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

Executives

Jeffrey Wilhoit - Vice President of Investor Relations

Charles A. Jeannes - Chief Executive Officer, President and Director

George Burns - Chief Operating Officer and Executive Vice President

Lindsay A. Hall - Chief Financial Officer and Executive Vice President

Analysts

Brian Yu - Citigroup Inc, Research Division

David Haughton - BMO Capital Markets Canada

Anita Soni - Crédit Suisse AG, Research Division

Greg Barnes - TD Securities Equity Research

Joung Park - Morningstar Inc., Research Division

Steven Butler - Canaccord Genuity, Research Division

Paretosh Misra - Morgan Stanley, Research Division

Alec Kodatsky - CIBC World Markets Inc., Research Division

Goldcorp (GG) Q3 2012 Earnings Call October 25, 2012 1:00 PM ET

Operator

Good morning, [audio gap] Goldcorp Inc. 2012 Third Quarter Conference Call for Thursday, October 25, 2012. Please be advised that this call is being recorded. I would like to turn the meeting over to Mr. Jeff Wilhoit, Vice President Investor Relations of Goldcorp. Please go ahead, Mr. Wilhoit.

Jeffrey Wilhoit

Thank you, and welcome, everyone, to the Goldcorp Third Quarter Earnings Conference Call. Some of the senior management in the room with me today are Chuck Jeannes, President and Chief Executive Officer; Lindsay Hall, Chief Financial Officer; and George Burns, Chief Operating Officer. For those of you participating on the webcast, we've 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 cost and timing of the development of new assets and 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.

Charles A. Jeannes

Thanks, Jeff, and thanks, everyone, for joining us today. I'm pleased to report that improved operating performance in the third quarter, combined with strong realized gold prices, resulted in Goldcorp's highest quarterly revenues ever, totaling $1.5 billion. This led to strong adjusted net earnings of $441 million and operating cash flows before working capital changes of $687 million.

Following the operational challenges we experienced in the first half of 2012, these improved results demonstrate the resilience and stability of our overall mine portfolio. There's always significant work to be done but we're confident that we can meet the challenges and continue to deliver on the unique value proposition that Goldcorp has represented over the long term.

Turning to the operations. At Red Lake, mining has advanced in the High Grade Zone following the completion of de-stress slots at the 41 and 45 levels. These cuts successfully reduced the seismicity that had previously delayed access to certain production headings, and you can see this beginning to be reflected in our increased grade in production for the quarter.

While it took longer to complete this work than we originally planned, we expect to benefit from the experience we've gained, as well as improved procedures now in place when we encounter seismicity deeper in the mine. We remain confident that these conditions will be manageable over the long term.

Ongoing exploration success, both at depth in the High Grade Zone and in a newly discovered zone, underscores the fact that Red Lake remains a fantastic deposit and one that will continue to be a cornerstone producer for us for many years to come.

At Peñasquito, we were pleased to report strong production in the third quarter driven by higher throughput, grades and recoveries. This resulted in earnings from operations of $245 million in the quarter, an outstanding result and the highest cash generator in our portfolio. What's more impressive is that this financial performance was achieved despite continued water availability issues, as we discussed last quarter. And I want to take this opportunity to address what may be a misperception in the market regarding the nature of Peñasquito's water supply in the aquifer. This aquifer is classified as alluvial in nature. That means that our well field, at our well field, we're pumping water from gravel and sand rather than from bedrock.

And the absence of significant rainfall in the Cedros Basin over the last few years has certainly exacerbated the challenges we've faced with declining flow rates in our wells. Future rainfall would contribute to the recharge of the basin and help those flow rates, but rainfall is a secondary consideration when it comes to our long-term water supply. Our goal is to ensure sufficient water for the long term, not just for Peñasquito but also for our other district opportunities led by Camino Rojo.

To address this, we've initiated a water and tailing study in the third quarter that will form the basis of a comprehensive water strategy at Peñasquito which we expect to complete in the first half of next year. In the meantime, the team will continue to focus on the exploration for and development of additional water wells in the well field and the dewatering areas for the pit. Our current water availability remains sufficient to achieve our guidance of between 370,000 to 390,000 ounces of gold produced in 2012.

As a final note on Peñasquito, a major focus is on the continued optimization of every facet of the operation. This emphasis on efficiency improvements and cost containment represents unrealized financial potential at this still-young mine.

Peñasquito, however, is no longer our newest mine, with Pueblo Viejo in the Dominican Republic achieving initial gold production in the third quarter. PV is on track to achieve commercial production at year end and is positioned to generate average production for Goldcorp of between 415,000 and 450,000 gold ounces in its first 5 full years of production.

The remainder of our mine portfolio delivered largely in line with expectations and we were certainly pleased to see the resumption of shipments of concentrates at Alumbrera during the quarter. I'm also pleased to report that Goldcorp's commitment to sustainability has once again been recognized through our inclusion in the Dow Jones Sustainability North America Index. Goldcorp was named to the Index for the first time in 2010, and it's gratifying to see this recognition for the hard work of a lot of people around the company focused on creating sustainable value for all of our stakeholders.

The third quarter saw continued progress at our growth projects as well. With PV transitioning to mine status, Cerro Negro becomes the next project positioned to contribute to Goldcorp's leading growth profile. The progress at Cerro Negro has been steady and all major mechanical equipment to be imported is now at the site or in country. First gold production there remains on track for late 2013.

Moving up to Québec in Canada, the Éléonore project continues to advance impressively. The Gaumond exploration shaft has now been completed and is transitioning to normal operating mode. This is an exciting development at Éléonore because it allows us to undertake cost effective exploration of the deeper portions of the deposit, and that will allow us to refine our resource models and mine plans. At Cochenour, development progress continues to be very good. A steady focus on the orientation of the Bruce Channel deposit and providing updated project capital expectations is now under review and we expect to include the study results with our guidance update release in early January.

The El Morro project in Chile remains suspended and most site activities have been discontinued and the equipment demobilized. Ongoing site activity is currently limited to the collection of information to support permit applications being prepared for submittal following the suspension being lifted. This period is also affording us the time to review the project and evaluate opportunities to optimize the development plan. Like all of our mining investments, El Morro will be required to meet strict financial discipline standards and provide a rate of return that meets our expectations.

In my discussion with investors this fall, the concept of capital discipline has been a common topic. And in some cases, it's been suggested that growth and financial discipline somehow can't coexist. We certainly reject that notion at Goldcorp. We've never been interested in growth at any cost or growth in gold ounces without regard to financial returns. Instead, we've always required rates of return in excess of our cost of capital for our capital investments. In short, we believe our high-quality, high-return growth projects now under construction provide a key competitive advantage for Goldcorp and our shareholders. This financial discipline is translated into one of the strongest balance sheets in the industry. We ended the quarter with $0.9 billion in cash and cash equivalents down, in addition to our undrawn $2 billion credit facility.

In light of the operational improvements at Red Lake and additional certainty related to the near-term water availability at Peñasquito, our 2012 guidance remains on track for between 2.35 million ounces and 2.45 million ounces at cash cost between $310 and $340 an ounce on a by-product basis and $625 and $650 per ounce on a co-product basis. So if you do the math, subtracting our actuals for the first 3 quarters of the year, you'll see that we're looking forward to strong fourth quarter production.

As to 2013 and beyond, we are currently in the midst of our planning and budgeting process and will provide 2013 guidance in early January 2013.

With respect to gold price, we're now heading into what has historically been a very strong period for the gold market. Driven by holiday buying in India combined with a stronger rupee, seasonal physical buying in the West and continued central bank purchases, we expect strength in the gold market this quarter. As we're also expecting growing gold production, I look for these factors to combine to generate strong financial results as we end the year.

And with that, I'd now like to introduce our recently appointed Chief Operating Officer, George Burns, to take you through a summary of the operations.

Many of you are familiar with George through his longtime participation at our Investor Days and site tours in his previous capacity heading up first our Canada, U.S. operations and subsequently our Mexico operations. As a result, George possesses a very strong understanding of our most important assets, as well as a clear plan as to how to maximize the potential that exists within our asset base. I enjoyed working closely with George and look forward to his contributions as a key member of our executive team. So George, with the expectations now set sufficiently high, I'll turn the call over to you.

George Burns

Thanks, Chuck. I'm pleased to be joining you today on the call. We have an outstanding collection of mines and projects, high quality, long life with strong, dedicated teams. My primary focus is on supporting our emphasis on execution and extending Goldcorp's record of safe, responsible operations.

Turning to the quarter, gold production was 592,500 ounces at cash cost of $220 per ounce on a by-product basis and $660 per ounce on a co-product basis. Our quarterly performance across the portfolio was solid with production driven by Red Lake and Peñasquito, in addition to a solid quarter throughout the rest of the producing mines.

Musselwhite made a strong contribution in the quarter driven by a significant increase in throughput and grade. This mine operates in a remote, challenging environment. As you'll recall, we had a number of unusual challenges recently. So it's particularly gratifying to see the team surface the potential that exists there through hard work and continued exploration success. This performance helped offset a lower quarter at Porcupine in Ontario where we saw lower grades, as expected, in light of mine sequencing in the Hoyle Pond underground.

Los Filos in Mexico continued its long-time record of production consistency, despite the annual rainy season. Our newest producing asset, Pueblo Viejo, contributed 1,000 ounces of gold to our third quarter production.

Turning to Red Lake. Third quarter gold production totaled 120,200 ounces at a total cash cost of $535 per ounce. A number of you on the line were present on the Red Lake mine tour last month, just as we were completing the de-stress slot on level 45 of the High Grade Zone. Since then, we have been able to access significantly more mine headings, which resulted in our increased grade of production in the quarter. I wanted to emphasize the reserves at Red Lake are secure. Seismicity may affect the rate at which we can access those reserves but not our eventual ability to do so. We remain comfortable with our guidance at Red Lake for the year.

The mine plan in 2013 calls for only one de-stress slot at the 47 level. As we have explained last quarter, our 2013 production expectations remain similar to 2012. We remain very excited about exploration at Red Lake. As we have noted early in the year, an offset to the High Grade Zone below the 52 level required us to do some significant drilling in an effort to relocate the zone. We indeed extended the High Grade Zone but in doing so, we identified a new mineralized zone to the west. Subsequently, drilling has confirmed this new gold discovery which we are calling the NXT Zone.

Both this new zone and the deep High Grade Zone remain open at depth and the next zone is open up launch. This is significant because the proximity to existing infrastructure providing the potential for additional mine flexibility. We have collared an exploration drift on the 47 level to provide closer drill access to develop this new structure. Drilling will continue in 2012 with the objective of providing an additional gold resource for the NXT Zone in this year's resource statement. We would also anticipate adding gold resources from the High Grade Zone drilling, but drill density may not be sufficient for reserve conversion this year.

At Peñasquito, third quarter gold production totaled 126,000 ounces at a total cash cost of negative $608 per ounce. Production increased over the second quarter due to higher grades and recoveries. Throughput continues to be affected by limited water availability, with current fresh water supply at approximately 70,000 cubic meters per day.

Our short-term program for additional water supply is on track and supporting plant throughput consistent with our guidance. We have 11 drills at site focused on additional dewatering and exploring for new wells in Cedros Basin. Both programs are progressing well and will be critical to maintaining our current water supply, as feasibility studies on our long-term water strategy progresses. This study will focus on potentially new water sources as well as more efficient water usage in our processing and tailings facilities. Study results are anticipated in the first half of 2013. Again, we have sufficient near-term water to support our guidance for the year.

Concurrent with this effort, we will continue to advance a number of initiatives that will improve mine and mill efficiency and productivity at Peñasquito. Additionally, the Waste Rock Overland Conveyor and Stacker project is on track to start up system commissioning by the end of this year. This will allow for much more efficient haulage in 2013.

Within the Peñasquito district, a Camino Rojo internal feasibility study to evaluate the potential of heap leach facility on the near-term oxide and transition ore was completed during the third quarter. The study demonstrated a strong -- project with strong returns but this does not include the impacts of recent positive exploration results in the sulfide portions of the ore body.

So we are going to attend to local land, water and logistical issues to make sure we've got a plan that looks ahead to what could be a very exciting future. In the meantime, drilling has been completed for the year and an aggressive program and infill drill program for the sulfide deposit is being planned for 2013.

During the quarter, strong drill results have continued at Camino Rojo, showing deep sulfide mineralization extending for 600 meters beyond the oxide resource. In addition, a new style of mineralization has been identified for another 600 meters on strike that consists of narrow high-grade silver, lead and zinc with good grade gold in multiple veins. The deposit remains open at depth and upward towards the surface.

Turning to Pueblo Viejo, first gold was poured on August 14, and ore containing more than 2 million ounces has been stockpiled. As part of planned startup activities, the first, second and third autoplays have been tested at 50% to 100% of design capacity, with the results that are in line with expectations for the initial ramp-up period. The fourth autoplay was currently undergoing pre-commission testing prior to plant commissioning in the fourth quarter. Construction of the starter dam for the tailings facility has been essentially completed to the design height of 182.5 meters. 2012 gold production is expected to be approximately 53,000 ounces of gold to Goldcorp's account.

I was just down at Cerro Negro and, despite the challenges of operating in Argentina, I was happy to see construction was on track towards initial gold production in late 2013. EPCM activities are progressing and we are 46% complete at the end of the third quarter. The Eureka vein has stockpiled over 25,000 tonnes of ore at over 10 grams per tonne of gold and 225 grams per tonne of silver, in line with our expectations. Excavation continued on the decline ramps into the ore bodies at Mariana Central and Mariana Norte as planned.

The largest 2 concrete pours for the process plant have been completed and all major mechanical equipment that needs to be imported has been secured and is en route to the site. All mill mechanical equipment is on site and associated drive equipment is in country. Exploration at the site continues to yield very impressive results, particularly in the Mariana Norte vein structure where reserve growth potential is high. Many of the veins remain open on strike and drilling over the next year will focus on continued expansion of these vein deposits. In just the early stage of regional geologic mapping, additional vein structures have already been identified on the eastern part of the property and we remain excited by the potential of this effort in further advancing the regional exploration potential of this concession.

At Cochenour in the Red Lake district, a study of the overall project reflecting updated costs and timing of first gold is under review for inclusion in year end 2013 budget planning. Widening concrete lining of the historical Cochenour shaft continued in the quarter with progress to a current depth of 423 meters. The haulage drift from Red Lake is now over 60% complete and 3 drills continue to test the underexplored ground along the haulage drift route.

Drilling also continues from the surface, and 2 drills to define the upper portions of the Bruce Channel deposit and additional resources at Cochenour Mine continue. Construction continues to advance in Éléonore in Québec. The exploration shaft reached its final depth and excavation is now complete, along with the excavation of the loading pocket and the station at the 690-meter level. The shaft is now in the process of being converted from its sinking mode to its normal operating mode.

The exploration ramp has now reached over 2,000 meters in length and corresponding to a vertical depth of 300 meters below the surface. Definition drilling progressed from platforms in the ramp and, during the fourth quarter, 2 rigs will be added for a total of 4 active drills. Construction of the production shaft and associated infrastructures continued during the quarter and progressed according to plan. Surface infrastructure in the underground portion of the shaft advanced well. More than 6,100 meters of exploration drilling took place in the quarter for a total of almost 37,000 meters year to date. With that, I will now turn over the call to Lindsay for the financial review

Lindsay A. Hall

Thanks, George. Our third quarter financial results reflect improved performance at Red Lake and Peñasquito, as well as higher sales at Alumbrera due to the resumption of shipments, although we had temporary suspension in the second quarter of 2012. We had record quarterly revenues of $1.5 billion, primarily from gold sales and an average realized gold price of $1,685 per ounce, with by-product cash costs of $220 per gold ounce. Operating cash flows before working capital amounted to $687 million, of which $669 million, almost all of it, was reinvested in our operations and capital projects.

Compared to the second quarter of 2012, by-product cash costs of $370 per ounce decreased by $150 per ounce, mainly due to higher by-product sales credits, positive provisional pricing impacts at Peñasquito and Alumbrera and higher sales at Alumbrera. On a co-product basis, cash costs increased to $660 per ounce compared to $619 per ounce in the second quarter as we continued to experience increased cost pressures at our Canadian and Mexican mines. Net earnings for the third quarter amounted to $498 million compared to $268 million in the prior quarter.

Adjusted earnings for the quarter amounted to $441 million or $0.54 per share, compared to $332 million or $0.41 per share in the prior quarter. To calculate adjusted earnings, we added back to our reported net earnings of $498 million the noncash derivative losses of $100 million, most of it related to the mark-to-market of our convertible debt, and deducted the company's book gain of $110 million related to our investment in Primero.

We also need to remove the effect of the noncash foreign exchange losses on the translation of deferred income tax assets and liabilities of $52 million from the book tax provision. The detailed calculation of our adjusted net earnings is disclosed on Page 42 of our MD&A. And 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 provisional pricing impact to Peñasquito in the third quarter was a positive $4 million compared to a negative $8 million in the prior quarter, reflecting higher metal prices realized in the third quarter.

At the end of the third quarter of 2012, Peñasquito's provisional pricing volume will reflect 103,000 ounces of gold priced at $1,776 per ounce, 5.7 million ounces of silver priced at $34.65 per ounce, 33 million pounds of lead priced at $1.04 per pound; and 57 million pounds of zinc priced at $0.95 per pound.

Alumbrera was also impacted by a positive provisional pricing pickup of $6 million compared to a negative $10 million in the prior quarter, mainly due to higher realized copper prices. At the end of the third quarter, we had 27.5 million pounds of copper priced at $3.71 per pound. Alumbrera expects to ship the remaining balance of the second quarter delayed sales of 38,000 dry metric tonnes, and that is 100% of the delayed sales, over the balance of 2012.

As to our currency hedging programs, for the remainder of 2012, the company has approximately CAD $50 million hedged at $1.02 or at 102 and MXN 120 million at an average of approximately MXN 13 to the US dollar.

The income tax provision included in our calculated adjusted earnings for the third quarter has an implied effective tax rate of 27%, which is consistent with our guidance of 28% for the year. For the most part, to calculate this effective rate, the book tax provision of $128 million for the quarter is adjusted for the foreign exchange gains on deferred taxes of $52 million and the earnings before tax of $626 million is adjusted to remove the impacts of the share-based compensation expense of $22 million; the $100 million of net mark-to-market losses from derivatives representing permanent differences, as these items will never be taxable; and the impairment reversal on our equity investments of $80 million.

Higher revenues resulting from a 16% increase in gold sales volume and a 6% increase in the average realized gold price generated operating cash flows before working capital in the third quarter of $687 million or $0.85 per share, an increase of $167 million when compared to $520 million or $0.64 per share in the second quarter. The change in working capital amounts was a net negative in the third quarter due to an increase in accounts receivable of $439 million related to the resumption of sales in the third quarter of Alumbrera and the increased production and corresponding sales at Peñasquito.

As progress continued at our capital projects, we made capital investments of some $669 million during the quarter, $258 million at our operating mines and $411 million at our growth projects. Included in the $411 million spent is $132 million at Pueblo Viejo, $126 million at Cerro Negro, $118 million at Éléonore, $12 million at El Morro, and $23 million at Cochenour.

At the end of the third quarter, we had some $900 million of cash, as well as our undrawn $2 billion revolving facility, evidence of both our strong liquidity and investment grade balance sheet. I am pleased with the third quarter financial performance. And with that, I'll turn it back over to the operator for questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Brian Yu from Citi.

Brian Yu - Citigroup Inc, Research Division

The first question is just with Peñasquito. You mentioned you're still being impacted by the wide variability but actually you had pretty good results. I was wondering if you could help us kind of quantify, maybe on a percentage basis or cubic meters per day, I mean how far short of where you would like it to be? And then secondly, as you think about expanding that supply for next year, what type of percentage increase are you looking for in terms of the capacity?

Charles A. Jeannes

Brian, it's Chuck. I mean the simple answer to the question is, as our original plan provided, we had hoped to be at 130,000 tonnes per day in our throughput at Peñasquito by this point. And we're not. I think we were between 105,000, 110,000 for the quarter. And so that limitation is the difference that you're looking for between where we had originally planned to be and where we are today. And then in terms of 2013, you heard George talk about the efforts that we have underway to source additional water. And until we have a little more clarity as to those efforts and their success, we're not able to give you any guidance on 2013. We'll be doing that early in January.

Brian Yu - Citigroup Inc, Research Division

I was kind of looking more for color in terms of how much more in water resources that -- whether in a capacity churn, that you're looking to bring online and be made available?

George Burns

Yes, Brian. As I stated, we're currently pumping about 70,000 cubic meters a day to achieve that 105,000 tonne a day sort of throughput. And to get to the 130,000, we need to be in the 85,000, 90,000 cubic meter a day range. And so that's what the study is all about, is how do we find additional water to be able to continue that ramp-up to our design capacity or find ways to reduce the amount of water required and still get that tonnage. And we are working on both.

Brian Yu - Citigroup Inc, Research Division

Okay. And then on Pueblo Viejo, the ounces there were just reduced a little bit. Is that fairly timing-related?

Charles A. Jeannes

Yes, typical startup issues at a new mine, nothing of significance. Just as things are going on a daily basis, we're keeping a very close eye.

Operator

The next question is from David Haughton from BMO Capital Markets.

David Haughton - BMO Capital Markets Canada

You had mentioned the Camino Rojo, I'm wondering if you could put some broad parameters around what we should be thinking. Should it be something like what we saw from the heap leach at Peñasquito? Or is there some other twist to the story here?

Charles A. Jeannes

Maybe I could start, David, and then George can give you his thoughts. Basically, you'll recall when we bought the asset, we said that we thought that the near-surface oxide would be more readily developable, but that we hoped that there would be a larger sulfide deposit that would really add the value to that transaction. And indeed, that's what's happened. We've got the near-surface oxide lined out. We've got an internal feasibility study that analyzes that and is actually quite a positive. But at the same time, we've had very good success defining a deeper sulfide resource. And where we are now is making sure that we don't take any action to advance the oxide that will later impede our ability to develop the sulfide. And all of this revolves around land access, around water, around the various infrastructure things. For example, you do a different power supply solution for a small oxide effort than you would for a much larger flotation plant. So those are the kinds of things that we're working on right now.

David Haughton - BMO Capital Markets Canada

All right. And is there any thought of integrating some of these plans with perhaps your neighbor?

Charles A. Jeannes

Well, we do have a neighbor there and, as you know, whenever you have an ore body that gets close to a boundary, you need to have some agreements with the neighbor as to how to lay back so that we can access all of our ore and they need to determine what they have on their side and how best to resolve that. So those are discussions that have taken place and that will continue to take place.

David Haughton - BMO Capital Markets Canada

And the next update will be coming out in the first quarter of this year. Will you be able to then wrap some financial numbers around it so that we can have a go ourselves at modeling this a little bit better than what we could at the moment?

Charles A. Jeannes

Yes, we hope so.

David Haughton - BMO Capital Markets Canada

All right. Just going now back to Cerro Negro. I heard the comments that you had made, Chuck and also George. So when we're thinking about this -- previously you'd said that the contingencies that you had baked into the CapEx and the timeline numbers, you were feeling relatively comfortable about. Have you reconsidered that now?

Charles A. Jeannes

Well, not to split hairs, but I think we last said that we were using up and had to use our contingencies. And that is the case. And so we're just in the midst of doing our updated capital estimates and budgeting and we'll have that information for you available in early January.

Operator

The next question is from Anita Soni from Crédit Suisse.

Anita Soni - Crédit Suisse AG, Research Division

I just wanted to know, in terms of the grades at Peñasquito that you're accessing now in the Peñasco pit, is that something that you expect to continue, say, at least for the next year, I guess, and -- from the prior model, and into 18 months or so?

George Burns

This is George. Yes, we had a really good third quarter and the pit, we're in Phase III. In the deep part of Phase III we're getting into the better grades consistent with the deeper part of the ore body. We're also stripping on Phase 4 and getting into ore. So you can see -- you can expect to see the fourth quarter grades to drop off a bit in line with the guidance that we've already put out, just as a result of Phase III's coming to a close and Phase IV now starting to come back down through the ore body.

Anita Soni - Crédit Suisse AG, Research Division

I think in the original, I mean, way back when, when we saw last off-season [ph], we were going to see these 0.6 grades next year and then slightly higher into 2014. Is that still the plan or did you access this a little bit earlier than forecasted?

Charles A. Jeannes

Well, Anita, remember we've actually accessed things slower than anticipated because of the slower or lower throughput that we're seeing. And so the original feasibility numbers anticipated the full 130,000 tonnes a day. And so there's going to be changes in those. And that's what we're working through right now in developing the mine plan and budget for next year. And we'll have that for you in January.

Operator

The next question is from Greg Barnes from TD Securities.

Greg Barnes - TD Securities Equity Research

Chuck, I guessed from your comments the heap leach or the oxide at Camino Rojo, really the story here is the deeper sulfide ore body. Can you characterize that for us, what kind of grades we're looking at, broadbrush scale? Just a little better sense of what's going on.

Charles A. Jeannes

Sure, I'll let George do that, but just to say if it weren't for the success we've had in outlining the sulfide mineralization, we would definitely be going forward with this oxide opportunity. It's a very high return, pretty straightforward, simple opportunity that we basically just duplicate the oxide plant at Peñasquito down at Camino Rojo. As I said, the challenge is making sure that we don't advance this in a way that later hurts us as we're trying to develop the sulfide. So with that kind of introduction, I'll pass it to George to talk a little bit more.

George Burns

Okay. So just to give you a general idea. As I see, we've got 3 different areas of sulfide mineralization and, there, each area's distinctively different. So the oxide deposit and transition ore that's included in our recent study continues at depth and there's sulfide there available. And we understand that fairly well. What's changed is up to the west and to the south, this mineralization continues and we've got 2 distinct zones. Generally, we're seeing gold grades a bit better than Peñasquito, and we're seeing lead, zinc and silver generally a bit worse. But again, there's 3 distinct zones. The latest discovered area is showing very high silver content. So to describe it as very challenging, all I can tell you is there's 3 distinct zones. We're excited about all 3 and we're developing drilling plans into next year to better understand it and for us to better determine what the potential really is there. All I can tell you, from a mining engineer perspective, when I look at the grades and thicknesses, I'm really excited about it.

Greg Barnes - TD Securities Equity Research

So conceptually, how do you see this project progressing over the next 3, 5 years?

George Burns

Well from my perspective, next year the big focus is going to be on drilling and we're looking to kind of put our foot to the pedal in terms of our drilling programs to understand that sulfide potential. And then we're going to be focused hard on metallurgical test work, geotechnical. And that metallurgical work is going to help us determine exactly what the processing method is and then we can start working on engineering plans. So my own idea, in the next 5 years, we're going to fully understand this potential and, assuming it's as good as I think it is, we're going to be executing on that potential.

Greg Barnes - TD Securities Equity Research

Do you see feasibility 2015, 2016, George?

George Burns

I think that's definitely possible.

Operator

The next question is from Joung Park from MorningStar.

Joung Park - Morningstar Inc., Research Division

Just have 3 questions. So first, at Red Lake, how are you guys thinking about the long-term production rates at that mine once we move past 2012? Are you guys still expecting it to be in the 500,000-ounce range, like this year?

Charles A. Jeannes

Yes, no change to the guidance and the way we answered that question last quarter. Unless and until we know more, we're suggesting that you should think about the Red Lake in that range, as a 500,000 ounce or so producer.

Joung Park - Morningstar Inc., Research Division

Okay. And then the second question is, I noticed that at Cerro Negro, you guys were able to secure all the major mechanical equipments that needed to be imported. So is Argentina being more lenient with the import restrictions that are in place earlier this year, is that what's going on?

Charles A. Jeannes

Actually, no. Those restrictions have been quite challenging, but I think our team deserves a shout-out down there. They've worked very hard and managed that process. And we ended up having to put a team together just to manage importations much broader and more expansive than we ever thought we would because we obviously didn't know about those restrictions when we started. And they've just done a good job of managing that situation and getting the material in country.

Joung Park - Morningstar Inc., Research Division

Okay. And then you mentioned the industry-wide capital cost pressures which could lead to potential upward revisions, who knows, when you update your figures in next year. So can you kind of categorize where you're seeing the best biggest pressures? Is it labor, is it plant and equipment?

Charles A. Jeannes

Well, I'll give my first overall impression, and it's primarily labor, and that rolls into everything else. As we have been, over the last 10 years, building more and more things throughout our sector, the availability of people, not only at the mines and at the projects but at the EPCM contractors, at the suppliers who provide our material, has been a limiting factor and a factor that's caused increasing costs. So I attribute it personally, from my experience, primarily to labor.

George Burns

And I would support that. We've seen increase in steel and diesel costs but I think labor is the primary driver and of course, that's driving a lot of those other input costs as well.

Operator

The next question is from Steve Butler from Canaccord Genuity.

Steven Butler - Canaccord Genuity, Research Division

You'd talked about the water and tailing study at Peñasquito, comprehensive water strategy and looking to find more or find ways of reducing. Chuck, does this imply that you -- you probably haven't exhausted the alluvial source, but you're looking to maybe secure -- perhaps it's a bedrock source of water that you're looking at, exploring the opportunities around that?

George Burns

It's, George, Steve. Yes, we are. We're looking to expand the alluvial well field. If I can describe it a little bit, there's about 5,100 square kilometers in Cedros Basin that we have water rights to. In less than 1% of that, we currently have wells tapping that aquifer. So there's lots of additional areas to look and we've been exploring. And we've had some success and that is going to feed into our study. We're also pumping water to dewater the pit that's coming out of bedrock and there are opportunities in the basin as well in bedrock. And then we're looking outside of the basin for other opportunities. And as you mentioned, we're looking at reducing our water consumption. So an example of something that's already underway, we started up the operation using sprinklers to leach with. And we're converting to drip, which will reduce evaporation, reduce the amount of water we need to operate. And on top of that, we're looking at other tailings modifications that are possible that will reduce our requirements. And at the end of the day, the study is all about finding the most economic solution so that we can get to our design throughput and deliver the best value to our shareholders. And that study will finish up in the first half of next year and we look forward to sharing that with you.

Steven Butler - Canaccord Genuity, Research Division

Okay. Can't wait. On Cerro Negro, you guys had drilled a whopping over 145,000 meters already and it looks like it's probably done for this year, October 10, you say, 421 holes. A lot of those being infill or is there any extensional? We should be thinking about inferred conversion that you'd been focusing on, the Mariana Central, Norte or San Marcos areas? I'm not sure where Charlie is on the line or you guys have any general comments about forward-looking expectations for year end. Maybe you said and the answer to it is no.

George Burns

I can tell you that we're excited about our exploration groups, working on the year end reserve process for them. We do have new zones. We expect to expand the resources. And although the drilling program's finished, we are working on a regional program for the remainder of the year, and that also offers some pretty good excitement into the future. So, Steve, from my perspective, I'm pretty excited about what we've seen this year in the drilling and look forward to the guys putting out our new resource reserve statement.

Charles A. Jeannes

And Steve, I can just say, the goal for the year at Cerro Negro was to both do a significant amount of infill drilling so that we convert both resources to reserves and potential to resources, and then also do extensional drilling. And we're just compiling all the results of that now and that's the information we'll have for you early in the year.

Operator

The next question is from Paretosh Misra from Morgan Stanley.

Paretosh Misra - Morgan Stanley, Research Division

First, on El Morro, would it be fair to assume that spending there would be about $10 million, $15 million per quarter until you -- or while you're trying to obtain the permit?

Charles A. Jeannes

Well, yes. I wouldn't say that's a terrible number but, again, not to be like a broken record, but we are just in the midst of our budgeting process. An this has been a fairly recent change at El Morro. I mean, up until pretty recently, these guys were blasting straight ahead and expecting to spend several hundred million dollars next year. So the change in plans in terms of what we can accomplish in the feasibility analysis and optimization work while we're waiting for this permitting process to take place is really still being designed in the budgeting process. So yes, it's going to be a much smaller number until we're are able to do something on the site. And because of the uncertainty of that, it's going to be a bit hazy for next year.

Paretosh Misra - Morgan Stanley, Research Division

Fair enough. And can you please remind me, is there any royalty at Santa Cruz in Argentina?

Charles A. Jeannes

Yes. And it's a 3% royalty and then-- sorry, I'm looking. Yes, there's a 3% mine mouth royalty. There's also a separate payment that we make that was a negotiated payment for corporate social responsibility in the local community.

Paretosh Misra - Morgan Stanley, Research Division

Finally, just going back to the CapEx question from earlier, is there any item within the CapEx where you're actually seeing things are getting somewhat better or maybe at least stabilizing, maybe some kind -- any consumable, or tires or reagents, anywhere, are you seeing things getting better?

Charles A. Jeannes

Well let me answer first and then I'll pass it to George. Certainly, we have an expectation that given the numerous projects around the world in the mining industry generally, not just the gold sector, that have been slowed down or put on hold, that, that should relieve some of the pressure on capital pricing going forward. That's a theory. It makes sense. I expect to see it but it's not as though you automatically, immediately see that. We're not buying a mill every week or every month so that we can compare the price of those things on a regular basis. But that general concept, I think, is accurate and it will happen over time. But it's not going to be immediate. George, any comments on the specifics?

George Burns

Yes, I'd just add that, from an equipment point of view, we were looking at really long delivery times. We're now seeing that soften up and actually some of the equipment we were looking to is going to be delivered a bit early, which is helpful to us. And we're also seeing a little bit of softening in the steel prices. So I think like Chuck said, all indications are things are going to level off, get a bit better, and it doesn't happen immediately but I think we're going to see more of that soon.

Operator

[Operator Instructions] The next question is from Alec Kodatsky from CIBC.

Alec Kodatsky - CIBC World Markets Inc., Research Division

Just a couple quick questions. First, on the NXT Zone, I guess you've given it a name. Have you given any more thought to potentially building that into a mine plan or how you may go about actually extracting it?

George Burns

George here. Our focus right now is chasing it up plunge and down dip, as well as that 47 level development that we just started. That's going to allow us to be able to drill it on closer centers, get a better understanding on how to mine it, dilution and those sort of factors. So what I'd tell you is we're looking to have resources by the end of the year, next year expand those resources, and with the hope to have reserves maybe late next year or into the following year. And then obviously, production and development will be chasing that. So the next couple of years, you're going to see that thing grow. And our production, I think, is 1 year or 2 out.

Alec Kodatsky - CIBC World Markets Inc., Research Division

And then next, with respect to the water study, just curious if -- just trying to get a sense for the actual motivation behind the study. How much of it would be related to Peñasquito versus the other opportunities? And I guess the other way of asking the question, if it was just Peñasquito that was under consideration, would you be going through such a comprehensive piece of work or is it really trying to unlock the potential for the other assets you have in the region?

George Burns

The study would be -- the comprehensiveness of the study is all about Peñasquito right now. But given the potential we see at Camino Rojo, we need more water. So the scope of the study is no different. It's just our total expectation is much bigger given the potential at the Camino Rojo. So I guess the way I would characterize it, we need additional water beyond Peñasquito's needs and this study is going to fit right into that.

Charles A. Jeannes

And maybe I can just give my sense of it, Alec, is, from my perspective, everything we can do to enhance the throughput of Peñasquito is being looked at right now, and that's the immediate focus. And you saw, we generated $245 million in operating earnings in one quarter. This is value that we can bring to the bottom line right now. And so that's the primary focus. And then the benefit, the side benefit, if you will, is that we'll learn more about Camino Rojo. But we're much more focused on enhancing the bird we have in the hand right now rather than the future deposit.

Operator

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

Charles A. Jeannes

Okay. Thanks very much and thanks, everyone, for joining us today. I think you can see from today's results, our team is doing a good job of managing the operational issues that hit us in the first half of the year. At the same time, it's important to point out that our growth proposition remains intact. In fact, the first phase of that growth is now here with the startup of Pueblo Viejo, with strong growth in production targeted over the next year and beyond. So we look forward to sharing those successes with all of you in the future. And we won't have another opportunity to talk this year, so I just want to wish everyone a happy and safe holiday season and we look forward to talking to you in the new year.

Operator

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 Management Discusses Q3 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts