Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Goldcorp Inc. (NYSE:GG)

Q2 2007 Earnings Call

August 9, 2007 1.00 pm ET

Executives

Jeff Wilhoit - Vice President, Investor Relations

Kevin McArthur - President, Chief Executive Officer, Director

Steve P. Reid - Chief Operating Officer, Executive Vice President

Lindsay Hall - Chief Financial Officer, Executive Vice President

Charles A. Jeannes - Executive Vice President - Corporate Development

Analysts

Mark Smith – Dundee Securities

Erica Brailey - HSBC

Haytham Hodaly - Salman Partners

Tony Lesiak - UBS Warburg Inc.

John Tumazos – John Tumazos Very Independent Research

Chantal Gosselin – Genuity Capital

David Stein – Cormark Securities

Ankush Agarwals - JP Morgan

TRANSCRIPT SPONSOR
Wall Street Breakfast

Operator

Good afternoon, ladies and gentlemen. Welcome to the Goldcorp Inc. second quarter conference call, for Thursday, August 09, 2007. Please be advised that this call is being recorded. I would now like to turn the meeting over to your host, Mr. Jeff Wilhoit, Vice President Investor Relations. Please go ahead, Mr. Wilhoit.

Jeff Wilhoit

Thank you and welcome everyone to the Goldcorp 2007 second quarter earnings conference call. In the room with me today are Kevin McArthur, President and Chief Executive Officer, Chuck Jeannes, Executive Vice President, Corporate Development and Exploration, Lindsey Hall, Chief Financial Officer, and Steve Reid, Chief Operating Officer.

And a reminder, we’ll be discussing forward-looking information that involves unique risks concerning the business, operations and financial performance and condition for 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 amount of estimated future production, cost of production, capital expenditures, costs and timing of the development of new deposits and permeating timelines.

Forward-looking statements are subject to known and unknown risks, uncertainties and unknown factors that may cause the actual results to be materially different from those expressed or implied by such statements. Recording should not be placed under reliance on forward-looking statements. With that, I will now turn the call over to Kevin McArthur.

Kevin McArthur

Okay, thanks, Jeff, and thank you everyone for joining us today. The important work of integrating over $10 billion in assets, acquired last year, again, kept us busy in the second quarter. At Red Lake we continued to fine-tune a combination with Campbell with his leading to expand our production to over one million ounces of gold per year, eventually. I can report our exploration programs are seeing a great deal of success and ensuring that mine future.

Second, the team at Peñasquito in Mexico is making its own great strides towards construction, another world company asset for the company. And you will recall that during the quarter, we reported a significant reserves increase at Peñasquito. We’re now working on an enhanced production in aerial that will be available by year-end.

Third, we announced a strong first resource estimate at Éléonore in Quebec, the best place in the world to build a mine and we will continue to see drill hole results coming in that will significantly increase initial numbers by year-end.

Fourth, we forward our first goal at Los Filos fields in Mexico. Now we’re way behind schedule here, but management changes are taking effect and we’re riding this ship, getting those things done, to develop this mine into a big, important producer for the company’s future.

Five, we await results from Barrick, our joint venture partner is Pueblo Viejo. We hope to jointly announce a positive position on that new mine in the near future.

We’re in an ongoing program of building large, high-quality, long-lived goldmines, located in the state jurisdictions in the Americas. As shareholders, we are nicely positioned at mid stay, a declining supply environment. (inaudible) our belief that Goldcorp long-term share price will outperform.

No less important are the steps we continue to take in the quarter that strengthen our balance sheet and to simplify and streamline our company. We closed the sale for the Peak and Amapari mines, bringing $200 million in cash. We closed a new $1.5 billion indicated credit facility. And early in the third quarter we completed the transaction with Silver Wheaton has held 25% of the silver production from our Peñasquito project for $485 million in cash and future cash payments of 3.90 per silver ounce. This held powerful leverage into our largest future mine, and as Silver Wheaton propelled by this growth, we enjoy the rise as our 49% of Silver Wheaton stock.

Our gold price a pound strong supported with $650 per ounce level during the quarter. We have zero gold hedges to deal with, and I like to think that we’ll be rewarded for delivering gold ounces to the market at consistently low cash costs despite amounting costs pressures our margins are among the highest in the precious metals sector.

Moving on to the highlights for the second quarter, our gold production increased 43% over last year’s second quarter, to 539,500 ounces. Our gold sales also increased 37%. Cash stocks were aligned with our expectations for the second quarter and again remained the lowest amongst our peer group at $133 per gold ounce. Adjusting gold production and sales for the disposition of Peak and Amapari in April, gold production in sales increased in 7% and 13% respectively on a sequential quarter basis. Cash costs are 48$48 per ounce lower compared to first quarter 2007 due the lower royalty payments, higher byproduct costs and silver credits, and stronger performances El Sauzal and Marlin.

