at Porcupine increased to 45,700 ounces for the quarter, up as a result of more selective mining in the Pamour open pit and production from Dome underground. Explorations there has identified new mining opportunities within the Timmins Camp, with 134 kilometers of diamond drilling completed in 2006.

Reserve additions from all resources more than replaced 2006 production ounces and total mineral resources have also seen increases; that's at PJV and Porcupine.

Our Luismin mines produced 52,600 ounces of gold and 2.12 million ounces of silver in the fourth quarter. 2006 was a record production year with 208,000 ounces of gold and proven and probable reserves increased by 53% from the previous year.

Exploration activities at Luismin continued throughout this year with planned expenditures at San Dimas of $18 million in 2007.

El Sauzal gold production increased by 10% to 84,800 ounces of gold in the quarter, and cash costs were lower at $94 per ounce. 2006 was a phenomenal year with record production of 300,000 ounces of gold, Mexico's largest gold mine for two straight years.

We're pleased to report that during the fourth quarter, we've seen Marlin resolve the startup issues that occurred earlier in the year and gold production increased to 55,100 ounces for the quarter. Silver production also increased significantly to 622,000 ounces, up from 382,000 ounces in the prior quarter.

In 2007, we expect to see a ramp-up of production from the underground mine to a 1000 tonnes per day, as well as improvements to the process leach circuit to allow continued increase in throughput while maintaining metallurgical recoveries.

The company continues to work with the communities around the project and with the government in capacity, building for Guatemala's still new mining industry. During this year, we enjoyed a great deal of progress in all of these efforts.

Alumbrera produced 44,200 gold ounces and 30 million copper pounds during the quarter. This was a decrease primarily due to the lower gold and copper grades, which were inline with expectations. Our cash costs were higher at negative $492 per ounce, due to lower production and to lower realized copper prices.

As discussed in previous quarters, the Alumbrera mine is also now subject to the YMAD royalty, which is calculated at 20% of net proceeds of distribution, which approximates EBITDA less capital expenditures and working capital adjustments.

Therefore, if cash builds up at Alumbrera, the royalty is not due and payable until cash is paid out to shareholders. And based on dividends paid to-date in quarter one of a $150 million, that's Goldcorp's share, there is a royalty impact to date of $30 million, also Goldcorp share. This is in the first quarter of 2007.

The expansion to a 40 million tonne per annum milling capacity was completed in December 2006 and work continues towards completion of the molybdenum circuit this year.

Our Marigold production increased by 66% to 34,600 ounces due to higher ore mined in process. In December of 2006, Marigold became the first operating mine in the world to be certified as fully compliant with the International Cyanide Management Code. This is an accomplishment that we plan to replicate throughout the company.

Turning to development projects; first of all, Los Filos, construction was 90% complete as of December 2006. All mine equipment needed for the open pit operation is on site with the exception of one hydraulic shovel scheduled to arrive soon.

Pre-stripping of both pits was completed two months ahead of schedule with almost 35 million tonnes mined as of 2006. A basic infrastructure such as primary and secondary access roads and power and water supply systems were completed during the year. Loading of the ore under the first heap leach pad cell was commenced and gold production is expected in the second quarter.

You may have seen that the project was recently subjected to a work stoppage as a result of a local road block. We are having some issues with the small group who wish to see more money in the way of land payments and infrastructure investments in the area. We are engaged in discussions and don't expect this situation to persist.

We have seen delays of certain pre-production activities. We still expect to hit our original target of commercial production in 2Q, and we don't see this impacting our 2007 corporate-wide projection of 2.6 million ounces this year.

Turning to the Penasquito project, we are pleased to receive all of the final permits required for construction and operation in January. In addition, agreements with the municipality of Mazapil are now in place that allow for construction of the mine and routing of the transmission line feeding the project.

Under previously granted construction permits, electric power and water were established to the site. The airstrip has been constructed, concrete foundations have been poured for the site’s medical and construction camp facilities and preparation for mill construction activities is underway.

The initial plant will consist of a 50,000 tonnes per day flotation mill with expansion to double that capacity to 100,000 tonnes per day by 2012. Production from the oxide heap leach plant is expected in late 2008, while the flotation plant is scheduled to commence operation in late 2009.

The mine currently has an estimated 17-year mine life. Since doubling the reserves in 2006 to 10 million ounces, drilling at Penasquito has continued with very good results and we expect to update reserves at Penasquito late in the second quarter.

