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

Executives

Jeff Wilhoit - VP, IR

Chuck Jeannes - President, CEO

Lindsay Hall - CFO

Steve Reid - COO

Analyst

Jorge Beristain - Deutsche Bank

Alec Kodatsky - CIBC

David Haughton - BMO Capital Markets

Joung Park - Morningstar

Steve Butler - Canaccord Genuity

Anita Soni - Credit Suisse

George Topping - Stifel

Tony Lesiak - Macquarie

Goldcorp, Inc. (GG) Q2 2012 Earnings Call July 26, 2012 1:00 PM ET

Operator

Welcome to the Goldcorp Incorporated 2012 second quarter conference call for Thursday, July 26, 2012. I would now like to turn the meeting over to Mr. Jeff Wilhoit, Vice President, Investor Relations of Goldcorp.

Jeff Wilhoit

Thank you, and welcome everyone to the Goldcorp second quarter earnings conference call. Among the senior management in the room with me today are Chuck Jeannes, President and Chief Executive Officer; Lindsay Hall, Chief Financial Officer; and Steve Reid, Chief Operating Officer.

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

As a reminder, we will be discussing forward-looking information that involves unique risks concerning the business, operations, and financial performance and condition of Goldcorp. Forward-looking statements include, but are not limited to, statements with respect to future metal prices, the estimation of mineral reserves and resources, the timing and amount of estimated future production, cost of production, capital expenditures, and costs and timing of the development of new deposits.

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

With that, I will now turn the call over to Chuck Jeannes, President and CEO.

Chuck Jeannes

Thanks, Jeff, and thanks everyone for joining us today. On July 10, we reported second quarter gold production as well as updated 2012 production and cash cost guidance in light of the operational issues we've experienced at Red Lake and Peñasquito.

In the ensuing weeks, I've had the opportunity to discus these issues with many of you. So those on the line that have not had a chance to talk to directly, I want to first apologize that our performance caused us to revise our 2012 guidance. As you all know, mining can be a difficult business to forecast and in the case of these two important operations we made assumptions about future performance that turned out to be incorrect.

With regard to Red Lake, our forecasts coming out of the first quarter assumed that the conditions that impacted our first quarter production would improve in the second quarter, and that assumption was wrong. The primary reason was delayed access into the high-grade zone due to the slower than expected rate of advancement of our de-stressing operations, which allow us to safely complete planned mining sequences.

The first of two de-stress cuts at the 41 level is now complete and access to adjacent stopes is well underway. Completion of the second de-stress cut at the 45 level is expected this quarter, which will lead to further production improvement in the second half.

At Peñasquito, we saw record gold production in the quarter, but limited water availability beginning late in the quarter is expected to curtail production for the full year. We've seen prolonged drought conditions in parts of northern Mexico, which have reduced normal aquifer discharge. This water deficit will restrict throughput in the plants until additional wells can be brought into production, which is anticipated to occur in the fourth quarter of 2012 and the first quarter of 2013.

We're working very hard to improve our forecasting and internal communications to allow us to fully realize the compelling value inherit in our company. Our second quarter results continue to bear that out. Strong low cost production with robust margins, and excellent financial capacity to fund our new growth projects under construction.

Elsewhere in the portfolio, we achieved solid production, especially in Los Filos in Mexico and Porcupine in Ontario. These mines are expected to be our third and fourth largest producers in 2012, and the solid base of production they provide add stability to our operations and mitigates risk over our asset base.

On the exploration front, we continue to see strong results throughout the company. We'll be providing a full report later in the year, but as a result of continued exploration success at the mines, particularly at Red Lake and Musselwhite, and that our growth projects including Cerro Negro and Camino Rojo. Our board of directors has authorized an increase in the 2012 exploration budget to $226 million compared to $200 million previously.

Additionally, we were pleased to announce that the Ontario Superior Court ruled in favor of Goldcorp 70% ownership of the El Morro project. While project construction remain suspended by the Chilean Supreme Court, pending further permitting required in connecting with additional consultation with the local community. Ongoing engineering work and project optimizations studies will continue, allowing us the opportunity to consider all available options for the advancement of this asset.

The second quarter saw impressive advances in our growth projects, starting with the Pueblo Viejo joint venture in the Dominican Republic, which is mere days away from first full production. We're pleased with the progress that has been made there. Our share of production in 2012 is expected to be in the range of 68,000 to 85,000 ounces.

Cerro Negro, in Argentina has made significant strides in overcoming challenges presented by importation restrictions. The majority of equipment and materials required for initial production is now in country, including the ball mill. These restrictions have consumed much of our contingency in the schedule and capital spending plans for Cerro Negro. But at this point, the project remains on track for first gold late in the second half of 2013.

Our two pure gold projects in Canada, Éléonore and Cochenour are also progressing very well. At Éléonore, underground drilling commenced from the 650 level in the exploration shaft are full quarter ahead of schedule. Deeper portions of the deposit we drilled with the objective of refining our geologically gold resource models.

At Cochenour, development progress has been very good as well. A new study is expected to be complete in third quarter, incorporating new information concerning the orientation of the Bruce Channel deposits and including updated project capital costs.

Our balance sheet remains one of the strongest in the industry. And we remain well positioned to finance and build this leading growth pipeline internally with $1.2 billion in cash and cash equivalents and an undrawn $2 billion credit facility.