Adjusted net earnings for the quarter amounted to $95.3 million or $0.14 per share. Our reported net earnings totaled $2.9 million.

As mentioned in this morning’s release, the difference in primarily due to a non-cash, foreign currency loss at $105 million arising from the unfavorable revaluation of future income tax reliabilities due to strengthening of Canadian dollars and Mexican pesos.

Our sensitivity to foreign exchange fluctuations will be an ongoing issue for us. It is very important to note that this effect was an accounting treatment, as a non-cash charge. The impact losses, a result of our accounting method, where our purchase (inaudible) are included in our mining interests rather than pushed into good will. This is a conservative method and that is why we’re very focused on the adjusted net earnings.

Operating cash flow was $142.7 million for the quarter and operating cash flow before working capital changes was $172 million. Adjusted net earnings of $95.3 million or $0.14 per share for the quarter is up compared with adjusted net earnings of $82.8 million or $0.12 per share in the previous quarter.

Operating cash flow was also up from the prior quarter. This is due in a large part to the lower Alumbrera royalty payment in the second quarter of $27 million in Goldcorp’s shares compared to $37 million in the first quarter of 2007.

A couple of additional notes, on our second quarter financial results our cash and cash equivalents at June 30, 2007 decreased to $283 million from $403.5 million at March 31, 2007. This is due to the repayment of $200 million in debt during the quarter, capital expenditures of $225 million and dividends paid of $32 million. Partly offsetting these outflows were strong operating cash flows of $143 million and $200 million in cash flow proceeds from the disposition of our Peak and Amapari mines.

One note is that after receiving $485 million from Silver Wheaton in July, I’m pleased to report that Goldcorp is now in a positive net cash position.

For the quarter, corporate administration costs were $22 million and stock option expenses amounted to $18 million. We expect our G&A run rate to be about $20 million [plus] $6 million of stock option expense per quarter for the second half of the year. I’m disappointed with this G&A expense to date for the number of integration costs certainly aren’t hitting us this year and we’re holding the line on building corporate infrastructure ensuring that most of our work is done at the mines. We’ll have a hard look at overhead costs during this year’s budget period.

Our adjusted net earnings of $95.3 million for the quarter were below our expectations. This was primarily due to lower than anticipated gold sales which resulted from previously announced delays in commercial production at Los Filos and grade reconciliation and mining issues at Marigold and San Dimas.

So turning now to our operations, first of all, Red Lake gold mine produced 173,500 ounces of gold. This compares to 176,600 ounces for the corresponding period last year. The increased production relates to marginally higher ore grades offset by lower tonnes milled and is consistent with our mine plan.

Our cash costs of $246 per ounce were higher in relation to 2006 but consistent with expectations. The increase in these costs reflect current mining market conditions and are due to the escalating costs of basic consumables, equipment, spare parts, the competitive labor market and of course the stronger Canadian Dollar.

The number three shaft construction at Red Lake was completed to allow for the commissioning of the production hoist. We’re currently hoisting waste up the number three shaft and hoisting ore is expected to begin shortly after the ventilation upgrade is done. The Red Lake mill expansion will be commissioned in the third quarter which will bring the combined processing capacity to over 3000 tonnes per day.

Some of you on the line will be participating in a tour there next month. We look forward to sharing more details at the mine with you then. We’ll also include tour related information on our website for those unable to attend.

Exploration of Red Lake continues to yield encouraging results in the five key areas which include the high grade zone, deep candle zone, the party wall area upper Red Lake sulphides and the open pit potential.

Of note, we’re finding very high grades in the party wall area. This gives us confidence that we can positively effect our mine plans for the mines in this area. The high grade zone in particular, exhibits great potential both laterally and at depth. The exploration development platform is slated to begin construction in the current quarter and this will create a basis for a new phase of exploration in the high grade zone that we expect to ramp up in 2008.

Turning to the two Canadian joint ventures, gold production at Musselwhite for the second quarter was 38,500 ounces. This was a 2% increase over the corresponding period in 2006 due to a higher mill throughput as a result of improvement in equipment availability and productivity.

A cash cost per ounce of $478 were 27% higher in the quarter compared to 2006. this is primarily due to the higher operating costs incurred in the underground mining operations as a result of infrastructure maintenance, higher mining equipment repair and operating costs and once again the higher Canadian Dollar. The mine is in the process of replacing aging mining equipment which is expected to eventually reduce maintenance cost and improve productivity and this is an ongoing process this year.

Positive exploration results continued to be returned from the PQ Deeps area as an additional underground drill rig was mobilized during the quarter, higher mining grades are also expected to eventually improve the cost picture at Musselwhite.

Gold production in Porcupine of 41,400 ounces for the quarter was essentially the same as the second quarter of 2006. Cash cost per ounce of $447 increased 24% over the second quarter of 2006 due to consumable price increases, maintenance due to unplanned breakdowns, higher stripping costs at the Pamour mine and once again the strong Canadian Dollar.

Deeper exploration in Hoyle Pond has identified wider zones of mineralization towards the south end of the deposit. Exploration drilling continues on the Hollinger project with

five surface diamond drills operating. The pre-feasibility study there is on target for completion in early 2008.

Luismin mines in Mexico, produced 35,600 ounces of gold and 1.34 million ounces of silver in the second quarter. This was down from Q1 due to lower grades, recoveries and mill throughput. Total cash cost were negatively effected by lower silver production, plus lower silver by-product credits and a one time payment related to the finalization of the labor agreement. Gold production was also lower due to lower grades at San Dimas and lower ore extraction from the Santa Lucia vein area.

Several projects on the side are progressing well. We have completed construction of a new filtering process for the tailings, installation of the new mill replacing the old mill is complete, and is operating at full capacity. And the Las Truchas power generation expansion project is on schedule at 63% completion.

Also in Mexico the El Sauzal mine produced 79,900 ounces of gold, compared with 75,400 ounces for the corresponding period last year, due mainly to higher grades in the mine. Recoveries and tonnes milled were comparable with the same period last year. Cash costs were at $127 per ounce, slightly higher due to higher mine equipment and plant maintenance costs.

During the second quarter of 2007, the Marlin Mine produced 53,700 ounces of gold and 680,800 ounces of silver. Mill throughput essentially doubled from the same period of 2006, averaging 4,850 tonnes per day. Gold recovery for the quarter was 89% , and silver recovery was 60%. Cash cost per ounce at Marlin for the quarter was $140 per ounce.

Marigold Mine in Nevada produced 18,600 ounces of gold, compared with 17,100 ounces of gold produced for the corresponding period last year. A very poor cash cost resulted from the low production and a write-down of in-process inventory valuation, that was a $2.2 million write-down equivalent to $114 per ounce. We expect Marigold to bounce back in the second half of the year.

Alumbrera’s gold production declined from 68,500 ounces in the second quarter of 2006 to 50,800 ounces in the current quarter, the last quarter, due to grade and recovery reductions in ore processed. Lower recoveries are due to occasional high gypsum content from specific areas of the pit, and the processing of stockpiled ore with lower recovery. Copper production also declined from 41.8 million pounds to 36.4 million pounds for the same reasons. Recoveries are expected to improve slightly during the remainder of the year.

Total cash costs during the second quarter were minus $1,000 per ounce of gold in line with our estimates. And our share in the YMAD royalty in the second quarter of 2007 was $27million. Compared to last quarter, production at Alumbrera increased as the grades and recoveries improved moderately. Total cash costs were lower due to increased buy in, lower royalties and higher realized copper prices.

So overall, corporately our mine operations are succeeding in containing costs, thus maintaining the company’s margins. Our new mines are designed to sustain these margins over a long period of time and clearly the continued delays at most fields and underperformance at Marigold and San Dimas are disappointing but action has been taken to resolve these issues and the second half of the year once again should see an improvement.

Turning to our development projects, as previously reported, once again Los Filos project produced its first gold on June 14th 2007, a total of 2,500 gold ounces were produced for the month of June. Capital expenditures to June 30th amounted to $278 million with total forecasted capital now at $308 million. In addition, operating costs of $26 million incurred to date have been capitalized to the project as Los Filos delays have prevented us from reaching commercial production levels.

Nothing is broken here, the ore body is fine, its just taken us a while to get the crusher and stacker into operation. A shakedown there is now underway and we expect commercial production levels to be achieved some time in the fourth quarter.

Turning to the Peñasquito project, we were pleased to report significant increases in reserves in June based on the latest exploration data. An updated feasibility study to increase the project throughput by 30% is expected by the end of this year. Permits for mine construction and operations have been received and construction is onto a brisk pace. This includes of course camp construction, concrete pours to the primary crusher and installation of the 400kVA electric line to the site.

Mining and auxiliary equipment purchases were completed for the first phase of mining and have started to arrive. The first two live loaders are complete and the first haul trucks have been erected. The initial plastic is now on site for the first phase and we are still committed to pouring our first gold by late 2008. Capital expenditures to date are $187 million.

A decline into the Peñasco outcrop is well under way in order to provide bulk samples for metallurgical test work and so far it appears we have been conservative with our recovery rates and concentrated grade estimates and this work on the bulk sample is designed to fine tune our production planning and to provide bulk concentrate samples for our marketing programs. The test work will be carried out in the coming months.

At the Éléonore Project in Quebec the first resource estimate for the project was issued in June. We feel a lot of upsides to the initial resource as good drilling results continue to arrive and we continue to scope and mine around a five million ounce concept. The permit application for the permanent air strip and access road has been submitted for approval with the construction to start in late 2007.

Sustainable development and social relationships are also a priority as our project team continues to develop a collaborative relationship with the Cree Nation.