At the Eleonore project, drilling continues at full drill to take advantage of the favorable winter drilling conditions. During 2006, the company completed 76,000 meters of drilling with an additional 80,000 meters planned for 2007. We have now extended some of the drilling to beyond 1,000 vertical meters with satisfactory results.

With the bulk of the initial infill drilling completed to the 600-meter level, a project scoping study is in progress to establish the primary operating parameters of the project. Regional infrastructure is ideal to support a future mining operation with available power, water, and year round highway access nearby, and not to mention, Quebec being one of the best places in world to build the mine.

We expect to publish the first resource estimate by the end of the second quarter, as our extensive drilling, permitting, and pre-feasibility programs continue.

At our 40% owned Pueblo Viejo project, Barrick continued to update feasibility study originally prepared by Placer Dome. This work today has resulted in an increase in silver recoveries and the addition of a copper and zinc recovery circuit.

Next steps include completion of engineering studies, completion of the negotiations with the government, and finalizing a power sourcing strategy. As recently announced by Barrick, our share of the PV reserves have now increased to 7.2 million gold ounces and significant amounts of byproduct metals. We eagerly anticipate the new feasibility study.

2006 was a remarkable year for Goldcorp, as the company’s market capitalization nearly tripled, successfully establishing our position as a world-class premier gold company. As we look forward to 2007, the key priorities of this management team include bringing the Los Filos project into production during the second quarter, advancing mine construction at Penasquito, continuing feasibility and development at Eleonore project, and completion of the integration, mill expansion, and #3 shaft operations at Red Lake.

We are sticking to our American strategy, big deposits and save places, and over 50% growth over the next five years. We saw 170% increases to proven and probable gold reserves year-over-year to 39.8 million ounces.

Measured and indicated gold resources increased more than five-fold to 16.4 million ounces, and inferred gold resources quadrupled to 30.8 million ounces. Also, proven and probable silver reserves increased to 781 million ounces.

Overall, our operations are working hard to contain the cost pressures that our industry is experiencing, particularly in the areas of the consumables such as reagents, tires and energy. As the various mining operations continue to integrate, we are seeing synergies, especially through productivity gains at Red Lake, and management cost savings, as we grow our Mexican operations.

We are confident that we will continue to maintain our position as the lowest cost and fastest-growing senior gold producer, while offering shareholders low political risk, a 100% unhedged gold status, and simplicity. These are all the good things normally attributed to the intermediate gold producers.

I believe we can unlock significant value from our very large concessions by investing $120 million during 2007 in brownfields exploration. This is drilling in the very shadows of our own head frames and around our own projects. So as the year develops, look for new future growth with low finding costs.

And that, I am happy to say, is the end of a very long lead-in. So, now, I would like to ask the operator, if you would please open the floor for questions?

Question-and-Answer Session

Operator

Certainly, thank you. We will now take questions from the phone lines. (Operator Instructions). Our first question is from Mr. John Bridges with JP Morgan. Please go ahead.

John Bridges - JP Morgan

Hi, Kevin. Congratulations. I am pulling it altogether.

Kevin McArthur

Thanks, John.

John Bridges - JP Morgan

A dumb question, you've broken up the book values into depletable and non-depletable. How should we handle those for accounting purposes, is the non-depletable just going to be a goodwill amount that sits there, or how do we deal with that?

Lindsay Hall

John, it's Lindsay Hall. You're absolutely correct, John. As we allocate the purchase price, and as you may know in the case of Glamis, we have a year to set that purchase price. When we look at the book values and the purchase values, we have to make an allocation. And a significant part of that allocation is into what we call the mineralization, particularly, the non-depletable right now. So that kind of sits there until we bring that non-depletable into the depletable and that’s the revenues when those flow. So, the basic gist of your question is, you're correct. It just sits there, kind of like goodwill.

John Bridges - JP Morgan

How will we know when to add that to the depletable balance?

Lindsay Hall

As we move through and move it into our reserves and we bring it into depreciation when that reserve starts getting produced, that’s when we'll start bringing across into the depletable. So you'll see it move into our depreciation. And when we give you a forward-looking depreciation number that will be, as we see essentially that mineralization coming into the depletion. So, through our guidance in '08-'09, we'll give you that view going forward. So, it's an element when they come into our reserves and they start to add to revenue.

John Bridges - JP Morgan

Okay, got it. On the Red Lake when we visited there last year, you had a [sort of billboard] of different ideas about what was going to happen. I just wonder if you give us a better idea as to where you are leaning in terms of developing that property?

Kevin McArthur

I'm going to start it and then Steve Reid, our Chief Operating Officer, might chip in. But I'm going to just do the big picture of thing and then, Steve is more than happy to talk in details.

Big picture, look forward 10 years, I believe this exploration program will bear fruit. We should be seeing extensions to high-grade zones in possibly multiple areas. Possibly an open pit operation, one big mill after shutting down the two mills, possibly mining in (inaudible) and other areas, and consolidation in the district. We believe Red Lake will be a cornerstone operation for the company for decades to come. Now, that's the big arm wave, remember the forward-looking statements warnings that Jeff gave. So, now that I said that perhaps I can turn it to Steve for a little more detail on what's currently going on.

Steve Reid

Thanks Kevin. John, it's Steve Reid.

John Bridges - JP Morgan

Hi, Steve.

Steve Reid

As we discussed when you were on site last week, we gave you five areas of focus in terms of where we were looking for from an exploration point of view. The high-grade zone, a dip on the Red Lake site, the Deep Campbell on a Campbell site, the party wall or the area between the two mines, which hasn't been looked at for sometime, the upper sulfide, and then looking at the pit option. What I would say is that at the moment, those are still the five areas that we're looking at. We're still heading in that direction and there's been nothing to suggest that they don't exist in the same priority.

What I would say is that we still really like that third option of the area in between. And that’s about the change that we will see if we start to get on to anything in that central area that will jump to the top priority I would think. But at the moment, it's going according to plan.

John Bridges - JP Morgan

So, how quickly would you fill this 3,000 tonnes a day milling capacity?

Steve Reid

Yeah, we think we can fill it quickly. We've already changed the Campbell operation onto 7 days a week. We're already filling the Campbell mill, which hadn’t been filled for some years. So, yes, we think we can fill it quickly.

John Bridges - JP Morgan

Okay, let me rephrase it. How much is going to come from those shallow open pits that you're playing with over there?

Steve Reid

Very little. It's just really a longer-term option, John. The biggest value and the best approach is for the underground material.

John Bridges - JP Morgan

If I might steal a second follow-up, how narrow is the intersection of Musselwhite?

Steve Reid

Which intersection specifically?

John Bridges - JP Morgan

You mentioned that you had an intersection, but it was narrow on the other side of the lake.

Steve Reid

Yes. The drilling for the other side of the lake -- we're talking about a few meters in all cases. We're looking for something significant and something that we can attach our mine. I guess what we're trying to say is we haven’t found that yet. So, they are of the order by a couple of meters.

John Bridges - JP Morgan

Okay thanks a lot. Good luck guys.

Steve Reid

Thanks John.

Operator

Thank you. Our next question is from David Stein with Sprott Securities. Please go ahead.

David Stein - Sprott Securities

Thanks. Good afternoon. First couple of questions on Alumbrera. Most of the recoveries were down and any reason why and any kind of guidance going forward on that?

Kevin McArthur

Yeah, there are some less than happy recoveries there due to the nature of some of the rocks that were in. There is a certain mineral; I am trying to remember it, gypsum. Thank you, Steve. It is gypsum in some of the ore. [Estrada] is during metallurgical testing to see where we are going here. We don't expect this to persist.

David Stein - Sprott Securities

Yeah, so back up to the high 80s for '07 or has your need to--

Kevin McArthur

I don't have any indication that we expect this to be a long-term issue.

David Stein - Sprott Securities

Okay. How much molybdenum are you going to produce?

Kevin McArthur

Oh boy, we are all looking around room. I remember this. I was just down there, so I remember seeing the numbers. I don't think in terms of pounds of moly, so it, I can tell you, we will be, somebody is looking right now. But I can tell you that it's not a huge amount. But a lot of number of these incremental investments that can be made through the Alumbrera mine that get very, very good rates of return on capital employed. And, so it's a small number.

David Stein - Sprott Securities

Okay.

Kevin McArthur

I am saying it right here now, 542,000 pounds in 2007.

David Stein - Sprott Securities

Okay, and thereafter?

Kevin McArthur

All right, that's our share.

David Stein - Sprott Securities

That's your share?

Kevin McArthur

Thereafter, what I am looking at 1.7 million to that kind of number.

David Stein - Sprott Securities

Okay perfect. I mean generally, I am assuming, you don’t want to get specific and generally are you expecting the grades to pick up in copper and gold this year, or they are going to be more like they were in Q4?

Kevin McArthur

No, I don't have the answer to that.

David Stein - Sprott Securities

Okay. Well, I know the plan changes a lot.

