Goldcorp's (GG) CEO David Garofalo on Q2 2016 Results - Earnings Call Transcript

| About: Goldcorp Inc. (GG)

Goldcorp Inc. (NYSE:GG)

Q2 2016 Earnings Conference Call

July 28, 2016 01:00 PM ET

Executives

Lynette Gould - Director of Investor Relations

David Garofalo - President and Chief Executive Officer

George Burns - Executive Vice President and Chief Operating Officer

Russell Ball - Executive Vice President and Chief Financial Officer

Brent Bergeron - Executive Vice President Corporate Affairs and Sustainability

Analysts

Andrew Quail - Goldman Sachs

John Bridges - JPMorgan

Stephen Walker - RBC Capital Markets

Jorge Beristain - Deutsche Bank

Anita Soni - Credit Suisse

David Haughton - CIBC

Greg Barnes - TD Securities

Steve Butler - GMP Securities

Tanya Jakusconek - Scotiabank

Operator

Good morning ladies and gentlemen, welcome to the Goldcorp Inc Q2 2016 Results Conference Call. Please be advised that this call is being recorded.

I would like to turn the meeting over to Ms. Lynette Gould, Director of Investor Relations of Goldcorp. Please go ahead, Ms. Gould.

Lynette Gould

Thank you, operator and welcome to the Goldcorp second quarter 2016 conference call. Our presenter today is David Garofalo, Goldcorp’s President and Chief Executive Officer. Accompanying David for the Q&A portion of the call will be George Burns, Executive Vice President and Chief Operating Officer Russell Ball, Executive Vice President and Chief Financial Officer and Brent Bergeron, Executive Vice President Corporate Affairs and Sustainability.

For those of you participating on the webcast, we have included a number of slides to support today’s discussion. These slides are available on our website at www.goldcorp.com.

As a reminder, comments made on today’s call may contain forward-looking information and this information by its nature is subject to risks and uncertainties and as such, actual results may differ materially from the views expressed today. For further information on these risks and uncertainties, please consult the Company’s relevant filings on SEDAR and EDGAR. These documents are also available on our website.

With that, I will now turn the call over to David Garofalo. Dave?

David Garofalo

Thanks, Lynette. Good morning everyone and thank you for joining us today. In the second quarter, we saw lower gold production compared to the prior year driven primarily by the performance of Penasquito and Cerro Negro as our Canadian operations, particularly Eleonore delivered a solid quarter.

While lower productions expected in the second quarter, the decision to accelerate a significant organizational restructuring had a short-term negative impact on gold production. A planned improvement in grade in the third and fourth quarters particularly at Penasquito where operations are now back at capacity after scheduled maintenance is projected to deliver steadily increase in production through the balance of 2016.

We are maintaining our full-year of guidance of between 2.8 million and 3.1 million of ounces of gold production at all-in sustaining costs of between $850 and $925 per ounce. However, we have increased our growth capital budget by $90 million to $100 million following the decision to proceed with high rate of return expansions at our Penasquito and Musselwhite mines. And the recent acquisition of the Coffee project were an expanded and accelerated exploration program will focus on gold resource growth in a target rich environment while permitting its launched later in the year.

During the quarter, we also identified measures to deliver 50% of the targeted $250 million in sustainable annual efficiencies that we set out as an objective last quarter and are on-track on to achieve the full target by 2018. Finally, the favorable market oriented reforms of the Macri administration have resulted in our decision to reinvest in exploration at our Cerro Negro camp, which has paid early dividends with the high grade extension of [indiscernible] resources within the Mariana's Complex Zone.

Turning to the second quarter results. While lower gold production drove an all-sustaining costs to $1,067 per ounce compared to $853 per ounce in 2015 we expect to deliver increased production over the balance of 2016 and reaffirm our full-year guidance of between 2.8 million to 3.1 million ounces of gold production at all-in sustaining costs of between $850 and $925 per ounce.

We expect to deliver steadily improved production in the third quarter compared to the second quarter and expect the fourth quarter to be the strongest. The same factors impacting production in all-in sustaining cost resulted in adjusted cash flows from operations of $307 million compared to $523 million in 2015. We maintain a strong balance sheet with total liquidity of $3.2 billion. By the end of 2018, we expect our net debt-to-EBITDA to be below one times as we harvest cash flow from operations.

A net loss of $78 million or $0.09 per share in the second quarter of 2016 included approximately $0.07 per share restructuring costs and non-cash deferred taxes, unrelated to the performance of the underlying business. Net earnings of $392 million or $0.47 per share in the comparable second quarter of 2015 were inflated by an after-tax gain of $358 million or $0.43 per share on the disposition of our Tahoe stake.

Turning to the key operations; At Penasquito, we had a 10-day mill shut down for maintenance, followed by slower than expected restart of the plant. Production also declined compared to the second quarter of 2015 as a result of planned lower ore grades from the upper transitional ore in the Penasco pit and lower grade stockpiles. In 2015, stripping was deferred while ore at the bottom of pit was mined at double the reserve grade.

As a result, we are undertaking a significant stripping campaign through 2018, which will enable us to get back into higher grade ore, which together with the added benefit of the new Pyrite leach plant approved yesterday by our Board, is projected to drive higher gold production and lower all-in sustaining costs.

Throughput during July returned to normal levels and gold production is expected to steadily improve over the remainder of the year as gold rates are projected to decline to an average of 0.7 grams per tonne for the full-year. In addition, by the end of June we brought online 15% of the Northern Well Field earlier than anticipated and expect the balance of the new water supply to be available by the end of the third quarter.

Cerro Negro production for the second quarter was lower compared to 2015 due to a significant workforce reduction resulted in a five day shutdown during the quarter and exhaustion of surface stockpiles, which were a meaningful source of ore for the mill in 2015. While the workforce reduction negatively impacted production in the short-term, we will see benefits in a lower cost structure, which I will discuss more fully in a moment.

Cerro Negro will further benefit from the development of the Marianas Norte deposit by 2015 and recent drilling has identified high-grade extensions of known zones near existing infrastructure.

At Eleonore, the mine performed well in the second quarter with increased throughput and grades, improved underground ore production was a result of mining four horizons compared to only two that we are active in the second quarter of 2015. And as we continue to improve on the stope designs to account for the folding and faulting, we are experiencing lower dilution and increasing grades.

The production shaft is on track to be completed later in the year, which will drive efficiencies and lower operating costs. It would also allow us to ramp up the full production of 7,000 tonnes per day in the first half of 2015, following the expansion from four to six mining horizons that is expected in 2017. At Red Lake, production decreased compared to the second quarter of 2015 due to lower grades process and lower mill throughout.

Production from the upper Red Lake zones continues to increase with the completion of a more efficient material handling system and improved mining efficiencies through the conversion to bulk mining. As expected, lower grades and lower tons from the High Grade Zone and Campbell offset these improvements.

Engineering continued to advance on the rationalization of the shaft and mill infrastructure with concrete action expected by year-end. At Porcupine, production increased compared to the second quarter of 2015 as a result of higher grades and recoveries offset by lower tons process.

As a result, of a higher gold prices and lower operating costs which have driven increasing margins, the Dome underground closure has been closure has been deferred while we undertake a review of options to extend the mine life.

During the quarter, we completed the Hoyle Deep project, which has allowed for more efficient movement of personnel and material to lower levels of the mine. Musselwhite continue to be a consistent performer during the quarter with solid production and low operating costs.

I want to touch briefly on what is one of our most prospective exploration camps in the portfolio Cerro Negro. This is comprised of a 215 square kilometer land package with several high grade veins open at depth and long stripe. We currently source ore from the Western side within Eureka and within the Marianas and Marianas Central.

To-date, we have seen positive gross outs from the Emilia Vein that were laid out in our second quarter release. This is interpreted to be a fault offset structure to the east of the Marian Central mine with one of the most significant results intersecting 4.66 meters through width at a 149.17 grams per ton gold and 858.2 grams per ton silver. This is just the beginning of the potential of expanded reserves and resources of at this camp.

In order to harvest maximum returns on the substantial capital investments we have made in the last several years, we have undertaken a significant restructuring of the organization. This has included substantial workforce reductions, strengthening of the senior management team, aligning compensation and net asset value growth and introducing zero based budgeting across all of our operations.

At our Canadian operations, we have appointed new mine general managers at Red Lake, Porcupine and Musselwhite and Latin America we have appointed new mine general managers at Panesquito and Cerro Negro. At the corporate level, we have added bench strength with the appointment of a new SVP Exploration, SVP Corporate Development, SVP Canada and regional CFOs for the Canadian and Latin American regions.

Since we established our efficiency objective last quarter, we have already identified measures to deliver 50% of the targeted $250 million in sustainable annual efficiencies. At Cerro Negro the workforce reductions and improvement initiatives underway and expected to deliver approximately $65 million of annual efficiencies.

Additionally, approximately $55 million in administrative cost savings have been identified of which 60% will be achieved by the beginning of 2017 and the remainder by the end of 2017. The reduction was a result of our shift to a decentralized operating model, to empower our mine general managers. so they can focus on increasing their net asset value at their individual businesses. This was realized through a one-third decrease in a number of employees at our corporate and regional offices earlier this month.

The balance of the efficiencies are expected to come from Penasquito site optimization of approximately $50 million to $60 million and a further approximate $60 million to $90 million from the optimizations at the Canadian sites. This positions us to deliver on our $250 million efficiency target by 2018, which we believe will add approximately $2 billion of incremental of incremental net asset value to our business or almost $2.50 per share.

I want to turn to the opportunities that we have within our portfolio for mine site expansions. We are moving forward with the Pyrite Leach and Materials Handling Project, which I’ll get to more detail in a minute. At Cochenour, we continue drilling in the core area of the deposit to increase data density and are moving to push the known mineralization towards the 5320-foot level.

Sill development along the Upper Main Zone commenced on both the 3990 and 4060 foot levels with all the material being stockpiled for processing through a sample tower in the third quarter. A rigorous face sampling program was initiated this quarter and will allow reconciliation with the mined material.

During the second quarter, one economic test stope was successfully mined on the 5320 level and the results were as expected. For the remainder of this year, we will continue drilling, sampling and test mining to get a much better understanding the geology so we can determine how it will fit into Red Lake’s long-term production profile.

At HG Young, the concept study underway is on track to be completed by the end of the year and a pre-feasibility study is expected to commence in the first half of 2017 with a decline from surface will provide access to the higher confidence areas for further exploration and bulk sampling. Exploration drilling has focused on increasing the confidence of the continuity of the mineralization and defining the plunge of the mineralization at 14-level.

At NuevaUnion, the project is advancing. An opportunity framing workshop was completed and various trade off studies commenced and are expected to be completed by the end of the third quarter. A pre-feasibility study is expected to commence in the fourth quarter, following the completion of the trade-off studies.

Yesterday, the Board approved the Pyrite Leach Project at Penasquito with initial capital investment of approximately $420 million. The Pyrite Leach Project is expected to recover approximately 40% of the gold, 48% of the silver currently reporting to the tailings and add incremental annual gold production of between 100,000 and 140,000 ounces and between 4 million and 6 million ounces of silver.

Commercial production is expected in the first quarter of 2019. Operating costs is expected to be approximately $1.75 per tonnne. The project has an expected after-tax IRR of approximately 17%, our long-term gold price of $1,250 and a long- time silver price of $18 per ounces. Also, for every $100 change in the gold price and $1.50 change in silver prices would impact the project IRR by approximately 2.5%. The proposed processing plant will be located within the existing footprint of the Penasquito mine and all necessary permits are in hand.

The Pyrite Leach Project will increase overall gold and silver recoveries by treating the zinc tailings before discharge to the tailings storage facility. The commercially proven process will include flotation to provide a pyrite concentrate, pyrite concentrate leaching to produce a gold-silver rich solution, mineral pre-processing and refining to recover precious metals from solution and produce a dore product, cyanide destruction to treat pyrite residue before it is sent to the tailings storage facility. Construction will commence next month.

The Materials Handling Project at Musselwhite was also approved by the Board yesterday with an initial investment of approximately $90 million. The winze is anticipated to be operational in the first quarter of 2019 and is expected to add incremental production of approximately 20% and reduce operating cost by approximately 10% for the life of the mine.

The project has an expected after tax IRR of approximately 25% at a long-term god price of $1250 per ounce which is essentially incentives of gold prices given the high margin of the incremental production. There is opportunity to further improve the IRR through a successful upgrade and conversion of our improved resources into the mineral reserves through further exploration drilling.

The benefits of this project is shown on this slide. Her you can see where our current portal is on the left hand side as the mine extended deeper the result has been longer haul distances to surface. By hoisting the ore to an underground winze and an associated infrastructure will have reduced reliance on high cost truck haulage by significantly reducing our per truck haulage between the winze and underground pressures leading to improved energy efficiency, reduced ventilation requirements, reducing mining costs, enhanced production profile and potential to extend mine life through exploration success. We expect to mobilize the contractor for additional development in August and the winze raisebore construction is expected to commence in December.

The acquisition of Kaminak and its Coffee project fits our strategy in partnering with junior exploration companies to identify and develop mining districts with significant exploration potential that is expected to grow our net asset value per share. Coffee is a high-grade heap leach, simple truck and shovel project that is potentially scalable. Located near infrastructure, it has a potential to add to our production profile in the medium term and is expected to be a low capital intensity project.

We are very excited about the Coffee project the Kaminak team has done an excellent job in consulting, engaging with the First Nations and the Yukon government. We look forward to our future engagement with the First Nations and different stakeholders in creating what we believe will be a long and lasting partnership. The exploration program at the Kaminak has proposed has been expanded following the closing of the transaction.

For the balance of 2016, we expect to invest approximately $15 million with a focus on exploration, permitting, infrastructure upgrades and basic engineering. The drilling program is expected to follow up on targets from peripheral to existing resources and reserves, test potential gaps in the resource models and the numerous near surface oxide mineralization targets which have been identified with gold and silver anomalies while also investigating the potential for additional high grade sulphide mineralization at depth.

This expanded and accelerated exploration program demonstrates our expectation that this project has the potential to increase reserve and resources substantially in the near-term. With the acquisition of Kaminak and its Coffee project, Gold Corp has inherited a very prospective land package with over 60,000 hectares that demonstrates potential for near mine discoveries with mineralization remaining open along strike and at depth and the potential for the discovery of a major new mineral system.

With the second quarter and a comprehensive reorganization behind us, we have aligned the organizational structure of compensation practices and our budgeting and planning process to focus on growing net asset value to deliver long-term shareholder value. In very short order, we have identified 50% of our $250 million annual efficiency objective and have identified a specific opportunities to deliver the balance of the target by 2018. This has the potential to add approximately $2 billion or $2.50 per share to our net asset value within the next two years.

We have also made meaningful progress in our project pipeline with the go ahead decisions at our Penasquito and Musselwhite expansions, each of which are projected to generate strong rates of return and further grow net asset value. Finally, we continue to advance the pipeline of low risk, potentially higher rate of return gold growth projects in which we can reinvest returns from our existing business.

With that operator, we would be pleased to take questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. And the first question is from Andrew Quail from Goldman Sachs. Please go ahead.

Andrew Quail

Thanks guys. Russ and George, I had just a couple of questions. First on Penasquito, just wonder if we can get some guidance on the grade, both on gold and on zinc. It seems like zinc is sort of coming off from the past few quarters, but also going forward on the gold grade. Just, obviously, next couple quarters, then maybe into 2017, if you can.

George Burns

Sure, Andrew this is George. In terms of grade at Penasquito, we are looking for Q3 to be in that 0.6 grams range and then increasing further in fourth quarter to around 0.8 grams, 0.85 grams and obviously, throughput returning back to normal levels, we basically achieved that in July. And then looking forwards on subsequent years we are in the 0.5 range for 2017 and 2018 and then return into about 0.7 grams 2019 and 2020.

I would mention beginning 2019, We will have the PLP project operational so that will add to our production profile beginning 2019. The other thing I would mention is at Penasquito, we have done a revised stripping plan and essentially, we have gone the wider benches in order to improve our mine productivity and our mining cost, and that’s a big value adder for Penasquito. And so, those wider benches, obviously, cause us to get to depth a bit slower than the narrow benches we have had in the past. That is resulting in that lower grade in 2017 and 2018. But the dividend is lower mining costs going forward.

Andrew Quail

Zinc?

George Burns

In terms of zinc, we are in 0.6 grams to 0.85 grams range over the second half of the year. In the first half of the year, we were a little over 0.5 grams.

Andrew Quail

Yes, so it goes up. And in 2017, you think that it holds that level?

George Burns

Yes, in 2017 that higher grade holds.

Andrew Quail

That’s good. Okay. Thanks George, one more and then one for you on maybe Cerro Negro. Look, if we look forward and look past your labor issues and look to more of a steady state with throughput and grade, do we say that the all-in cost down there sort of in the low-600 going forward?

George Burns

Well, first on the production levels. We made the conscious decision to accelerate an optimization at Cerro Negro that will drive net asset value. And really the focus of that is lower manpower levels, focused on local employment and there is some big benefits that come out of that obviously one of which is consolidation from two counts to one with reduced manpower we are shutting down Eureka camp and obviously that has a good overall effect on our cost structure.

In the short term, our mine production levels drop off and you can see that in Q2 we are looking for that steadily ramp up in Q3 and Q4 approaching back about 2,800 tons a day in the fourth quarter. And essentially, that's as we continue to develop and train a local workforce and reduce reliance on expats and higher cost labor.

And then in terms of the overall ramp up we are working on Mariana Norte development throughout next year and expect to have that in the production in 2018. And at that point, we are feeling confident We will be able to fill the mill and obviously that We will have a very positive impact on driving down our usage cost at that point.

Andrew Quail

Okay, thanks. And then I suppose my last question Dave. Can you comment on capital allocation going forward in terms of through the external opportunities versus internal opportunities?

David Haughton

Well, I would say that one of our properties is to continue to deleverage the balance sheet. We have one of the lowest leverage ratios in the space and we have low debt levels on an absolute basis, but we are in a harvest period right now and our objective is to drive our net debt EBITDA to below one times as we pay off our couple of natural debt maturities over the next couple of years.

We have internal opportunities including some Brownfield expansion opportunities that we are still bringing to the study phase and we are allocating capital to those and obviously with the go ahead at Penasquito on the Pyrite Leach and Musselwhite Materials Handling, we are brining capital work on those.

So I would characterize those as priorities in terms of capital allocation and whenever we are considering other opportunities it's always about trading up the quality of the portfolio and I think Goldcorp has done that exceptionally well overtime. And by introducing a project at Coffee other things will fall off the table. So there are some non-core operations that we are contemplating the sale of in Los Filos, Marlin and Alumbrera.

Andrew Quail

Thanks Matt.

Operator

Thank you. The next question is from John Bridges from JPMorgan. Please go ahead.

John Bridges

Good morning, afternoon, Dave and everybody. On Red Lake, so obviously you have got a low profile now, while you focused on Penasquito and so on. But I'm just afraid that you might be sort of perhaps trying to be very cautious with HG Young after what happened with Cochenour. And maybe we are not fully looking at the potential of HG Young. What are you seeing there at the moment? What could that be? And then with Cochenour, the test stopping, what did come out of that? What were you expecting will come out of it?

George Burns

Hi John it's George. May be starting with Cochenour, so during the quarter we had identified one particular stope in the lower Cochenour it was about 2,000 ounces and we made a decision to test mine that stope to confirm dilution and reconciliation against our drilling. I can tell you that it was an economic stope we successfully mined it. The production came out slightly above what we modeled. So it’s given us some confidence that we can get a good correlation between modeling a stope and production out of the stope. And it’s just one of many thresholds that we are working away through to understand the value of Cochenour and what it mean to our company going forward.

In terms of Upper Cochenour, we continued progress. We actually began the selling process, and we expect to be running our sampler, tower sampler actually beginning next week. That’s going to give us again reliable technical information to take the modeled numbers on those sales against some precise assays that will, again, improve our confidence on our reliability and modeling and understanding that ore body. And so we are going to be continuing that advanced exploration development work over the next year or so to understand the full potential of Cochenour.

Shifting to HG Young, we have had a nice discovery here and our focus right now is on permitting a ramp to allow us to get down and touch the core area of our successful drilling so far. We are hopeful to be able to break ground early next year on the decline under ramp that would then allow us to get better underground drilling access and a bulk sample to better understand HG Young. And so it’s one step at the time as we work it through our stage gates in the Goldcorp investment framework. We will be updating the market as to what that will mean to Goldcorp going forward.

David Garofalo

Yes. And John, I might add, I don’t think we are being overly cautious. I just think we are being systematic and I think in the past, we got a little bit ahead of our ski tips and published production estimates without the benefit of going to our gaining process. So I think we are going at this as quickly as we practically can.

John Bridges

Yes, I understand the circumstances. And then maybe just one more with Cochenour, what are you doing now that allows you to accurately estimate the stopes compared to what you were doing before that caused the confusion?

George Burns

Well, in the upper area, along with the normal sort of cross-sectional drilling to define the resource and ultimately try to block out a model, we have also drilled essentially down the cell to see if we have got that lateral continuity on the designed interpretation, the mineralization. So we have completed that step, and it gave us confidence. And now the selling will confirm, again, is the grade consistent with that modeling. So it’s really systematically working our way through drilling, development and then ultimately, test stopes that’ll give us that confidence to put a mine plan together in our production profile.

Operator

The next question is from Stephen Walker from RBC Capital Markets. Please go ahead.

Stephen Walker

Thank you and two questions. George, just while you have got the floor there, you have changed out effectively all, except one of your mine managers at the operating mines. And when we see this happen, there tends to be a switch out of mine and mill superintendents, maintenance teams and so forth, which obviously does take time as the new mine manager or General Manager fits into the new role or into the new operations. When do you expect to see benefits from these management changes at the mine site level and is that something that you expect immediate or trends over the next three to six, 12 months? What is your expectations with the management changes?

George Burns

Okay. Stephen, I would start out to say shift in our organizational structure and design. We are expecting to see some immediate changes. And so, while the mine general managers holding their business all aspects of it we are going to get early and quick traction on that and that goes everywhere from exploration development operations and projects. So, keen focus to on that entire business. And we do have a few of the mine general managers are the same. Guy at Eleonore has been there for seven or eight years now.

Bill Gascon has been with us for about two years, he was responsible for leading the turnaround of our Musselwhite mine and knocking out a $200 an ounce. We have shifted him over to Red Lake to recreate those good results and confident he will and if you swinging south to our Latin American mines we have got two mine general managers new to the organization but they come in with a really strong background of delivering and executing on growth and operations and focus on costs. So I’m confident we are going to see some immediate shift across the portfolio and over the next couple of years significant improvement in value.

Stephen Walker

Great, thank you. Just to follow up on John's question on Red Lake. There is a statement in the MD&A talking about trade-off studies to advance the rationalization of the infrastructure. Does this have to do with the prior comment that talked about the conversion to bulk mining from cut and fill long haul to cut, from cut and fill? Are you re-examining whether you are going to maintain the long haul mining at depths at Red Lake high grade or are you talking about infrastructure associated with the multiple shafts and the underground development?

George Burns

Yes, the focus is on shafts, so we have two shafts that are no longer necessary as part of our production profile going forward. There are some infrastructure within those shafts that has to be moved out and reconfigured. So that's what we are working our way through the engineering and timing to get that work finished. Ultimately shut those shaft down so we don't have the ongoing costs of maintenance. The other key thing on infrastructure is having the capability to go to one mill. And so we are working on that as we speak, expect to have that work finished at the end of the year.

What that does for is at least in the production profile we see in the near-term at Red Lake we only need one mill and obviously running one mill is going to be lower operating cost. We will have the ability to fire up that second mill with successful expansion at HG Young and Cochenour and we could essentially run the one mill full time in the future have the ability to fire up a second mill to batch excess or through. So it's all about shutting down and unneeded infrastructure and improving our optimization of our milling circuits.

In terms of your comment on your comment on the long haul mining, we still continue to do cut and fill mining on that high grade zone in some areas and wherever possible we go to the bulk long haul mining for lower costs. So lower costs. So what’s left with the High Grade Zone continue to see a combination of under-and and over-hand cut and fill as well as long haul. The rest of deposit primarily long haul mining lower cost, bulk mining drive our cost down and improve our margins and our net asset value.

Stephen Walker

Thank you for that. David, if I might ask, just to get the confidence of the market back, you are going to need to achieve or beat guidance on a sustained basis. Can you give us a sense of your level of comfort with guidance going forward here? You revised the budgeting and the planning aspects of Goldcorp, which were by and large missing from what I can gather and tighten up the finance side of the business. Can you give us a sense of when you think you are going to have a 100% confidence in being able to achieve and beat guidance, should the case occur?

David Garofalo

Thanks, Steve. We have undertaken a complete overhaul of our planning and budgeting process. Under the previous management, it was housed within the finance department. We have moved our budgeting planning into operations. And so there is a better integration between our planning and budgeting and our mine operations. We have gone back to zero based budgeting because clearly having missed our internal budgets for many, many years, there is something clearly systemically wrong with our budgeting and planning process.

So going back to a zero base and challenging every underlying productivity assumption that goes into the numbers was necessary. I have a much higher degree of confidence in our forecast for this year in achieving our guidance given we had stripped it down basically to the foundation. And we are doing the same for both our 2017 budget and our life of mine plans.

What I would emphasize is the mine managers have been charged with maximizing net present value of their underlying mines in their life of mine plans. And so ounces are not the focus anymore, it’s very much about generating maximum cash flow and generating maximum return on the invested capital. And so over time, I would expect the ounce number will go up and down. It will be the output of the process as opposed to the input.

Russell Ball

Steve, its Russ. Maybe I could just add. As Dave said, we have moved the planning function over, absolutely the right decision. The finance group, my finance group at least is intimately involved with that process and is a key user obviously, the outputs of that process, but we are working very collaboratively with George in the operations and projects group in that process. I would also add the addition of the two regional CFOs. One we have in place already in Toronto, very experienced; and then a second one, also well experienced within our business taking up residency in Mexico City here in a month; have added an enhanced focus on the regional submissions, the regional business cases.

So, it does look and feel very differently from the last three years, at least the time that I’ve been here. And I take, as Dave said, a lot more comfort in our ability to execute, having a much better understanding of both the risks and opportunities embedded in those plans. So we are pushing that authority, as Dave said, to the sites, but they are the appropriate reviews, checks, balances and an intimate knowledge of what’s going in there and rolling up by the finance function in particular. So I feel very good. I don’t necessarily need to own those numbers, but we are a key user of them and it really is a collaborative effort across operations, projects and finance to pull those together.

Stephen Walker

Thank you for that Russ and thank you David.

Operator

Thank you. Your next question is from Jorge Beristain from Deutsche Bank. Please go ahead.

Jorge Beristain

Hi guys. Just really had a follow-up on the mixed shelf filing that you guys recently filed; the $3 billion. If could you just talk about the rationale behind such a large number and if you intend in the future to issue equity?

Russell Ball

Jorge its Russ. Sure. We did file a $3 billion shelf the other day as you saw prudent financial management the older one with a $1 billion than we had used it up with no intention to access it, but I believe just a prudent filing and we are continuing on with our business.

Jorge Beristain

Okay. And then Russ, maybe since I have got you live as well. I did want to understand some of those changes in the organizational structure. Do the two new regional CFOs report to you?

Russell Ball

No, they report into the regional heads, but we will be and we do spend a lot of time on the phone and in person. And the criteria as we went out to recruit externally for these positions whether they would provide succession planning for my role as CFO down the road and so is part of that succession planning process, I’m intimately involved whether its gold setting performance appraisal. So, Yes they don’t have a reporting relation to me, but they are a key part of the finance function and the control within the organization.

George Burns

It's George here. I would add Russell and I have been attached at the hip for the last three years and that's continuing and our optimization in the regions same things in place. Our two regional SVPs and their finance partner will be focused at adding that asset value to all those assets and the two teams of two will be working closely with Russell and I would do that on a portfolio basis.

So it's very collaborative approach, but it's very focused approach on. We are all here to help drive value out of these mines and we have really eliminated all the other issues at a regional level they're now reporting in the corporate which really keeps my two regional SVPs and their finance teams focused on driving the business.

Jorge Beristain

Thanks. And Russ, I just wanted to ask for your perspective given that you have been one of the both financially involved but also in the budgeting and cost cutting and planning from a few years ago in your role. Could you just kind of talk about what has been the change in the culture or what is being changed now in the structure that is going to allow for better budgeting and sticking to that kind of new guidance that you guys will get to them? Just trying to understand what has changed because you have obviously been there in the past and just if you could speak to that.

Russell Ball

Sure, Jorge. I would say a couple of things come to mind, first and foremost is the people do in the work we have significantly upgraded the people, in fact in a number of key assets we'd outsource a lot of that work due to a lack of resources. So bringing in, and in fact, as part of the latest moving a lot of technical people to the site level. So I think that was key. I would say also the level of review once the numbers were submitted wasn't may be at a level where could have been, as those plans were consolidated and added up.

And I would say probably the most important what I’m spending a lot of time with my Board of Finance group during is working collaboratively with operations, I would say historically it wasn't always a clear alignment between the operations and the project side of the business and the finance function which earned those consolidated numbers.

So I think much more collaborative. In addition, we really push through the Goldcorp investment framework a level of rigor and discipline and the stage gate. I think you heard earlier as we are talking about Cochenour and HG Y in response to John’s question is, going through things in a systematic disciplined approach requiring the appropriate work to be done at the various stages.

And then under our new model providing the appropriate checks and balances over a few subject matter experts, I would call them, at the corporate level. So it really is very different. I would say the level of change in what’s it been, Dave? Three of four months in this area is quite phenomenal. So hats off to the team that are working on this and I feel very comfortable that what we are looking at as a plan is much more thoroughly understood.

Yes, there are risks, but we understand those risks and likewise we understand the opportunities. And as Dave said, from the beginning of his tenure when we a mine plan with a block model, we will put it in the numbers and tell you about it.

Jorge Beristain

Okay thank you all. I'll get back in queue.

Operator

The next question is from Anita Soni from Credit Suisse. Please go ahead.

Anita Soni

Good afternoon, guys. Thanks for taking my call. The question that I have is just go back to Penasquito. I just want to reconfirm, George the grades that you talked about in, I think, it was 2017 and 2018. Was it 0.5 gram per tonne for both of those years?

George Burns

Correct.

Anita Soni

Okay. And then, just moving to the stripping that you guys are talked about that’s going to wider benches, will that have an impact on the strip ratio for those years?

George Burns

I mean over the five-year plan, it’s essentially slow down our rate to access higher grade ores. So it’s not really impacting strip ratio, but it’s impacting the grade that we are releasing, so essentially a delay at getting into higher grade ore because we are in these wider benches.

Anita Soni

Okay. And then, just moving to Cerro Negro, could you remind me, what was the size of that vein? And then, again, I’m sorry, of Mariana Central and then similarly, the number of bounces in Mariana Norte.

George Burns

Well, we gave a full release of the drill information as part of our release this quarter. I don’t have those numbers right in front of me, but I can tell you, the Emilia vein and the offset from Mariana Central, we are seeing similar high-grade and nearly similar widths.

Anita Soni

Yes. No, I was just focused on basically you talked about getting the Mariana Norte developed and I’m just trying to get an understanding of how much more we have left to go in Mariana Central? And what kind of runway length you guys have once you get Mariana Norte up and running in terms of throughput?

George Burns

Yes. We have got several years of production ahead of us at Mariana Central. In terms of Mariana Norte, this year and next year, development will be done in order to get that into production in 2018.

Anita Soni

Okay. And then just at Mariana…

George Burns

The exciting part of the extension at Mariana Central where we have got grade and obviously runway to extend that high-grade life and so the margins are good, the infrastructure is close. Mariana Norte is an important part of filling the mill, but not quite the high-grade we see in Mariana Central in these new extensions.

Anita Soni

All right, so that was the next question I was going to ask. I mean, last year at Mariana Central, grades were cultured to the mid-20s in grams per tonne, and now, it dropped into the higher teens. I’m just wondering, are we expecting higher teens? And then, once these additional veins come back through, we could see it go higher or is it going to continue to decline?

George Burns

Well, the recent drop in grade in Mariana Central we have had some higher dilution, so we are working on getting back in our control that will drive Mariana Central grade back up and I would say that's the key drive in terms of this year we are looking to be in a 17 gram range in the second half. Overall, come out of Cerro Negro which I think I think that shows you Mariana Central will be up.

Anita Soni

Okay. And then last question, just going back to Penasquito. In terms of the throughput, you said you guys have resumed normal throughput levels in July, and so that would be the 115,000 tonne per day level?

George Burns

Well, last year we did a 106,000 tonne a day and so in July we are in that range again. This year our plan was to ramp up throughput to 117,000 tonne a day obviously we haven't done that year-to-date and at this point we are not predicting We will hit that in the second half we expect to be in that 100,000 to 110,000 tonne a day range.

And essentially the reason for that in the first half of the year we had significant maintenance issues that we worked our way through especially in Q2. But, we are also seeing some quarts in the ore that's harder just take a more kilowatt hours to grind and so cautiously we are thinking around a 100,000 to 110,000 tonne for the second half.

Anita Soni

And would that be similar levels for 2017-2018?

George Burns

At this point when we are in the [indiscernible] we have seen the ability to get to those higher throughputs. So, my current view would be, Yes we will probably be in that 105,000-110,000 tonne a day range until we are back into the higher grade soft doors. We will give a further update on those sort of things at the end of the year.

Anita Soni

Thank you, of taking that time. Thanks.

Operator

Thank you. The following question is from David Haughton of CIBC. Please go ahead.

David Haughton

Yes, hi Dave and team thank you for the update. So two assets, underground assets today, yet to realize their full potential; you have got Eleonore and Cerro Negro. I noticed in your commentary that both are expected to get to their full rate of underground mining mid-2018. Second quarter or third quarter was likely to be an improvement. Should we see a linear kind of growth in the underground production for both of those mines?

George Burns

So at Eleonore, yes it will be steady improvement. We are working on infrastructure on that lower half of the mine so We will have the shaft complete at the end of the year. We will be working on then connecting the shaft with ore waste passes that will be much more efficient than our current method of moving material. We will be shutting down the exploration shaft lots of advantages coming.

And so again early next year on to the middle of 2018 as we get the development done in the lower of the mine and get an infrastructure in place We will see a steady ramp up in production and throughput at Eleonore. At Cerro Negro, I would say there is two things happening here, first, development of Mariana Norte in 2018 will give us a step change in sort of mining phases and therefore tonnage.

But at the same time this reoptimization we are focused on local employment, but on a less scale we have been training miners here for a couple of years now but less reliance on expats and highly experienced miners focused on training and continue to develop our local workforce that's adding that asset value, but it's decreasing the ramp up and throughput. So We will see steady improvement in the productivity of our local workforce and a steady ramp up but a step change once Mariana Norte is in production.

David Haughton

Right. Now just turning to those cost savings that have been identified at Cerro Negro, $65 million. That’s a sizable percentage of the operating cost base around about 20% thereabouts. If we are thinking about putting that through, should we be looking at dropping the unit cost by as much as $40, $45 a tonne to reflect that?

George Burns

So I mean that $65 million is cost reduction, and the key is labor, less expensive labor so less expats, less travel related costs. And all that’s focused in on reducing the support cost around that higher labor force. So we have gone to the one camp. We have gone to a local caterer, one caterer rather than two.

And so cumulatively, the labor cost and the support for labor is the bulk of what’s driving that $65 million. There are other cost reduction initiatives underway. The macroeconomics within the country have improved our ability to import and the future is going to be better and get pricing and materials and so yes, we are going to be driving those mining costs down as a result of that $65 million a year, and it’s going to hit mining, milling and G&A.

Russell Ball

Dave, Russ, I would also say you should think about it across total spending, including capital, both sustaining and expansionary not just the income statement, so to speak. So think of it as $65 million more in the cigar box but not all of that will drop into operating cost less CAS, right.

David Haughton

So most of it sounds like a fixed cost. So the unit saving of it would be quite a bit better once you hit the full rate compared to what we are seeing today.

George Burns

Right.

David Haughton

But I guess, another way of putting that question is, that $65 million that you have identified, is that all reflected in the costs of Cerro Negro or are some of those costs actually in the corporate line as well?

George Burns

No, it’s just Cerro Negro.

David Haughton

Okay.

Russell Ball

The corporate costs are in that different bar that you saw in the slide of, I think it was $55 million to $60 million.

David Haughton

Alright, thank you very much.

Operator

The following question is from Greg Barnes of TD Securities. Please go ahead.

Greg Barnes

Thank you. At the risk of flogging a dead horse here, it sounds like Russ and George, you have gone back to ground zero on Cerro Negro and really, redone the mine plan, relooked at the costs and done everything new. Is that effectively what has happened?

Greg Barnes

That’s correct. We have got a new General Manager for Cerro Negro and he is coming and take a look at the business unit. We have now, we are telling our mine General Managers, we are focused on net asset value not production and the combination of those two, we made the decision to reduce the reliance on higher cost labor that we know will have a short-term impact on production.

But it’s going to have a positive impact on cash flow and net asset value. So we have pulled that trigger, and we didn’t anticipate that at the beginning of the year, but as Dave said, we are focused now on value and not necessarily ounces and we have made the right decision and Burn and his team will deliver it.

Greg Barnes

So George, for next year, what kind of tonnage throughput rate should we be expecting?

George Burns

Well, you will see a ramp up from current production levels in the second quarter to that 4,000 tonne a day by 2018.

Greg Barnes

Okay. Are you going to then with this reset of the mine, are you going to give us a new 43-101 for Cerro Negro, a new mine plan, new grid profile, cost structure, the whole thing at the end of the year or sometime in 2017?

George Burns

We are not anticipating doing that.

Greg Barnes

Okay. Thank you.

Operator

Thank you. The following question is from Steve Butler of GMP Securities. Please go ahead.

Steve Butler

Just the horse one more time. Mariana Norte, what is the remaining capital to spend on the underground development approximately?

Russell Ball

Steve it's Russ. We will get back to you with a confirmed number but I think we are somewhere in the $50 million range risk.

Steve Butler

50?

Russell Ball

Yes, We will get back to you.

Steve Butler

Okay. That's fine. And when you look at Penasquito with respect to George maybe alluded to a little bit, but the Penasquito, I think that's your next area of taking out the can in terms of efficiencies and cost reductions et cetera. This $50 million to $60 million target, where are the is a low-hanging fruit to pick at? Is it, again, a labor issue or where are your buckets there that you are thinking about targeting for efficiencies?

George Burns

So volumes are big issue at Penasquito and any savings we have at Penasquito on an unit basis has a big impact. So, we are going to be focus on there is a high reliance on contract labor, big opportunity there. Materials and supplies, big opportunity there and just strategic and efficiencies issues with our workforce and contractors I guess would be the three big buckets.

Steve Butler

Okay, George. One last thing, on the grade in the second quarter, 0.39 grams per tonne, which obviously did not exceed most of our estimates. The pit and a stockpile, can you, as you say that George, you are up to 0.6 grams or so roughly for the third quarter, which is a nice Hail Mary improvement over Q2. What was stockpile grade to the mill in the second quarter or maybe other way of saying, what was the pit grade in the second quarter? Because obviously, the mill grade was influenced lower by stockpile, I have to assume.

George Burns

Yes, we had a fairly high reliance on low rate stock piles in the second quarter as the strip in phases are working on their way back down into fresh pit work. And that's where we would strive in Q3 and Q4 grade up is less or low reliance on low grade stock piles and release of higher grade ore out of the pit. So, fourth quarter we are expecting to be about 0.8 gram per tonne and we are confident that will happen.

Steve Butler

And in July, you said, are you quite confident in the 0.6 grams for Q3?

George Burns

Correct.

Steve Butler

Okay. That's it guys. Thank you.

Operator

Thank you. The following question is from Tanya Jakusconek of Scotiabank. Please go ahead.

Tanya Jakusconek

Yes, good afternoon and good morning everyone. I think I'm just poking this horse again, I don't know if it's moving, but I will try. Just wanted to come back to Penasquito, a lot of my questions have been answered. And George, maybe to just reconfirm, I know we don't have the reliance on the stockpile, but in the month of July, are we at least in the 0.6 gram per tonne grade material?

George Burns

Yes, it’s a little bit below 0.6 grams in July with the flows and throughputs back to normal ranges is 100,000 plus tonne a day.

Tanya Jakusconek

Okay. And you mentioned then that’s going to stay between 100,000 and 110,000 as we go into Q4 and the grade from that 0.6 grams to 0.85 grams?

George Burns

Correct.

Tanya Jakusconek

Okay. I think I will leave Penasquito and I just wanted to come back to Cerro Negro, if I could. You mentioned that we are going to be steadily ramping up throughput into Q4. I didn’t understand whether we are exiting Q4 at 2,800 tonnes per day or are we averaging 2,800 tonnes per day?

George Burns

Averaging 2,800 tonnes.

Tanya Jakusconek

We are averaging? Okay, so we are coming from the 2,600 going to 2,800 in that 17 grams performance tonne?

George Burns

Correct.

George Burns

In the month of July, have we moved from that 14 grams we were in Q2? Are we in the 17 grams?

George Burns

It’s slightly below. I think 16 gram in July.

Tanya Jakusconek

Okay, that’s helpful, thank you. And then, can I just make sure that I understand all of the mines that are expected to have better grades in the second half of this year. Mussel had a low-grade in Q2. Is Musselwhite’s grade back to normal for the second half of the year?

George Burns

So one of the big advantages of having a portfolio is, we have some winners and some losers against our estimates. So I would maybe just gave you across the Canadian operations, we are expecting a stronger second half then first half and we are expecting all four of our Canadian sites to be strong in their guidance and that will help offset the conscious moves that we made at Cerro Negro impacting us in the tough second quarter at Penasquito. As well PV is looking to have a bit stronger second half and first. So between the Canadian mines and PV, we are looking for a bit stronger second half.

Tanya Jakusconek

Okay, thank you for that. And then just maybe one last question on Cerro Negro. We have had the strike. The workforce is back. Have we had any more disruptions at all at Cerro Negro? Has our productivity gone back to normalized levels there?

George Burns

So we haven’t had any other disruptions. And I just characterize what happened with our announcement on the optimization and the cutbacks in reliance on employees and contractors. We shut down for two days basically to announce and reconfigure the schedules. And then the union did strike for three days. But they had ability to strike longer and I think we are developing a better relationship.

Our focus on local employment and leveraging local contractors I think, is giving us positive support. And then, to your question, no, we are not back to normal productivity levels on development or mining rates yet. And we are expecting to see that steady improvement over the coming quarters as we continue to focus and rely on local workers for mining and development.

Tanya Jakusconek

So is it safe to assume then George, that Q3 will be weaker than Q4 because of the productivity and higher throughput in Q4 and even, all things being equal with similar grade?

George Burns

That’s correct.

Tanya Jakusconek

Okay. Thank you very much for that. Sorry about the [indiscernible].

George Burns

No problem.

Operator

Thank you. This will conclude the question and answer session. I would like to turn the meeting back over to Mr. Garofalo.

David Garofalo

Okay. Thanks everybody, it's been an extremely busy day for results and I appreciate you taking the time to converse with us and if you have any other questions, please don't hesitate to call any of us. Thank you.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time and thank you for your participation.

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