On this slide you can see our new 2012 gold production guidance that we released two weeks ago, now between 2.35 million and 2.45 million ounces for the year. Lower production has also resulted in a revision to our full year cash cost guidance, now expected to be between $310 and $340 per ounce on a by-product basis and $625 to $650 per ounce on a co-product basis.

With respect to capital spending, our expected capital expenditures for the year increased from $2.6 billion to $2.7 billion, primarily due to the impact of the timing of expenditures at Pueblo Viejo. The capital expenditures are allocated approximately 40% to operations and 60% to projects.

With the news over the last couple of weeks, we've had many questions, as to how the issues of Red Lake and Peñasquito will effect our production expectations for 2013 and beyond. Our annual planning and budgeting process is underway. And we'll culminate as usual with new guidance in early January. This process will consider a number of moving parts that will be incorporated in the forecast. We've already discussed Red Lake.

Ending completion of the new mine planning work, it's prudent to assume that the conditions, which slowed production this year will continue, such that 2013 production would be similar to the range we're now forecasting for 2012.

It's important to emphasize that seismicity at Red Lake simply affects the pace at which we access our higher grade stopes and has not sterilized ounces or changed reserves in the High Grade Zone. Red Lake remains a great gold mine with a tremendous future ahead.

At Peñasquito, we believe the current throughput restrictions are manageable with a plan to secure new sources of water that we've outlined. We'll have much more information in this regard when we complete our 2013 production forecast at yearend.

I want to say few words about gold price before concluding. Speculation continues to build regarding the potential for further monitory stimulus in light poor economic data, not only in the U.S., but also across Europe and other developed countries.

While it's clear that a fiscal reckoning must occur over the longer-term, it's pretty apparent that weak economic conditions will continue to favor lose monitory policy for sometime. And in this environment, I think we could see the gold price touch to $2,000 mark in the next six to 12 months.

Goldcorp's tremendous cash margin leave our inventors well positioned to participate fully in stronger metals markets. And our excellent financial condition and the low capital intensity of our growth projects enhance our ability to prosper in any conceivable gold price environment.

Despite the short-term challenges experienced in the quarter, our key strategic attributes, growing production, low costs, low political risk and a strong balance sheet remain fully intact. And we look forward to strong performance going forward.

And with that, I'll now turn it over to Steve Reid for a review of the operations for the second quarter.

Steve Reid

Thanks, Jeff. Gold production for the second quarter was 578,600 ounces with some solid performances across the portfolio of operations, offset by the shortfall of Red Lake and Peñasquito.

Production at Porcupine increased 23% compared to the first quarter of 2012, driven by higher grade. The Hoyle Pond underground operations delivered almost 50% better grades and 16% higher tonnages, as a result of more efficient mining and benefits from recent investments in hoisting infrastructure.

Los Filos matched its second best ever quarterly production mark in the second quarter, helped by improvement in leaching efficiencies as well as refinements in the size of crushed ore placed on the pad. These are important months for our company and we're pleased that they delivered for us.

At Red Lake, second quarter gold production was 104,000 ounces at total cash cost of $568 per ounce. Similar operating conditions persisted in the second quarter to what was experienced in the first, resulting in similar production levels.

Production was again partially limited in the three primary mining areas. In the High Grade Zone with de-stressing activities are underway on both the 41 and the 45 levels. In the Footwall Zone, where we've experienced inconsistent grades within the mineralization. And Campbell, where the gold price were low.

Seismic activity in the High Grade Zone continued to a big, the right of advance of the de-stressing efforts, but significant progress was made in both areas that are currently underway. The de-stressed process as illustrated on the slide were successfully completed on the 41 level late in the quarter, resulting in immediate access to higher grade ore and improved mill results.

Ongoing work on the 45 level is progressing satisfactorily and is expected to be completed in late in the third quarter. In combination higher grades from these areas will provide the increased gold production from the High Grade Zone in the second half of the year, as reflected in the new guidance.

Inconsistent mineralization in the Footwall Zone encountered in the first quarter has also continued into the second quarter, while production in the Campbell Zone improved slightly relative to the first quarter. The combine effect of these areas has resulted in a change for our forecast gold production at Red Lake to between 460,000 and 510,000 ounces in 2012.

Over the balance of the year, we'll continue to evaluate the impact on Red Lake's long-term production profile and the timing of the de-stressing activities in accessing High Grade Zone reserves. And increased levels of infill drilling will be carried out in the Footwall Zone to improve the grade projections in this area. In two further study of these issues of advance, the range of production expectation for the Red Lake beyond the current year should reflect production similar to the range provided for 2012.

I'm pleased to report that we continue to see success on the exploration side at Red Lake. Several drill intercepts have confirmed the extension of consistent high grade mineralization between the 52 and 55 levels. Drilling is also indicating the presence of high grade intercepts deeper at the 57 level.

Additionally, new drill result in previously unexplored area west of the High Grade Zone, have outlined a potential new zone extending above the 52 level and remained open vertically into the west. This area will be the focus of drilling over the remainder of the year, as it has the potential to increase mining flexibility due to proximity to the existing infrastructure at the higher elevations.