Our Pueblo Viejo project, our joint venture partner Barrick, the 6% owner and operator continues to update the feasibility analysis and we expect to see a revised feasibility study in the fourth quarter. The advances over the past quarter have included EIA approval for the mine modification to improve silver recoveries, a review of zinc production possibilities and potential alternatives for the location and construction of the power plant required for operations.

Many of you on the call also tuned into Barrick’s call so you are aware of some of the exciting things they are finding. We look forward to sharing with Barrick in the successes of this important project.

Our key corporate priorities for the balance of the year remain, are maintaining high margins through continued low cash cost bringing the Los Filos project into full production, ramping up mine construction at Peñasquito and continuing development of the Éléonore project and maximizing our opportunities at Red Lake gold mines and of course at our other mines.

As I mentioned earlier, gold production is expected to increase in the second half of the year with a corresponding decrease in total cash cost. We took the decision to reforecast the year’s production based largely on the delays a t Los Filos but also due to the first half underperformance at Marigold and San Dimas. The company expects to produce between 2.2 million and 2.3 million ounces of gold for the year at a total cash cost of under $150 per ounce. This assumes the worst and we hope to be in the high end of this range.

Other than the delay to Los Filos, we are hitting our stride at our new projects. I see daily reminders that our explorational and organic route emphasis is paying dividends. We’ll be sharing these results as we see in our critical mass of new information later in the year.

So with that I’d like now to move to the Q&A section. Operator, will you please open the lines for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) The first question is from John Bridges from JP Morgan. Please go ahead.

Ankush Agarwals - JP Morgan

Hi Gavin, This is Ankush. At Luismin the tonnages and grades were lower this quarter and you are currently incurring CapEx expansion so in the short term could you please brief us on what the situation is now with labor shortage and how much improvement we should expect in grades and tonnages in Q3 and Q4? And also in the slightly longer term Silver Wheaton is forecasting 13 million ounce silver production at the Luismin mine so if you could give us a little more color on how we should expect the mine to ramp up to these levels?

Kevin McArthur

Ok, thanks Ankush, I’m going to defer that question over to Steve Reid, our Chief Operating Officer.

Steve Reid

Ankush, we’re not happy with what’s gone on at San Dimas, what we have done is changed the development sequence there to get us towards some higher grades in the central block and we’re looking for an improvement in the second half of the year at San Dimas as we get into those higher grades and provide us the flexibility we need in the mining schedule for that. In terms of the capital we’re incurring there, we are happy with the way things have gone there. We’ve replaced the old mills with new mills and they’re going well. Kevin in terms of the Silver Wheaton question. Can you just repeat that for me please?

Ankush Agarwals - JP Morgan

Well, Silver Wheaton’s been pointing out they expect Luismin to produce about 13 million ounces by 2009 so I was just wondering if we could get some ideas of how you plan to ramp up to these levels from now?

Kevin McArthur

We have certainly our programs at San Dimas and at Luismin for silver production, but I don’t think we’ve disclosed our full five-year forecast for silver.

Steve Reid

There are plans of course to install an additional mill, and that’s still ongoing, so yes, we’re still working towards that. What we’re experiencing at the moment is short-term lack of flexibility in the mine plan, but the construction effort is still ongoing.

Ankush Agarwals - JP Morgan

Okay, so this second mill, the decision would be, is yet to be taken?

Steve Reid

The decision’s taken, we’re working towards it. We don’t expect it in place until the end of next year.

Ankush Agarwals - JP Morgan

Okay. Okay, thank you.

Operator

Thank you. The next question is from David Stein from Cormark Securities. Please go ahead.

David Stein – Cormark Securities

Thanks, my first my question is, you mentioned in the introduction Peñasquito enhanced production scenario. I was wondering if you could just kind of give a sense of what you’re looking at for that?

Kevin McArthur

Yeah, David, we’re working currently to review our options at Peñasquito, as we’re seeing, of course we’ve seen, more reserves there, and we’re seeing further upside in the project. It’s a complicated situation, trying to optimize where we’re going to head in the future as we’re building the mine currently. But we are looking at an increase, first phase from 50,000 tons per day to, increase that to a 55,000 ton per day case, and then eventually, the 100,000 ton per day expansion that was planned for later, by, I’m thinking 2011.

We will now be looking at a 130,000 ton per day rate. I think we’re, I know we’re making a lot of plans to get these expansion steps underway. However, I’ve asked for a full feasibility study internal to the company to ensure that we get a good rate of return on those kind of developments, so I’m waiting for the latter half of the year to see the numbers on that. We’re also redoing the mine plan to accommodate that, so essentially what we’ll be seeing is a higher throughput, of course more capital, which we have not analyzed at this point in time, and indeed we hope to see a higher rate of return, at least an incremental rate of return, on this expansion. But it’s early days yet, until we see the numbers I can’t expand much more on that.

David Stein – Cormark Securities

Oh, fair enough, that’s good. Do you have any sense of, would your aim be to maintain the 2011 schedule for the expansion even if you resized it upward?

Kevin McArthur

Yes, absolutely.

David Stein – Cormark Securities

Okay, that’s great, and that’s it for now, thanks.

Kevin McArthur

Thanks David.

Operator

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

Chantal Gosselin – Genuity Capital

Hi, good morning. My first question is regarding Red Lake. The ton(inaudible 33:34) for the past couple quarters has been declining, about 10 to 15% a quarter, and I was wondering if it’s due to interference of the current development, or is it the productivity that has a problem, or something else?

Steve Reid

Chantal, there’s no primary issue here, other than, you’d be aware that there’s a lot of work going on focusing on getting the shaft project going, and that’s primarily what’s going on. And what we’ve said here of course, and where we’re up to, is we’re in great shape in that we’re hoisting feed already, so we’re happy with how that’s going. This is all about interaction with the shaft at this point.

Chantal Gosselin – Genuity Capital

Okay, you’re planning to increase to 3,000 tons per day with the mill expansion, that would be about 50% higher than what you’re doing right now. When do you expect that to be in place then?

Steve Reid

The situation we’re in is we actually have the mill sitting there and we have the capacity being commissioned this quarter. What we need is mine capacity and that’s why the focus on the shaft, and once that shaft is in place, the next critical item on the critical path is ventilation for mining, and as I said, that’s where our focus is.

Chantal Gosselin – Genuity Capital

So just to give us a little sense of timing, when do you expect that to be all completed so you can start ramp up?

Steve Reid

Oh, we’re aiming for around the end of the year.

Chantal Gosselin – Genuity Capital

So end of year, all ventilation, everything would be completed and then you could ramp up to 3,000 tons a day. Is that right?

Steve Reid

That’s what we’re looking for, we’re looking at all our options right now, because we have three race boards operating and that’s clearly critical path.

Chantal Gosselin – Genuity Capital

Okay. There’s something else in the press release, I may be reading a little too much into it, but you added two drills for the open pits in Marlin. Is there anything that prompted you to do that, or was it planned, can you give us some color?

Steve Reid

Yeah, I don’t know that you’re reading too much into it, and at the same time, we’re not looking to be doing a large pit there next year or anything. This is part of the long-term plan, and what we’ve always said is there is great potential there, and we’ve been getting great results. So we’re continuing to look at that. And in some cases, this would be feed that’s very accessible. So, yeah, we’re just looking at it, we don’t have a sense, and we’re not trying to build it into any near-term forecast.

Chantal Gosselin – Genuity Capital

Okay, I guess it’s too early to talk about resource, yes, by year-end or sometime next year, early next year?

Steve Reid

Probably too early.

Chantal Gosselin – Genuity Capital

Okay. Last question is regarding Peñasquito. You spent so far 187 million, but how much have you committed?

Unidentified Company Representative

300, over 300.

Kevin McArthur

Yeah, over 300 I’m hearing from Lindsey across the way.

Chantal Gosselin – Genuity Capital

Okay, is that pretty much in line with your budget.

Kevin McArthur

Yeah, yeah, we’re right on track there.

Chantal Gosselin – Genuity Capital

Okay, that’s it. Thanks so much.

Kevin McArthur

Just to clarify that a little bit, there of course is some amount of capital creep as we’ve spoke about in our last conference call. Part of the, what we want to do by late this year with our expansion program is to accommodate all of that and have one number that we can get back out to the street and report. Thanks Chantal.

Operator

Thank you. The next question is from John Tumazos from John Tumazos Very Independent Research. Please go ahead.

John Tumazos – John Tumazos Very Independent Research

Two questions if I may. Do you have any effort, or is there any restriction in the JV with Barrick, in terms of having your own exploration program in the Dominican Republic and Haiti and having ground on a 100% basis, etc.? And second, concerning the June 25 resource release for Peñasquito and Éléonore, could you describe the constraints on data collection and processing, such as the large number of Éléonore holes that weren’t incorporated in the resource. It sounds like the rock is there and the data’s there, but it takes a long time to get it tabulated.

Kevin McArthur

Yeah, John, as far as Pueblo Viejo and the joint venture in the Dominican Republic, we have no plans to enter into any exploration in Dominican Republic. We see ourselves good partners with Barrick, our joint venture partner, and I’m sorry, but I am unaware of exactly what is in the joint venture agreement from a legal basis. There’s certainly a big land boundary there that would preclude us from doing things, as in any joint venture, but I would think that it would be in our best interests, if we were to try and undertake something else in the Dominican Republic, that we would try and do it as a joint venture, as good partners do.

Second part of the question, as far as Éléonore, has an interesting process when we chose to work on the resource. We had to figure out an area where we could drill dense enough just to get to a first resource that we could call 43-101, so that we could talking about moving the project into some form of feasibility. And clearly we had a lot of drill holes outside of that resource boundary that we used, where we have a lot more information. And, but you know, we’re just like all the other companies, we’re very constrained as to what we can say by National Instrument 43-101. In terms of, so I can’t remember the exact dates of the cutoff, but it was a pretty early cutoff that we used in terms the date of getting the information in. We’ve seen a lot of drilling since then.

Of course there’s a fair amount of lag time between getting the core dug, getting it split, getting it out for assay. You know we see drill holes with visible, we know its going to be ore bearing horizons but between getting that ore out of the ground, getting the assays into the model takes a fair amount of time so we have a great deal of confidence in moving this project forward. The resource that we put out was smallish but we wanted to get it started and by year end you’ll see some addition to that resource. I’m pretty confident

John Tumazos – John Tumazos Very Independent Research

Thank you, what is the area and influence of the holes in Éléonore

Kevin McArthur

Looking around the room I’m not seeing anybody able to answer the question here. But typical of underground mains systems its probably 15 or 20 meters.

John Tumazos – John Tumazos Very Independent Research

Thank you.

Operator

Our next call comes from Tony Lesiak from UBS.

Tony Lesiak - UBS Warburg Inc.

OK, first question is an accounting one. I’m having difficulty between your adjusted earnings and the relevant items on your income statement. I was just hoping to clarify two of them anyway; the gain on sale you recorded on the income statement was just over $40 million. But on the adjusted earnings, it’s only $6.5 million. What was the rationale there?

Lindsay Hall

Tony, it’s Lindsey. What’s happening is that the $40 million is the gain on (amafury) its off peak, which is the pre-tax gain and then the income tax provision in fact is relating to that gain of something of the order of $33 million resulting in an after tax gain on the Peak and Amapari of about 6.5 million.

Tony Lesiak - UBS Warburg Inc.

Okay, and on the FX loss as well, you’re showing a greater benefit on the adjustment than was recorded on the income statement?

B>Lindsay Hall

Greater benefit?

Tony Lesiak - UBS Warburg Inc.

Yeah, basically you show…

B>Lindsay Hall

103 versus 104. The insignificant amount would just to do with regular foreign exchange realized in the period, so we wouldn’t add that on a normalized basis.

Tony Lesiak - UBS Warburg Inc.

Okay, thanks. Second question, Penasquito metallurgy, you talked about higher recover rates. Can you talk about which of the metals could be most impacted and maybe qualify how much of an impact we could see?

B>Lindsay Hall

Yeah, we took a pretty fairly, pretty conservative view of the lead and zinc recoveries in our concentrates, and that was due to, you know, how much work we had done at the time of the feasibility. We didn’t want to complete a feasibility without more work and since that time, we’ve had some consultants in looking at our information and they’ve pointed to some of these, you know, just, percentage points of recovery conservatism. Also, I added that we think that the grade of the concentrate will be better also. So you know this will come out when we get the test work done later this year, and that should be incorporated into our revised feasibility work, so it will give us a good idea of where we’re headed. But do I know what the numbers will be? No, I don’t. I mean, that’s going to take some time.

Tony Lesiak - UBS Warburg Inc.

And what you’re suggesting is that the pickup may be a little more modest?

Lindsay Hall

It will be just percentage points. It’s not, we’re not talking about huge increases, but what I wanted to be sure to let people know is that we’re on the conservative side, not the aggressive side, which I’ve heard from around the grapevine that maybe our recovery rates were too aggressive. But that’s indeed quite the opposite.

Tony Lesiak - UBS Warburg Inc.

OK. Finally, on Red Lake, could you give us a sense of the 2008-2009 production profile, and maybe talk to your longer-term cost structure?

Steve Reid

Tony, in general we’re looking to ramp up and clearly as we outlined earlier, once we have the new (south) operating and the economies of scale we get with that, that’s why where looking for an increase. We haven’t put out numbers, but what we have said is that we’re looking to turn this in to a million ounce a year mine, and that’s going to take us something like four to five years, that we think to get us into that sort of range. So somewhere between here and there that’s what your production ramp up is going to look like.

Kevin McArthur

Yeah, if you take 790 this year and a million by 2011, just draw a straight line between them and you’re going to be pretty good.

Steve Reid

And in terms of cost, that’s something that we’re looking at quite closely here as we put together the situation between the high-grade zone which we do want to keep the priority on, which obviously gives us a lot of cost, we are looking at what we can do in terms of additional production with some of the more medium-grade, should we call it, and this is red like sand. It’s all (inaudible). But this other material that’s higher up, what we don’t know, and Kevin alluded to earlier, is we do have more exploration activities going on, certainly in the boundary area between the two previous properties. And that’s barely accessible to us.

So, all of that is moving at the moment but we’re looking to maximize our high-grade material at all times.

Tony Lesiak - UBS Warburg Inc.

All right, thanks very much.

Kevin McArthur

Hey Tony, if I could just add in to that; there is so much going on at that mine with the development work at the number three shaft, the ventilation, hoisting, the expansion to the mill, all of the exploration work. This is just a mountain of data coming in that we’re trying to assimilate to see if there’s a strategic planning effort underway. And we’ve got the budgeting process. I think this is all indicating very good things, and not to mention all of the integration things that are going on, both with putting the two mines together, everything on the surface, the two workforces coming together. This is going to be a very, very good story but it just take’s time to germinate and that’s where we are right now. Thank very much.

Operator

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

Haytham Hodaly - Salman Partners

Thank you. Just a couple of follow-up questions I guess, more house cleaning, most of my questions have been answered. The first question, I guess, was in regards to expensed exploration guidance. I know previously we’ve said $120 million in total exploration of which half would be expensed. Looks like you’re significantly under so far, for the half of the year. Do you still expect to get to roughly $60 million expensed exploration this year?

Chuck Jeannes

Yeah, Haytham, this is Chuck. Yeah we do. We’re still looking at about $60 million unexpensed and $60 million capitalized. There’s a bit of a lag there as we’ve gotten in to the midst of the drilling season. There’s a lot of properties right now, but we expect to come in around 60 by the end of the year.

Haytham Hodaly - Salman Partners

OK, perfect. I guess the next question is just with another housekeeping item. Effective tax rate in the second half of the year, what does it look like roughly?

Chuck Jeannes

Haytham, that’s still liquid 33% or 34%. Something like that.

Haytham Hodaly - Salman Partners

33 or 34. OK, perfect. And last question with regards to Marigold, obviously we’ve seen costs cut, can we talk a little about that?

B>Steve Reid

Yeah, the situation at Marigold is what we expect to put on the pads is exactly what we thought prior to the start of the year. We’re dealing with lag times for stuff into the pile, from last year and stuff, whether it’s going to go into the pile and recovered in time. This is why we’re experiencing issues and I know that we reported at the end of last quarter that we identified the issue. This was about some issues at the base of the pit and so on, but no, we don’t see any ongoing issues there; it’s going to come back.

Chuck Jeannes

Remember that the costs were negatively affected at Marigold by the $2 million work in process inventory write-down, so that will go away by this year. And what Steve mentioned, I don’t think it quite came out clearly, was that he thinks—that the Marigold folks think—that actually by the end of the year, they’ll have sacked the actual number of ounces that they projected for the year. It’s just that it’s very back-end loaded. Getting those ounces out, that’s going to be the issue—the timing. And should those ounces get out, which we believe they will, then we should have a very good bounce back at the end of the year.

Haytham Hodaly - Salman Partners

With hope, what’s your leach cycle here?

Chuck Jeannes

Well, it’s very complicated depending on heights of which heaps we’ve got, but typically 180 days leach cycle is about what we get for the 70 or 80% recovery.

Haytham Hodaly - Salman Partners

So through the actual production from there, what would say is a reasonable number for full year?

Steve Reid

We’re looking, our share, is in the 80 to 90,000.

Haytham Hodaly - Salman Partners

In cash costs, hopefully a little bit lower if you get to those r, is that correct?

Chuck Jeannes

I’d like to say it a little stronger than hopefully, but I’ve got to, I guess, beware of my forward looking statements, and yeah.

Haytham Hodaly - Salman Partners

No worries. Thank you.

Chuck Jeannes

Thanks Haytham.

Operator

Thank you. The next question is from Erica Brailey from HSBC. Please go ahead.

Erica Brailey - HSBC

Thank you. Good morning. Can you please provide how much tithe at Red Lake came from (inaudible)shaft and how much from the old Red Lake shaft, and then the grade at each for the quarter?

Unidentified Company Representative

Sorry, I don’t have it in front of me.

Unidentified Company Representative

Yeah, that’s a tough one. We just don’t have that detail with us.

Erica Brailey - HSBC

(inaudible)

Unidentified Company Representative

Ok, you bet.

Operator

Thank you. (Operator Instructions). The next question is from Mark Smith of Dundee Securities. Please go ahead.

Mark Smith – Dundee Securities

Yeah, hi guys, I’ve got a few questions for you if you’ve got the time. Starting first with the new mill at San Dimas. How much is the capital for that for next year, and then how do you expect to feed it, what improvements in the workings you’re going to do to get more feed?

Unidentified Company Representative

Mark, just give us a second, and we’ll get the capital for you for next year.

Steve Reid

In terms of San Dimas, as I mentioned earlier, what we are lacking there is development flexibility, and that’s what we’re working on right now. Our throughput we’re looking to take from about 2,100 to about 3,100 tons per day. That’s what the additional mill is going to give us, but obviously to do that, we need the flexibility, so that’s why the priority on development is right now.

Mark Smith – Dundee Securities

(inaudible) What do you do?

Steve Reid

It’s not in one place. Clearly you would know that we’re dealing with multiples and there’s a concentration in the central block and that’s where the bulk of our assets are coming from right now and that’s where the focus on development is. I just wanted to say we’re doing development in numerous other places as well.

Mark Smith – Dundee Securities

While you’re looking for the capital number on it. Maybe we could just move on to El Sauzal and what do you expect the grades to (inaudible).

Steve Reid

We are saying that in the near term we are looking to keep an eye and that’s not something we’re planning on but we’ll get some more answers on that as we go through the current flushing process that we’re right in the middle of now.

Unidentified Company Representative

And that Capital number. You know we’ll review things at the end of the year so we’re looking at 25 million in ’08 but we’ll review that at the end of ’07 when we go through line for line plans with our mines and we can establish our approved budget at the end of ’07 so [inaudible] if you want to through something into the model?

I would use that number for now Mark, and again, we’ll advise you at the tail end of the year when we get closer to approving those kind of decisions. But for planning, I’d use 25 million.

Mark Smith – Dundee Securities

Okay. Good enough. Just a little housekeeping, your revised guidance of 2.2 to 2.3, does that include the pre-production from Los Filos, or, what is that pre-production?

Steve Reid

Yes, it does include the pre-production

Mark Smith – Dundee Securities

Okay, and what was that pre-production from Los Filos, do you know?

Steve Reid

We’re looking at in the range of 30 to 40,000.

Mark Smith – Dundee Securities

Okay, okay good. (inaudible) Sort of losing over time. Can you give me an idea of what the progress has been at Cerro Blanco, and sort of, is there any problem with a loss of a little bit of focus for you guys too, but what’s the kind of timing that we can prepare for there?

Chuck Jeannes

Yeah, Mark, this is Chuck. As you know, we’ve been hung up on permitting at Cerro Blanco, and haven’t made a lot of progress on that. We did recently receive permits to do the water well drilling, and that’s underway. We’re also, we have an exploration rig back at the site and are starting to do some more infill and extensional drilling, but it’s going slow and I hate to give you and kind of time frame, because obviously this has taken us longer on the permitting side than we originally anticipated. Also we have an exploration rig back at the site and they're starting to do some more infill and extensional drilling but it's going slow and I hate to give you any kind of time frame because obviously this has taken us longer on the (inaudible) side than we originally anticipated and I just don't have a good sense for it now but its, it's a project that's still important to us, we just have to wait until the authorities give us the authorization to proceed

Mark Smith – Dundee Securities

OK, good enough. You're still looking at, basically an underground philosophy though rather than, that will be easier to permit rather than an open sensitive one.

Chuck Jeannes

That's correct.

Unidentified Company Representative

Mark, just so you get another sense. For example, we just got a permit to move the main road, you've been there, that goes by the project. That public road, so its not as though the authorities are ignoring us completely, its just moving slowly.

Mark Smith – Dundee Securities

Yeah, everything is moving slowly these days. There's no shocker there. Good enough. Thanks guys.

Operator

Thank you. The next question is from John Zinny from (inaudible) Adams. Please go ahead.

John Zinny

A quick question on if we were to trip out the payment related to the labour agreement would unit cost be similar to the preceding quarter?

Unidentified Company Representative

Yeah I think so. There’s the labour cost that we’ve got in there I think is 1.7 in the quarter that puts a charge of 2.7 that’s running through that quarter.

John Zinny

Ok, on a go forward basis assume that a unit cost is similar to the preceding quarter.

Unidentified Company Representative

That’s correct

Operator

There are no further questions. I would like to turn the meeting back over to Mr McArthur.

Kevin McArthur

Thanks everyone for tuning in again. Obviously it’s a tough quarter, made even tougher by detailing all those numbers that we are moving forward and looking back over the last six months I’m pretty happy with what we’ve achieved. I really truly believe that we have what appears when it comes to the company’s decisions to participate in continued strong markets for gold. We don’t have to make promises about getting bigger. We merely execute like we know we can and if we do our shareholders will be the beneficiaries. Our 50% growth profile over the next five years and that’s our gross (inaudible) having achieved that around the globe but without having to buy anything. So our gold ore has a great future in the gold industry and that future continues to get closer. A little painful right now with some of the growing pains and putting the two companies together but we’re very close now. In the very near future we look forward to seeing you as we get closer to our fall conference and our mine tour season. We’re hosting tours of Red Lake, this fall so (inaudible) preparing for that and we hope to be sharing exploration results in the fall on all these projects that we’ve been drilling on so a lot of good excitement. So in the meantime please enjoy the summer and we’ll be seeing you around conference time coming up thanks very much.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Goldcorp Inc. Q2 2007 Earnings Call Transcript
This Transcript
All Transcripts