Steve Reid

Steve. It would be slightly higher in the second half. That is what we understand.

David Stein - Sprott Securities

Okay. Can you give an update on Cerro Blanco? Obviously with the combined company, it is just less of a priority, but I am just really wondering what's the situ with that asset?

Kevin McArthur

Yeah, Cerro Blanco, we are still high on Cerro Blanco. We think it will be a mine one day. It's stuck in no-man's-land right now, waiting for permitting work. We are also getting a drill on-site to drill the aquifer to make sure that we've identified the water resources. Not only the water resources in the area that we would impact, but also what kind of mine dewatering we would have to have.

But interestingly to look at the very good possibility that we are going to have a geothermal power plant there one day. So, these are all things that are in the works. When you include the impact of the geothermal power plants, it still has a very good rate of return, and so we've just gone quite for a while. We are just hunkered down getting some work done.

David Stein - Sprott Securities

Okay. Perfect. Lastly an accounting question; the sale of Q1 for Peak Gold, assuming that closes in Q1 or whenever it closes. So, you wrote down Amapari in Q4. Will you then be able to book again? Will that flow through your income statement when that sale happens?

Steve Reid

No David, there will be no material effect in the first quarter.

David Stein - Sprott Securities

Okay. That deal is scheduled to close in the first quarter though, am I correct?

Steve Reid

I am sorry. David, you were asking on Peak, is that correct?

David Stein - Sprott Securities

Well, the Peak Gold includes Amapari, right? So you wrote down Amapari, but then you needed some money for it from the sales into Peak Gold. Or you're going to get a value for it in shares of the new company, plus cash, right? So, how will that be accounted for is my question?

Steve Reid

David, you are quite right. I answered the question on Amapari. There will be no material effect. But in the first quarter, we are looking at something like a pre-tax gain of $50 million that will be recorded in the first quarter on the Peak side of the transaction. But we are looking through the valuations as we speak.

David Stein - Sprott Securities

Perfect, okay. That is all. Thank you very much.

Operator

Thank you. Our next question is from Tony Lesiak with UBS. Please go ahead.

Tony Lesiak - UBS

Good afternoon. Kevin, could you tell me Los Filos; how much production are you expecting this year?

Kevin McArthur

Yes, Los Filos, our original projection was around 200,000 ounces of gold for the year. But when you throw in Nukay, it's 230 or so. Certainly, we don't believe we are going quite hit those numbers. Our Luismin group is telling us, don't sweat it. The Luismin mines will come through. So, there is no impact on our total numbers.

Tony Lesiak - UBS

Okay, because originally I heard two different numbers, 200 and 260.

Kevin McArthur

Yes, whether or not you include Nukay, is where 30,000 ounces bounces back and forth.

Tony Lesiak - UBS

Okay. But if you are sure, what type of number should we be looking at?

Kevin McArthur

I don't have an estimate for that right now.

Tony Lesiak - UBS

Okay. Can you comment on Marlin, and the type of underground production rate you are hitting right now, cost per tonne dilution rates. And maybe also update us on what's happening on the exploration side, may be at West Vero?

Kevin McArthur

Yeah, I know that, drilling continues at West Vero. They are having pretty decent luck there. We have not put out a reserve on that, so we are just slowly building on that.

In terms of the underground production rates, we have been hitting better than 500 tonnes per day in the first quarter. And we are moving ourselves towards 1,000 tonnes per day by yearend. A lot of that depends on getting development work done in time, to open up enough bases. We are quite confident and we will be up to 1,000 tonnes per day level.

In terms of the dilution, I can't tell you that. I don't have the answers for you. And I am looking at Steve, this is a new mine for him, he doesn't have the answer either. But I have not received any report that we have got on towards dilution at the Marlin underground.

Steve Reid

No, I think, Tony, the answer is that we are happy with the progress we are making, in terms of escalating the underground production. And we have additional equipment coming and so and so on with perhaps with how that's going.

Tony Lesiak - UBS

Okay. And then finally, may be on the PJV. You had the big pickup in the resource picture there. It looks like you do have some opportunities that maybe increase milling capacity. Can you comment on your longer-term plans there?

Kevin McArthur

Tony, what I would tell you is, it's very early days there. We have it in resource, but we are still evaluating what the situation is there. We are hopeful of doing that, but it is very early.

Tony Lesiak - UBS

Okay. Great. Thanks so much.

Kevin McArthur

Thanks.

Operator

Thank you. Our next question is from Chantal Gosselin with Genuity Capital. Please go ahead.

Chantal Gosselin - Genuity Capital

Good afternoon. My first question relates to El Sauzal. Could you give us some color on the reserve that you are in 2006? It seems that there was a decrease in reserve from the previous year, even if you back out the production?

Kevin McArthur

Yeah Chantal, back in the early days, when we designed and built El Sauzal. Of course, basically what I was always saying, is what you see is what you get. And we have not had a lot of luck adding to reserves on an exploration basis other than some heap leach resources that we are analyzing right now.

In mining, the very high grade core of the deposit over the last couple of years, especially just late last year we came to understand that we were having some in-pit losses there. And so we looked at a very conservative modeling technique. We went to that modeling technique and that just reflects conservatism in the high-grade zone.

Chantal Gosselin - Genuity Capital

Okay. So, going forward, you're pretty much out of the high-grade zone. You don't have many tonnes left in that zone. I am not so sure about the property, I have never been there. But just trying to get a sense on [that location]?

Kevin McArthur

We are in the heart of the high-grade zone still. Our grades are very high there. That high grade zone persists throughout our mining operation, all the way to the base of the open pit. But it's the central portion of the pit. And we are just mining through it sequentially and we are not getting all of the reserves there that were in the model. But we've gone to a more conservative model. I think we've got some chances to do a little bit better, but we decided that was the best way to go going forward.

Chantal Gosselin - Genuity Capital

Okay. My two other questions are related to financials. What's the effective tax rate going forward? What do you think you should do?

Lindsay Hall

Chantal, it’s Lindsay Hall. It's around 35%.

Chantal Gosselin - Genuity Capital

Okay. And could you provide a little bit of better breakdown for this $750 million in CapEx and is that including the $60 million that you mentioned in the introduction in exploration?

Kevin McArthur

Yes, that includes the exploration amount. For the breakdown, it’s $315 million for Penasquito this year.

Chantal Gosselin - Genuity Capital

Yeah.

Kevin McArthur

$110 million at Red Lake, $95 million that includes Los Filos and San Dimas, the latter of which includes the ongoing construction of a hydroelectric power plant at San Dimas. And then the exploration is around $60 million, and then you got a variety of other capital costs at the other mines.

Chantal Gosselin - Genuity Capital

Okay, thank you.

Kevin McArthur

You bet.

Operator

Thank you. Our next question is from Haytham Hodaly with Salman Partners. Please go ahead.

Haytham Hodaly - Salman Partners

Thank you, operator. Couple of questions, actually just maybe to touch on Mexico a little bit more. Was the plan not when Los Filos comes on that Nukay comes off, or are you thinking about keeping that going at this point?

Kevin McArthur

No, that continues in the plan. It's a small underground mine.

Haytham Hodaly - Salman Partners

Potential milling facilities, does that get shutdown, as everything is just taken over to Los Filos?

Kevin McArthur

Yeah, eventually, we’re calling it one mine, because the grand plan is that we're running into some very good exploration result at Nukay underground and that we're drifting in that. My intuition tells me, we're going to have a decent underground mine there one day and we’ll have a mill there one day.

Haytham Hodaly - Salman Partners

Okay. So, the mill will keep going at least at the current rate for a while, there is no point in shutting it down there?

Kevin McArthur

Yes.

Haytham Hodaly - Salman Partners

Okay. Just on Penasquito, you say you’ve already ordered a lot of the long lead time equipment. What percentage of the overall cost do you think is actually fixed at this point?

Kevin McArthur

That’s one-third to a half.

Haytham Hodaly - Salman Partners

Okay. And then for Pueblo Viejo you indicated that you've got higher silver recoveries going from 5% up to -- was is it 84%? Is that going to come with an increased CapEx? Are you looking for additional circuit put in there? What's the plan there? What’s the reason for that?

Kevin McArthur

Yeah, new circuits for metals recoveries, and this is in Barrick's area. They’ll be updating the market perhaps some time in the second quarter.

Haytham Hodaly - Salman Partners

So we should see a revised CapEx number around Pueblo Viejo?

Kevin McArthur

Yeah, I believe that Greg Wilkins at BMO conference was talking about two --

Steve Reid

It is a range of 2.1 billion to 2.3 billion that they put out about a week and a half ago.

Haytham Hodaly - Salman Partners

Okay, now that’s perfect. One last question I guess just with regards to Mexico. What's happening with your interest in the El Limon project, as TeckCominco comes out with another revised estimate? Are they still drilling there?

Kevin McArthur

Still doing work there, but we haven’t seen a revised estimate for some time.

Haytham Hodaly - Salman Partners

Okay Thank you.

Kevin McArthur

You bet.

Operator

Thank you. Our next question is from Barry Cooper with CIBC World Markets. Please go ahead.

Barry Cooper - CIBC World Markets

Hi, good day. I know we've talked little bit about Red Lake on this call, but I was just wondering, Kevin, if you could breakdown when are we going to actually see production coming from the lower grade sulfide mineralization there, and I am assuming that we are going to be coming down to reserve grade levels fairly soon, and just trying to flesh out what the next five-year horizon looks like for Red Lake?

Steve Reid

Barry, it's Steve Reid. I think these are the issues we were talking to about before. We don't have that nailed. I am not in a hurry to come down to reserve grades and use those lower grades in a hurry. So that’s not something that we are looking to do in a hurry. However, yes, we do want to understand what they are. I wouldn't be doing it in a hurry.

Barry Cooper - CIBC World Markets

Okay, fair enough, and more or less running 25-30 grams for the next couple of years then?

Steve Reid

That’s certainly our preference, yeah.

Barry Cooper - CIBC World Markets

Okay. Then on then the Eleonore resources, I am just wondering why weren't they included in the year-end numbers? What's taking so long to get a number out there, because it's really been well over two years now if you go right back to the original Virginia work that started off and you guys had, I guess, about 15. Well, a year I guess in terms of the closing, but in terms of when you made the bid, it's 15-16 months. Is there a complexity there that we should be warming up to or cooling down to or what is it?

Kevin McArthur

No. We believe it's going to be a mine and we are moving building infrastructure and doing all kinds of things to get there. It’s a matter of drill facing. The Virginia guys did a great job of discovering Eleonore and bringing it along, but never even got to a resource, and there is only so much time and so many drills that you can employ to get enough infill spacing to get to a resource number.

And we are just getting to that point where we are able to get those calculations moving now and we don't have a number yet. But I don't think it will disappoint. Remember, it's not fully to depth when we come out with the resource other than we may have some inferred there. But this is now the first building block to start building a mine plan around, so that we can get on with the actual scope of the operation and building a mine.

Barry Cooper - CIBC World Markets

Do you have a specific time for the lease of the resource? I think you said Q2, but is it --?

Kevin McArthur

Late 2Q. Think June.

Barry Cooper - CIBC World Markets

Okay, good enough.

Kevin McArthur

We'll probably have Eleonore and the Penasquito reserve updated in the same timeframe.

Barry Cooper - CIBC World Markets

Great. Okay, well, you hit on my next question further. You’ve got 315 million allocated to Penasquito for this year in the regional, well, not the regional, the last feasibility I think the schedule was somewhere around 200 million in this particular year. There’s whole bunch of things we could interpret from that $100 million increase.

Number one, costs have gone up and up, therefore, this is the start of a reflection of something that we should be getting and anticipating something greater than the 80-82. The projects gotten bigger, only you've haven't told us. It could be that you are just accelerating things and may be you'll get it started early. Is there anything that you would care to lean us towards?

Kevin McArthur

Well, yeah, it started earlier. We got things going. We budget optimistically. In other words, we budget that we hope we can spend money faster than you possibly can. And so, the budget reflects getting it started in 1Q. We had indications that we could get our permits early and get this work underway. So, that’s in the budget. And that's basically, yes, we don’t have any cost blowups happening. We’re still in the, let's call it in five years, we’re talking $900 million but that includes some incremental capital. We are still at that 880 capital estimate. But I would say that judging by the drilling that we are seeing that number may move one day if we are considering something bigger. And my sense is that we are looking at something bigger.

Barry Cooper - CIBC World Markets

Okay thanks a lot

Kevin McArthur

Yeah, you bet.

Operator

Thank you, your next question is from John Tumazos with Prudential Equity Group. Please go ahead?

John Tumazos - Prudential Equity Group

I think the Peak transaction and the departure of Brazil and Australia’s venues was very interesting. The company keeps getting bigger with success and acquisitions. I think, you are in eight countries now and operators in six of those countries. How many is enough?

Kevin McArthur

Well, I think the gist of your question John in fact is right. We don’t want to be in too many countries. And of course, we’ve just succeeded in reducing by two. And first of all in Australia, we felt that it was too far away, either get very large in Australia or not be there. And nothing wrong with Peak mine. This is a wonderful operation, but it just wasn’t for us. And we’ve kind of out grown the size of Peak.

And then of course at Amapari, there is a chance to put Peak and Amapari together and a small operation that has potential that we could using the 80/20 rule remove a lot of our efforts and focus where we do the best job. I kind of look at Central America as one country. I hear that we're in three separate Central American countries if you include Pueblo Viejo. And where we can, we will continue to focus more in centralized locations. That's why we are spending so much money on our organic growth concept this year.

And the big focus is two places, Mexico where most of our growth is coming and Canada where a very significant amount of growth is coming through Red Lake and hopefully other places. You know, we are doing everything we can to simplify the company and to boil that down to few countries as we possibly can. We got that Americas focus at least if you ask what, how many continents were on. I can call up the continent of the Americas where we are kind of in one place. We are not off in all four corners of the world.

I know, it is a rambling answer John. Sorry.

John Tumazos - Prudential Equity Group

No, that's a good answer, Kevin. I remember back when it was just Southern California. And I guess, one of the deposits in Imperial Valley never got mine. And it's awful tough to measure risk anymore. Now Barrick has got some good drill holes, although they are mostly copper coming out of Pakistan. And I guess the catholic priest will never give an unfavorable sermon in Baluchistan and the NGOs will probably stay out because they might lose their heads. And Africa is not just a bad place either and the environmental opposition is least in Africa. And do you think the Americas focus is still the best focus?

Kevin McArthur

It is what we do, I'll put it that way and --

John Tumazos - Prudential Equity Group

I don’t know what the best is, I am just getting around with you a little bit.

Kevin McArthur

Well I actually do, because we believe that, first of all NAFTA countries are the best place to put our investment dollar. Notice, that when I said where our growth is, its Mexico and Canada. It wasn't in between. The key word is focus. We are able to focus because we are in few areas; we've got big deposits in those two countries. So, that's where we intend to stay.

John Tumazos - Prudential Equity Group

And do you think environmental trends are starting to get better in the Americas? Do you think there was any backlash backing the direction of employment and jobs?

Kevin McArthur

Well, societies get wealthier and middle classes start to build environmental pressures, they always tend to be on the increase and we're seeing it everywhere. I have got to say that the industry and Goldcorp in particular, are pretty adept at managing our way through these things. So, we're comfortable with our position.

John Tumazos - Prudential Equity Group

Congratulations on everything.

Kevin McArthur

Thanks John.

Operator

Thank you. Our next question is from Mark Smith with Dundee Securities. Please go ahead.

Mark Smith - Dundee Securities

Yes, hi and good afternoon. I have a couple of questions here. Just going back to Red Lake and just ramping up to 3000. You had mentioned that you've been increasing the throughput levels at Campbell underground and, finally filling that mill; it seems to be sleeping on Sundays. Have you gone back to long-haul or are you still doing mechanized cut-and-fill? What is the mining method that you switched in to get the higher productivity?

Steve Reid

Mark, it's Steve Reid. We haven't changed anything dramatic in terms of mining methods. What we're doing is looking a lot closer, and as they say, using the resources there, whether it's the (inaudible) or the equipment.

Going forward, obviously, we're not far away from that new shaft either and that's going to make a big boost in things. I don't know if you recall, but actually to get people to the workplace right now, they go down the number one shaft across, and then down to number two shaft.

Mark Smith - Dundee Securities

I see. The increase in productivity is coming from the Red Lake mine and not the Campbell mine?

Steve Reid

It's vital. We're looking at everything at the moment and we are bringing this under one management and the guys are doing a great job of looking at everything.

Mark Smith - Dundee Securities

Yes. I'm just a little puzzled. There is a very significant increase in productivity. I just was wondering where it was coming from, more than I would have expected just from regular optimization?

Steve Reid

I have to say, great management, Mark.

Mark Smith - Dundee Securities

Okay, good. You can pat yourself on the back for that one then. The next one, I have just a quick question. In terms of exploration capitalized, you gave $60 million capitalized. So, I should take that $55 million that is expensed of my income statement for this coming year, or is that an addition to the $60 million capitalized?

Kevin McArthur

That is in addition.

Mark Smith - Dundee Securities

Alright. Thank you. I just wanted to clarify that. Okay. And then just at El Sauzal, Chantal asked a very good question there. But you are currently mining about double the reserve grade. When should we start to expect the grade to drop down to reserve grade?

Kevin McArthur

Boy, that's a good question. I don't have my life of mine plan, but you'll see it dropping off. I am trying to look in our budget book here. But you'll see production at El Sauzal, after this year is 265,000. After this year you'll see it drop off slowly.

Mark Smith - Dundee Securities

There is no stockpiling going on of lower grade material that we should build on in the last couple of years or anything like that?

Kevin McArthur

Well, there is heap leach stockpiling going on. That heap leach construction will be completed this year and then the heap leach commences.

Mark Smith - Dundee Securities

Okay. And when should we consider putting in that heap leach spend?

Kevin McArthur

I suspect by late this year or early next year. I don't know what the exact plan is on that one.

Mark Smith - Dundee Securities

Okay. Are you going to put or have put in a second crushing circuit in that (inaudible)

Kevin McArthur

No.

Mark Smith - Dundee Securities

No? That’s already in?

Kevin McArthur

Exactly.

Mark Smith - Dundee Securities

Okay. All right. Thanks very much. That's great guys.

Kevin McArthur

Thanks, Mark.

Operator

Thank you. Our next question is from Steven Butler with Canaccord Adams. Please go ahead.

Steven Butler - Canaccord Adams

Thank you, operator. Good afternoon, guys. A question, Kevin or Steve on La Coipa, which had a phenomenal quarter for [Goldcorp], particularly silver grade and maybe a little bit of guidance would be helpful for early part or '07 for silver grades or production at La Coipa.

Kevin McArthur

I don’t believe we've given guidance on the silver grades at La Coipa.

Steven Butler - Canaccord Adams

Okay. It's little about reserve base, so just noting that, that's all. I mean that 273 grams per tonne, which is a fine result, I guess. Was that particularly only Puren mine that was in production for Q4?

Kevin McArthur

Yeah. It's basically a Puren mine.

Steven Butler - Canaccord Adams

Okay. The other question, just to humping back Kevin to your comments on DD&A, you said overall you're looking at your guidance towards -- about 200 bucks announced for global production, DD&A per ounce, is that about right?

Kevin McArthur

Correct.

Steven Butler - Canaccord Adams

Okay. So, it's a healthy number, about $500 million you are saying for the year then roughly?

Kevin McArthur

Steven, you are talking for '07?

Steven Butler - Canaccord Adams

Right.

Kevin McArthur

That would be at least little bit more, may be 550-ish.

Steven Butler - Canaccord Adams

Right, okay. That is it guys. Thank you.

Kevin McArthur

Okay.

Operator

Thank you. Our next question is from [Isabelle Lipris] with [Casa de Vil]. Please go ahead. Ms. [Lipris], your line is open.

Steven Kinsey - Casa de Vil

Hello. Yes, sorry, it’s not Isabelle. It’s [Steven Kinsey]. I just like to ask, Kevin, could you give us a little bit of color on the metallurgy at Penasquito, what you have been learning recently? And maybe just to put it in layman’s terms, how much of a challenge will it be in metallurgy asset deposit?

Kevin McArthur

Yeah, well of course, two separate deposits. First of all, the oxide is heap leach and it's a small operation in terms of the bigger picture. So, the flotation getting to a concentrate, it's a low grade ore, you end up with a low grade concentrate. We have done a lot of test work on the recovery rates on all of the metals.

We feel quite confident, but that test work just continues. For instance, we are starting up a decline into the ore zone and will be doing both testing and sampling. This is more in line with plans to optimize our flotation and also to come up with bigger samples for more flotation concentrate work, so we can ship concentrates to various smelters for other test work. But, all in all, everything we are seeing is very much in line with what we saw in the feasibility study.

Steven Kinsey - Casa de Vil

Thank you.

Kevin McArthur

Okay, Steve. Thanks.

Operator

Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to Mr. McArthur.

Kevin McArthur

Okay, thanks very much. I just wanted to make a couple of personal comments. This is following my first 100 days on the job. This company just went through a year of real turmoil, acquiring over $10 billion worth of assets, then assimilating those assets, accounting for them all, meeting all of our filing deadlines, complying with Sarbanes-Oxley, meeting most of our goals at the mines and putting up with huge management changes over that last 100 days.

Our employees accomplished a mountain of work. They deserve the thanks and the praise of this CEO on behalf of the shareholders. Ian Telfer, our Chairman, and I are very pleased with this team. We are thrilled with our company's prospects. I look forward now to getting out and communicating with shareholders. My first 100 days has now passed and it’s time to deliver results.

So, thank you very much for this call and please tune in next quarter.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation and have a great day.

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Source: Goldcorp Q4 2006 Earnings Call Transcript
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