At Peñasquito, our second quarter gold production totaled 103,800 ounces, a 51% increase over the first quarter and cash costs of negative $425 per ounce. We set another quarterly production record of performance with lower than expected as no throughput was expected by a limited water supply from the start of June. Ore grades were generally higher than the prior quarter, a very good recovery results.

The water shortage at the side has been exacerbated by drought conditions in the region, where rainfall for the last three years has been well below the long-term annual average. Our immediate efforts to deal with this issues is both drilling 10 more wells in an around the pit to be completed in November, and outfitting two additional wells in our nearby well field.

We're already exploring for additional water more broadly across the basin containing the aquifer, where we hold the water rods. And we're also looking at ways to increase the efficiency of water used generally project-wide.

The current water capacity is expected to limit planned throughputs between approximately 98,000 and 107,000 tons per day over the balance of 2012. This is expected to result in gold production of between 370,000 and 390,000 ounces in 2012.

Production of the by-product, silver, expected to total between 23 million and 24 million ounces. Zinc production is expected to total 310 million pounds to 325 million pounds. And led production is expected to total 155 million pounds to 160 million pounds in 2012.

At the two district projects near Peñasquito, Camino Rojo and Noche Buena, we continue to advance the studies, which are currently in progress and we expect both to be completed during this quarter. At Camino Rojo, we're currently studying the potential for stand-alone oxide heap leach operation, but ongoing drilling has demonstrated that sulphide mineralization is also present and extends a depth for at least 550 meters west of the Represa resource.

Construction is now essentially completed in Pueblo Viejo, and first gold production is expected in just a few weeks. At the end of the second quarter, 16 million tons of ore was stockpiled containing approximately 1.9 million ounces of gold.

During the quarter the construction in tailing facility advanced to an elevation in excess of 175 meters. And the site is now connected to the National Power Grid and has also secured backup supplemental power on the site. Goldcorp's 40% share of production this year is estimated to be between 68,000 and 85,000 ounces.

At the Cerro Negro project in Argentina, constructing continues to advance towards initial gold production later in the second of 2013. The engineering procurement construction management activities are progressing and were 36% complete at the end of the second quarter.

In the in the Eureka vein, portions of the vein were excavated as part of the mine development activities. And an ore stockpile of approximately 12,000 tons and over 10 grams per ton of gold and 200 grams per ton of silver was established. Excavation of the declining ramps into the ore bodies at Mariana Central and Mariana Norte commenced and it conjunction with Eureka, mining from these ore bodies will provide the 4,000 tons a day of ore feed to the mill during operations.

The excavation for the plant facilities were complete with anchor bolts for the plant building installed and the ball mill shell arrived in Argentina recently. Exploration at the site continues to yield very impressive results, particularly in the Mariana Norte vein structure, where reserve growth potentially appears to be very hard.

The Cochenour in the Red Lake district also continued to advance well. The widening and concrete lining of the historical Cochenour shaft continued through the quarter with progress to a current depth of 342 meters. The haulage drift being driven from Red Lake is now over 51% complete, and two drills continue to test the under explored ground along the haulage drift route.

Drilling also continues from the surface with three drills to define to the upper portions of the Bruce Channel deposits and additional resources at the Cochenour mine. As our understanding, the details of the Cochenour ore body growth and these drilling results will continue to refine the mine development plan.

Construction continues to advance at Éléonore in Quebec. The Gaumond exploration shaft has reached the depth of 701 meters, representing 97% completion of the shafts vertical depth. Provisioning and hoisting in shaft facilities is expected to be complete in the fourth quarter of this year, which will then enable to commence but of hard level development work from the 650 meter level.

Most importantly, we commenced underground exploration drilling for the first time in the history of this subject, when we commenced drilling from the 650 meter level during the quarter. This was approximately three months ahead of our original schedule.

The exploration ramp has reached 1,500 meters in length corresponding to a vertical depth of 230 meters below the surface. Definition drilling of the upper sections of ore body is schedule to take place from the ramp commencing this quarter.

Engineering work is progressing and is on scheduled to support construction in the third quarter of this year and major equipment and long lead-items have been ordered. Foundation for the production shaft has been completed and structural steel erection is commenced.

Full-faced shaft, sinking of this second shaft is expected before yearend and this work will be done in parallel with the construction of the head frame under engineered bulk head. The 120 KV substation was energized as planned in July. And since this exploration completed more than 15,000 meters of drilling for the quarter for a total of almost 30,000 meters year-to-date.

I'm very proud of the fact that during the quarter, the Éléonore team was awarded the F.J. O'Connell Trophy by the Quebec Mining Association for their 2011 safety performance. So I'd like to pass on congratulation to the entire team at Éléonore, to helping make Goldcorp safe enough for our family

And with that, I'll turn out to Lindsay for the financial review.

Lindsay Hall

Thanks, Steve. Our financial results in the second quarter were impacted by the challenges experienced at Red Lake continues to resulting in lower than expected production. While our other lines met of expectations, at Alumbrera sales were deferred due to the imposition of a new export sales repatriation requirement imposed by the government of Argentina. The repatriation agreement was recently amended and the sales of the deferred shipment resume this quarter.

For the quarter, we generated $1.1 billion of revenue and approximately $520 million of operating cash flows for working capital. With an average realized gold price of $1,590 per ounce and by-product cash cost of $370 per gold ounce, capturing gross margins of some 77% of the realized gold price. $630 million was also invested at our operation and capital project this quarter.

By-product cash costs amounted to $370 per ounce in the second quarter compared to $251 per ounce in the first quarter of 2012. The increase is primarily due to lower gold sales and lower by-products sales credits. Lower by-product revenues experiencing the second quarter were primarily a result of the temporary suspension of shipments at Alumbrera, lower metal prices as well as negative provisional price adjustments in the second quarter from the settlement of Peñasquito and Alumbrera sales of concentrate made during the first quarter.

On a co-product basis, cash cost decreased to $619 per ounce compared to $648 per ounce in the first quarter, primarily due to the temporary suspension of shipments by Alumbrera during the second quarter, which led to more costing inventory, lower YMAD payments, and lower export retention taxes payable as well as lower operating cost at Peñasquito and the favorable impact of foreign exchange movement.

Net earnings for the second quarter amounted to $268 million compared to $479 million in the prior quarter. Adjusted net earning for the quarter amounted to $332 million or $0.41 per share compared to $404 million or $0.50 per share in the prior quarter.

If we calculate adjusted earning, we adjusted our reported net earnings of $268 million by deducting the non-cash derivative gains of $63 million, primarily associated with our convertible debt and adding back the company share of losses and impairments on equity investments and marketable securities of $75 million.

And as always remove the effect of the non-cash foreign exchange losses on the translation of deferred income tax assets and liabilities of $53 million from the book tax provision. The detail calculation of our adjusted net earnings is disclosed on Page 43 of our MD&A.

Consistent with previous quarters, we did not make any adjustment for non-cash share-based compensation expense, which amounted to $22 million or $0.03 per share. The income tax provision included and our calculated adjusted earnings for the second quarter has an applied effective tax rate of 18%.

For the most part, to calculate this effective rate, the book tax provision of $128 million for the quarter is adjusted for the deduction of foreign exchange losses and deferred taxes of $53 million. And the earnings before tax of $396 million is adjusted to remove the impact of the $63 million of net mark-to-market gains from derivatives, representing permanent differences as these items will never be taxable and the impact of the impairment of equity investments and marketable securities of $69 million. The lower rate as compared to our guidance of 30%, is due primarily to the settlement of certain tax cut positions during the second quarter of 2012.

Now that we have six months of actual results in hand, we have reduced our annual guidance for income taxes for the year to 28% from 30%, which to reiterate will be the applicable tax rate for our full 2012 full year results.

Turning to provisional pricing, the impact of Peñasquito in the second quarter was a negative $8 million compared to a positive $27 million in the prior quarter, reflecting a 3% decrease in realized prices and the lower volume of sales at the end of first quarter, subject to pricing adjustments during the second quarter.

At the end of the second quarter of 2012, Peñasquito's provisional pricing volume will reflect 48,000 of ounces of gold priced at $1,599 per ounce, 3.2 million ounces of silver priced at $27 per ounce, 24.4 million pounds of led priced at $0.81 per pound, and 42 million pounds of zinc priced at $0.84 per pound with approximately a third subject to a two-month provisional pricing period.

Alumbrera was impacted by negative provisional pricing of $10 million, mainly due to lower realized copper prices. And as at June 30, 2012, we have 13.8 million pounds of copper priced at $3.48 per pound. Alumbrera had approximately 102,000 tons of concentrate inventories available for shipments, which resumed on July 16, 2012, with 30,000 tons shipped on July 17, and another 32,000 tons on July 23. So we do expect to ship the remaining deferred sales during the second half of 2012.

As to our currency hedging program, for the reminder of 2012 the company holds Canadian dollars cost for $72 million and an average rated of $1.2. Canadian dollar and forward contract to sell $78 million at par to the U.S. dollar, Mexico calls for $108 million at an average rate of $12.90 and peso forward contract to sell $120 million on an average rate of $13.31.

Operating cash flow before working capital were $520 million or $0.64 per share compared to $408 million or $0.59 per share in the first quarter. The increase in operating cash flow is due primarily to the impact of higher income taxes included in the first quarter of 2012 pertaining to the amount of cash taxes we expect to pay in respect to Red Lake's 2011 earnings.

As progress at our capital projects continue to ramp up, we made capital investments of some $630 million during the quarter, approximately $240 million in our operating mines and $390 million at our growth projects. Included in the $390 million expense is $118 million of Pueblo Viejo, $101 million of Cerro Negro, $91 million at Éléonore, $32 million at El Morro and $25 million at Cochenour.

As mentioned in our second quarter MD&A, we increased our full year 2012 guidance for capital expenditures to $2.7 billion from$2.6 billion, primarily to recognize the impact of the timing of capital expenditures of Pueblo Viejo that were planned in 2011, but occurred in 2012.

At the end of the second quarter, we have $1.2 billion of cash from which we'll fund our capital targets in conjunction with cash flows generated from existing operations. This along with our $2 billion revolving credit facility and over $1 billion in marketable securities, maintains our strong liquidity and financially strong balance sheet.

With that, I'll turn it back over to you, the operator, for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Jorge Beristain of Deutsche Bank.

Jorge Beristain - Deutsche Bank

I guess, my first question is for Steve. Do you have an update on what the new wells would be costing at Peñasquito in terms of incremental CapEx or like?

Steve Reid

Yes. We've added $25 million to our second half capital estimates for Peñasquito to cover those wells.

Jorge Beristain - Deutsche Bank

And a question for, Lindsay. What is the carrying value that you're now marking your Thompson Creek stake at both on a per share basis and in aggregate dollar amount?

Lindsay Hall

I think, Jorge, the value is about $80 million.

Jorge Beristain - Deutsche Bank

Lastly, just a question for Chuck, in terms of the buy versus the build pendulum, you guys have managed and navigated your CapEx a lot tighter than a lot of your peers. But, again, I kind of ask this question every few quarters, has the decision of buying versus build, you think the pendulum is swinging in favor of buying at this point given the numerous cost of overruns we're seeing in the mine landscape out there.

Chuck Jeannes

I think, it's probably fair to say that the pendulum is moving, yes. But there is certainly not absolutes here. I mean, you have to look at the particular asset involved and see what the market price is and what our perception of value and whether you can add value to our shareholders by doing a transaction for a already build project.

And then on the other side, we as an industry have learned a lot over the last few years about capital cost escalation and I think we can be more sophisticated in our risk discounting on new projects, such that that if you put those two factors together, yes, I would say the pendulum is swinging aback a bit.

But it still comes down to looking at individual opportunities and see if you can make something happen at a price that's adding value for your shareholders.

Operator

Our next question is from Alec Kodatsky from CIBC.

Alec Kodatsky - CIBC

I just had a couple of questions on slide 12, which is quite helpful. Just firstly, wondered if you could maybe just indicate what the scale is, in terms of how long the de-stress logs actually are between the different mining segments?

Steve Reid

And you're meaning vertically between the two levels?

Alec Kodatsky - CIBC

I'm just sort of curious what the distances are?

Steve Reid

The de-stress itself is about 80 or 90 feet. And that's at the levels we're dealing now at around the 45-47 levels. And so between the sublevels outside of that, we're adding an additional 40-50 feet. And we work in feet, given Red Lake's history.

Alec Kodatsky - CIBC

Just a follow-on on that, and I guess, over the last few weeks and in probably months, just curious as to how you're thinking it may have evolved or be evolving with respect to sequencing with sort of altering, I guess, the sequence that I have presented here in order to improve rates and what's scope there maybe to do that?

Lindsay Hall

What we've been doing is looking very specifically at our methodology, firstly. Because getting the methodology rights, means you have the ability to see things coming as things are moving.

So our methodology is very much focusing around ensuring that the holes are not squeezing together. To make sure the holes are surveyed so there is no deviation as we're drilling and those sort of things.

The actual scheduling itself, the de-stress pieces last for about 9 to 12 months in total. So as we describe the full issue here is just not that in any way harm the old body, it's the sequencing and then when you have multiple of these happening at one-time, your ability to mine at a high production level is reduced. So scheduling the mixed of these and how they are all done in sequence, we have to make sure that they are not scheduled, so that any overlap.

And if some start to overlap, we provide ourselves more flexibility. And that more flexibility points to some of the recent discussions and discoveries where we've actually found projections from lower down in the yield, projecting up past their existing workings. That would provide us more flexibility generally.

Alec Kodatsky - CIBC

So it's bit of a process as well or perhaps put the trial and error to see sort of what you'll be capable of doing, but is it in essence fair to say that you're already sort of as tough, as smart as you expect to be over the coming years?

Chuck Jeannes

We're happy with the fact that we're actually through the 41 level and that's done. And we're already starting to see the high-grade coming from that we're trying to access from the 41 level. 45 is going very well. And as we've said, we expect it to be finished this year. Now, having done two of them this quarter just to be clear, and the fact that we were doing two of them together was what was causing us the issue.

For a while then, after that we would not be doing any. And if you look at our full year guidance for Red Lake, against their first half actuals, the right of production for the second half is actually very strong as a result of that.

Operator

Our next question is from David Haughton of BMO Capital Markets

David Haughton - BMO Capital Markets

Steve, you're saying that part of the problem is that you had two of these open slots at the 41-45 level and that that was creating more de-stressing problems than you normally would?

Steve Reid

Not so much de-stressing problems. It's really the sequencing and if we're looking at way, how did we get into this situation. We were starting to see the lights, like in last year but we didn't pickup on the implications of if they weren't done back in late last year that we're going to overlap significantly together and therefore limit our access to high grades.

David Haughton - BMO Capital Markets

Can we forward at Red Lake. I think I heard you correctly that the current guidance is what we should be thinking about for next year and the year beyond, the 0.5 million ounce kind of production level?

Chuck Jeannes

David, we want to be very clear in that. We're now working on the mine plans for our 2013 budget and our updated life-of-mine plans. But we don't have those available today. We're just trying to give you the best kind of guesstimate we can at this point, and based on what we know today we think, it's prudent to consider that we'll have the same kinds of rates of advancement in the future, in developing these de-stress lots, as we've had this year. So that's the best we can tell you at this point and we'll give you more information as the mine plans are developed.

David Haughton - BMO Capital Markets

Prudence is certainly what the market is in the mute for at the moment. Looking at 2015, I guess that that will step up, that's the proposed date of Cochenour coming on stream. Is that still accurate?

Steve Reid

We don't see anything changing that significantly at the moment, David, and in fact, what we are looking to do, as we've discussed a number of terms is look at the transition between the Campbell and Cochenour. And that the Cochenour grade is higher than the Campbell grade, so the sooner we can get into it, the sooner we mine that transition and how we deal that overlap is exactly what we're looking at.

So yes, the soon as a better, and yes, that there is no change at this point.

David Haughton - BMO Capital Markets

Yes, but without compromising that the long term viability at Cochenour, just by rushing out presume?

Steve Reid

Absolutely.

David Haughton - BMO Capital Markets

Over to Peñasquito, most of that drilling of the wells would be undertaken for the balance of this year. Are you then happy that in 2013 we can see the throughput getting up to that 130,000 tons a day level?

Lindsay Hall

David, just a slight clarification, as we said in the press release the well drilling will go through the rest of this year, and into the beginning of next year. And mainly you can break that down to where we're doing the doing the de-watering wells, additional de-watering wells in and around fit area, as soon as we can presently and then we'll be doing additional wells in a well field, further into the future.

And this is going to be an ongoing process. It's not is though, it will be done in February. We'll continue to plan ahead and look for additional sources of water, as we go forward and so that's basically the sequence of our search and efforts to acquire new water.

David Haughton - BMO Capital Markets

So will the deep watering wells be sufficient, then, to provide the water requirements for the plant under normal circumstances or you then need to go further a field into the additional aquifers?

Chuck Jeannes

In the longer term, we will be looking further field, because as you're aware the deepwatering is designed to do exactly that, on the deepwater and then keep it away. And we're not dealing here with a very, very large course aquifer. We're dealing with ground conditions at the operation itself.

So we would expect that its sustainable rate is not as large as we would wanted in the long term. So hence, as we said, we're already exploring elsewhere across the places.

David Haughton - BMO Capital Markets

And you've got the permits to be able to extract that water to the level that you need?

Chuck Jeannes

Yes, we did.

David Haughton - BMO Capital Markets

Down to Cerro Negro, indication in the text of some cost pressures, you're still sticking to your timeline. Is there still a fluid situation that you're going to be monitoring as you go without necessarily being certain of the CapEx provisions that you've got at the moment are adequate?

Lindsay Hall

Yes, David and we tried to be very clear in our disclosure with respect to all capital projects that we do a full reanalysis of the capital spending on an annual basis, in conjunction with the budgeting process, and then try to stay on top of that, obviously as best we can on an ongoing basis.

But in terms of giving new guidance, we'll do that after we get through the budgeting process, right now but clearly we've said in our MD&A and it's the case that we are not immune from capital cost escalation that you've seen elsewhere in the industry, and when we have additional information then we'll provide it to you.

David Haughton - BMO Capital Markets

I guess, at this stage I haven't tried to repatriate funds out of Argentina or that you would have cash coming to you from Alumbrera. Have you tested that or is it still hypothetical for you at this stage?

Chuck Jeannes

Certainly, David, you're referring obviously to Cerro Negro. We're putting money into the project, but at Alumbrera with the delayed shipments, we weren't a position to actually pay dividend anyways, but we expect that we'll be able to pay dividend at Alumbrera near the end of the year.

David Haughton - BMO Capital Markets

Would you expect to get that money out of country or would you just keep it in country to reinvest in Cerro Negro.

Chuck Jeannes

Yes. We'd use pesos, and since it's in pesos around Alumbrera, we'd use the pesos to reinvest into Cerro Negro.

Operator

Your next question is from Joung Park of Morningstar.

Joung Park - Morningstar

I noticed that the grades are down again at Red Lake. Obviously, as a result of the difficulties you're having accessing the High Grade Zone, so. Just one question for you, what's the mix that you're getting from the High Grade Zone this quarter compared to from the other zones and how does that compare to historical averages?

Lindsay Hall

Let me just say, we do not have or see a problem with our grade reconciliation in the High Grade Zone at all. As we said, a matter of delayed access into the stopes that we want to get into in the High Grade Zone, and so the overall mix means there is less production of high grade material coming into the mill.

And so you're seeing an overall lower grade, but that's due to where the tons are coming from not any issue with the grade of the material in the High Grade Zone. Steve can give you some more detail on the actual mix of where the material came from.

Joung Park - Morningstar

While Steve looks that up, just had one more question on Peñasquito, well, mainly two questions. I know you guys are drilling the wells to get more water, but if you guys have more rainfall then would that alleviate the situation?

Chuck Jeannes

More rainfall would certainly help, yes.

Joung Park - Morningstar

But would it be sufficient?

Chuck Jeannes

I can't say categorically. There are lots and lots of hydrologic modeling going into all this and the performance of the basin, and recharge and so on. What I'm telling you is all of these efforts are being combined to refine our estimates on the recharge and the basin's performance. So that's all on going. But would more rainfall help? Absolutely, yes.

Joung Park - Morningstar

Then there was obviously discrepancy between the tons mine and process during the quarter, again, because of the water shortages. So I'm just wondering how this, I guess I'm presuming stock pile door will be worked down? Should we expect growth temporary spike once you guys get more water to run the plants to full capacity?

Lindsay Hall

I'm not sure which number's you're referring to exactly but if you're referring to the fact, are we mining more ore than we're processing. The answer is sometimes, yes and in those circumstances, guess, what we will always do is process the higher grades first and the lower grades second.

So absolutely, once we have additional capacity, we'd pull in any stock piles that we have. So thank you for this question about make up of the Red Lake production.

What I can tell you is this is somewhat lower than we would expect from the High Grade Zone but it's roughly 50% of the High Grade Zone, 15% out in the Footwall zones, and 30% out in Campbell. Now, that's what it was quarter. And normally, we'd be looking for as we said, a little more out of the High Grade Zone but that's more in terms of productions.

We were actually looking for little more out of both of them as well. As we described about at de-stressing being complete at 41 and we'll advance on 45, the shortfall that we will experience will make up the lot of during the second half and that will be very much High Grade Zone focused.

Operator

Our next question is from Steve Butler of Canaccord Genuity.

Steve Butler - Canaccord Genuity

Steve, when we do the math, somewhat on the sort as it take the midpoint of the guidance for 2012 for Red Lake and versus the first half and all has been equal on throughput. We know, we have to get to grade of about 18 to 20 grams per ton. Can you say, is the grade coming up in early July or do you still need to wait for later this quarter and Q4?

Steve Reid

As I've indicated in the opening here. Yes, we have seen some improvement in grade, but it's only from the performance of the 41 level so far. Once we've got the additional add-on from the 45 as well, and we're well into, we should see it so. So if you're asking where the second half is two quarters, the fourth should be better.

Steve Butler - Canaccord Genuity

And Steve, in the analyst session that you had few months ago, the Red Lake was supposed to be at least the tons per day out of the mine anyway was 2,700 and 22 tons per day, not to be exact but that was the exact number. Will you fill still the mill at that sort of level or is it better to run here at 2,500 tons per day, as you've been closer to that market in the first half?

Steve Reid

Our efforts generally are to fill the mill but as you'd be aware is when we do that we're always doing it when the mining the High Grade Zone as fast as we are capable at every point in time. So if there is additional capacity, we'll add it from other lower grade areas. Hit the bottom line as we would add other material as much as we can and the point here is we are mining right to constrained, and that's what's driving mill number not the mill itself.

Steve Butler - Canaccord Genuity

And last one, Lindsay you mentioned about 102,000 tons at Alumbrera and inventory are build concentrated stock piles, if you will inventory, 30,000 plus another 32,000, Will you ship the most of the 100,000 here in the third quarter or will some of that will linger into Q4?

Lindsay Hall

I think it will linger a bit in the Q4. Steve, probably everything is going to get shift in the second half.

Operator

Our next question is from Anita Soni of Credit Suisse.

Anita Soni - Credit Suisse

My question is with regard to some of the rock mechanic studies that are going on with regards to the mine plan. How are they looking at further down side risk? What kind of mitigation measures would they'll be looking at and if the situation does get worse, then what you're currently anticipating?

Chuck Jeannes

Are we talking Red Lake, Anita?

Anita Soni - Credit Suisse

Yes.

Anita Soni - Credit Suisse

Yes, we are looking at this but what I could tell you this has been an ongoing process so several years. As I said, I'm not too concerned with our actual mechanism and so on. Up what we're dealing primarily here is the sequencing and making sure that as we get things right, and we focus on the detail, that we try and do a couple of these de-stresses together, which is ain't going to slow down our access to the higher grade that they actually liberate by getting them completed.

So yes, we are looking at all these. Yes, we do have expertise from out of country and around the world and we stay in touch with that expertise regularly that we always have been.

Anita Soni - Credit Suisse

You're confident that you're not going sterilized any of the ore in thee revised mine plan, I mean how are you guys coming to that conclusion at the stage if the studies are ongoing?

Chuck Jeannes

I think it's important that you remember that the de-stressing is working. It's just advancing slower than we expect. And we talked about how if there is an increase in seismic activity. It requires us to get out of the heading until it settles down.

If there are holes, that holes that we drill before they get loaded, they can collapse and have to be re-drilled so you can blast and advance your heading. There are these things like that are slowing us down but we haven't seen activity that has taken us out of areas that have sterilized our ability to get into portions of the High Grade Zone. That hasn't been the problem.

Lindsay Hall

And on top of that, I'll just add, Chuck, that as we go through the forward projections here we can also look at different methodologies if we like, however it's those methodologies, what we're looking at is how quickly and what is their mining right that we can sustain in that area, while we're moving stress at the same time. So to me, it's more about the sequencing better than any actual concern about leaving material behind.

Anita Soni - Credit Suisse

I guess, I was just thinking that one of the mitigation measures that for reducing production rate, doesn't seem to be working or isn't working as quickly as you want it to start leaving wider pillars, and I guess if the question becomes, can we go back and can we get those pillars, is that something that you're looking at?

Steve Reid

Not specifically, but what I can tell is we are looking at lot of things and efficiency is the name of the game here.

Operator

Our next question is from George Topping of Stifel.

George Topping - Stifel

Couple of quick questions, On Barrick, they cited labor inflation as being the main culprit for their CapEx blowout down at Pasquelama. Can you give us an indication of what labor inflation you are seeing particularly in Argentina, that's seems to be the worst?

Chuck Jeannes

George, actually if you look back you'll see that at beginning of the year we increased our capital estimate at Cerro Negro from $750 million to $800 million, and we have cited in-country inflation in doing that, and that was primarily labor inflation.

We also said and we continue to say in our MD&A that we haven't yet included any inflation factor for 2013 because it's very much in moving target and also depends upon any future devaluation of the peso. So that is the status of our project.

And the as far as the actual grades, I know that Barrick provided some specific rates. I don't have those available, but we're certainly and have seen things in the 20% to 25% range in terms of inflation for labor in Argentina.

George Topping - Stifel

And of the construction cost, I know its price specific, but do you have an indication of how much of the over the $850 million CapEx, is labor is 25% of that or near about?

Lindsay Hall

We're going to have to get that for you. I don't have it here. I can say that, we are advancing well and we're up to over $500 million spending committed. So as we do that the amount that is subject to additional inflation is being reduced.

George Topping - Stifel

The MD&A talks of 80% of the equipment that's pretty much in-country or in its way agreed to, what's outstanding and is there any that have issues?

Steve Reid

The 80% applies to the primary equipment. We'd looked at all the big stuff, the things that we were concerned about, but needed to get moving and it's all moving.

The things that are less in terms of the project expenditure, primarily relate to now smaller materials, the kind of materials that you would get, that don't relate to major pieces that need to come from elsewhere. And also, labor as you've mentioned. So it's very labor intensive, the back half of the project.

George Topping - Stifel

So what I'm getting out is do you have all the equipment you need to start production at this mine, agreed to come into the country or in-country?

Steve Reid

We've not said all and we should be clear that that 80% doesn't mean that's all landed in the country. It means that there is lot of it in the country and as we said, the ball mill, just arrived just a few days ago. It's on the way. We're not seeing any issues at the moment.

Operator

Our next question is from Tony Lesiak of Macquarie.

Tony Lesiak - Macquarie

On Peñasquito, you spooked your efforts in the finding more water, can you talk about your efforts to used less?

Steve Reid

Yes, absolutely a lot of that, Tony, revolves around getting more reclaim from the tailings area. We're looking at improving the deposition there. We have cyclones and storm at the Thailand facility where we're looking to improve the operation of those cyclones which freeze out the water in the tails dam, because two-thirds of our water is actual replant water and comes from the tailings.

So we need to make sure for that's separation at tailings areas is more efficient, because that's actually a lot cheaper and lot more efficient than sourcing new water.

Tony Lesiak - Macquarie

And when do you think you'll be in a position, now if there is any opportunity to increase your reclaimed water?

Steve Reid

We're working on it continually, and as Chuck has said, in terms of a number for next year or how things will plan that given that we are working on it continuously will build whatever information we have into next two systems.

Tony Lesiak - Macquarie

Moving to Cochenour, you mentioned in your introductory comments that you are in the process of putting out a study on the orientation of the Bruce Channel deposit. I mean do you see based on the work that you've done so far, that there could be a change in the mining method or a potential impact to timing or CapEx or in the other parameters?

Lindsay Hall

What we're doing, Tony, is we're incorporating information as we go along, because you'll understand that relative to what we believe, decided the mine to be in the future. The actual real information that we have is somewhat limited by the drilling from the surface. Just like we're at Éléonore, we would love to get underground and be drilling from underground much closer to the ore body.

As we looked at that, and then one of the things that we are considering is, do we deepened the shaft at Cochenour to get the shaft down more into the meet of the ore body. It's something that we looking at we considering it. We don't have the answer, yet. Therefore, example is one of the things we're looking at and why we're looking at it.

Tony Lesiak - Macquarie

So basically what you're saying is you want to maximize the concentration of ounces. So that nothing has really changed?

Lindsay Hall

No, not at all. And you asked about mining method, and we don't see any change in method at the moment. But that's it, there is a lot of the ore bodies that we still need to understand a lot better.

Operator

Our next question is from Anita Soni of Credit Suisse.

Anita Soni - Credit Suisse

I just had a question with regards to, I can't remember the phraseology but you're talking about I guess, focusing a little bit more in capital allocation. Which of the projects in your pipeline you see are you view as core? And give us an idea of which ones are getting some intensive scrutiny?

Steve Reid

Anita, we certainly feel very strongly that nothing is going to change in terms of our allocation of resources and effort. At Pueblo Viejo it's almost done. Cerro Negro, we've talked a lot about, it's on track for late 2013. And then we've got Éléonore, and Cochenour that are going full speed ahead for late 2014 and we don't see any issues there.

I supposed the one that we need to have another look at is El Morro because we now have the opportunity to do so. Our permit has been suspended by the Supreme Court pending. There is additional effort for consultation with local community and while that's being done we will on the optimization of the project and look at alternatives, and make sure that's where we want to spend our next $3.8 billion, but that's exactly what will take the opportunity to do over the coming months.

Operator

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

Charles Jeannes

Thank you operator, and thanks everybody for joining us today. I know it's been a full morning for you with other reporting today as well. So I'll keep it short. Thanks very much and we look forward to talking to you after the third quarter.

Operator

Thank you, gentlemen. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.

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's CEO Discusses Q2 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts