Goldcorp Inc. (NYSE:GG) America/Merrill Lynch - 20th Annual Canada Mining Conference September 4, 2014 11:10 AM ET
Chuck Jeannes - President and CEO
Michael Jalonen - BofA Merrill Lynch Research
Michael Jalonen - BofA Merrill Lynch Research
Who is our next presenter, Chuck Jeannes. And, our next company is Goldcorp. And some of you may have heard of it. Well we are very – they are obviously, one of the largest gold producers in the world and with a very strong growth.
They have Chuck Jeannes, who is CEO and has been in that position since 2008. But I should point out Chuck has been in the mining – largely gold mining business for now about 30 years, Chuck? Extensive experience, again lost track and I'll pass the podium to yourself.
Thanks very much Mike, and good morning everybody. Thanks for being here.
I just - I heard it was the 20th anniversary of this conference Mike, and I just wanted to congratulate you for that. I think its tribute to you and Merrill Lynch - now Bank of America/Merrill Lynch for sticking with the industry during somewhat cyclical times that we've experienced over that last 20 years. So, congratulations and thanks for that.
So, I appreciate the opportunity to update everybody as to what we’ve been doing at Goldcorp. I hope you had a good summer. I've got to say that it's probably the busiest and most exciting time that I've experienced during my eight or so years at Goldcorp.
As we continue with our - all the time focused on execution and delivering the ounces and the costs, that we said we would for the year in our January guidance. But as we also try to bring three new mines in the production on schedule and on budget and I think we’re doing a pretty good job there. I'm very excited to update you as we go.
And then, as we look ahead, the excitement comes from the fact that we are completing a very long and intense period of capital investment with these three new projects. And from a financial perspective, we see that the capital tailing off, production increasing, and costs declining, which is a great formula for financial success. And, so, that is definitely got us interested.
And then finally, I just want to say that we have – I think been quite opportunistic and good at the strategic decisions that one has to make or a company has to make over time with respect to M&A and divestitures. And I'll talk a little bit about that but I think that that adds to the value proposition and the excitement going forward as well.
So, some forward-looking statements that I'll make, so be aware of the risks and uncertainties associated with that. One of the things that I think stands out at Goldcorp is that we had a consistent strategy. And I look out in the crowd and I see so many familiar faces and I'm sorry I say this every time.
But, I think it's important because, consistency is something that we've strived for. And I think it's allowed us to generate strong results. So we continue to be focused on quality, growth and we have that growth profile in front of us. And we're delivering on that today and we’ll talk more about that.
We're executing on our cost containment initiatives with sequentially lower costs both last year, this year and going forward. We've projected our balance sheet even while investing in the future leaving us in a position to take advantage of new opportunities.
Our focus remains in areas of low political risk. We continue to show that we're being 100% responsible in the way we interact with the environment communities. And we have remained focused on goal.
And so I think that has been a strong formula for success and those attributes will allow us to continue to create what we call sustainable value for our shareholders and all of our stakeholders.
So digging a little deeper into what we are really focusing on right now. I mentioned execution. We are only interested in safe production. We're committed at Goldcorp to a culture of continuous improvement in all areas of our business but not as more important than the safety of our people. And I'm happy to report that we continue to see improved performance in that area.
As I said, if you look at the right side of the slide, we are focused on delivering the new projects as planned. And we are very excited to pour our first goal down at - in Argentina at Cerro Negro project in July. And I'll give you an update on that.
And then on costs, we’ve really approached the drop in the gold price last year as an opportunity, because it allowed us to create a real sense of urgency around the organization, in support of our cost containment initiatives, what we call operating for excellence. And that is looking for ways to be more productive on the revenue side, smarter on the cost side in both capital and operating and that's paying off.
Today, year-to-date, we've seen just over $250 million of added value from those initiatives in this year. And now, as we are going through the budgeting process for 2016 or 2015, I expect to see those built-in to the budgets and then looking for new opportunities as we go forward.
And as I said, we are always focused on the improvement of our overall portfolio both through the divesture of non-core assets like we did a few months ago at Marigold and adding high quality new assets both organically. I'm going to talk a lot about of that in a few minutes and through smart M&A which I think we've also done pretty well in the past.
So, I want to jump right in to the operations. Here you can see our geographic mix. By far our production comes primarily from North America. And as you look out in the future, we’re adding a lot of ounces coming from Argentina but also from Quebec and Ontario. So our mix will actually trend more towards Canada over time based on our current project mix.
I'm going to start with Cerro Negro. As I said, very excited to pour first gold there in July. For those of you who aren't familiar with it, it's a series of underground veins, very high grade, shallow, easy-to-access. And so we have three separate veins under development today and two that are being mined, and third that will come on soon.
And that allows for a pretty quick ramp at Penasquito. Of course right now, we are in the commissioning phase, a lot of fits and starts. I do expect us to meet our guidance for the year that we've provided as you can see between 130,000 ounces and 180,000 ounces for the year.
But as we look to 2015, because of the nature of the deposit and the fact that we've got a significant stockpile already built, we expect this to ramp up quite quickly to 500,000 ounces or more in 2015.
From a reserve standpoint, you can see on a combined basis about 7 million ounces of reserves and resources. And we expect that that will grow considerably over time. The veins that we're mining today we have not seen the end of and we’ve got several weather targets that we're developing and drilling on site. So we expect to see that growth definitely over time.
On the capital side just to mention, we haven’t seen a lot of this in our business over for the last few years but we actually lowered the capital estimate for Cerro Negro by $100 million when you saw our 2Q results couple of months ago.
And a lot of that had to do with the devaluation of the Argentine peso. And as we look forward, Argentina continues to be a tough place to operate. There is a high inflation rate and we certainly expect to see another devaluation as we go forward in the next couple of months.
Moving way up north to Canada, in Quebec, the Éléonore project is going extremely well. We expect first gold production in the fourth quarter which is just around the corner. And the team there is doing a great job of setting this site up for long term success both the underground mine development and surface construction are advancing very well.
Now the ramp up here is going to take a little longer because it's a vertical ore body - and you have to develop below yourselves, so it takes longer to get there. But once ramped up, we expect Éléonore to produce an average of about 600,000 ounces annually making it one of the largest gold mines in Canada.
Now I want to talk about Red Lake and Cochenour together because that's the way we look at them. Well Cochenour is about 5 kilometers from the Red Lake and Campbell Complex, and we are drifting over in – what we call the tram drift at about a mile below the surface and that's one point of access and we’ll be done with that drift this year.
We've already completed a shaft which is the second point of access in the Cochenour and that's done with the rehabilitation of the old Cochenour shaft. And we are on track for first production at Cochenour on budget, the capital spend that we gave you with the guidance earlier this year, just under $500 million.
So we expect first production ore from Cochenour mid next year. We’ll actually see first gold right around the end of this year in some of the development [heading] (ph). And very excited about that because it allows us to integrate with Red Lake which as an overall camp, we're seeing the Campbell side of the Red Lake mine really drop-off as plan and this Cochenour production is going to come in and offset that so that we can continue to look at Red Lake as approximately 500,000 ounce a year producer in definitely into the future.
Now the other excitement at Red Lake is a new discovery which I think is testament to the tremendous upside that we still have on this property, even after mining there for 65 years. And that is what we call the HG Young discovery. This is an old area that was developed many years ago. And not much came of it. Our guys got back in there with some different geologic thinking and have hit some very exciting high grade intercepts within two separate geologic structures.
And so, we've got five drills turning at surface chasing this mineralization. And we're rehabilitating an old drift that came out towards HG Young from the Campbell side of the mine. And it will be able to drill underground into the target from there sometime mid-next year.
So, very excited about that and I think there's a good opportunity, given that it’s close by. We already have the mill, we already have the infrastructure for this discovery to impact production at Red Lake in the near term.
Penasquito, I'll probably talk less about Penasquito than I have in many years because it’s all going extremely well. And Penasquito is hitting it's numbers. It’s performing as expected. We’re on track for the guidance we provided of 530,000 ounces to 560,000 ounces this year.
We’re in the heart of the ore body. We are expecting several years of this kind of performance and even better as we go forward. And we have the water that we need. We are now advancing the development of the long term water supply from the Northern well field. We continue to expect that to be complete by mid-next year.
And then, we also have the studies going on with respect to the concentrated enrichments and Pyrite Leach programs. I wrote down in my notes that we have some very exciting metallurgical news. So not often that you get excited about metallurgy, but – this is important because at Penasquito, we have found plants of high copper material and that copper, when it goes thorough the process and ends up in the lead concentrate, where it reports - it becomes a deleterious element for the sale of that concentrate. And that’s where most of our gold reports as well.
So, high copper is bad. So, what we’ve done is avoided the copper in our mine plant. Those areas with high copper, we work around them and that's not allowed us to be quite as efficient as we could otherwise be at Penasquito.
So, the guys have come up with a way to what we call as concentrated enrichment program proven with the pilot plan on site to create a third product at Penasquito, a copper concentrate. It's salable and it takes the copper out and means that the lead con that we produce, where all the value is cleaner and more salable itself.
So, this is very important. We expect to have a pre-feasibility study done by the end of the year and we think that there is a real enhancement of the economics that Penasquito that’s possible as we advance this work. So, that's exciting to us.
South of Penasquito about 50 kilometers is the Camino Rojo project. And, I am really convinced that this is one that's going to very significantly enhance our future. It’s a big discovery. We’re up about 12 million ounces in all categories there.
And that's just gold. It’s another poly-metallic deposit, a similar but not the same as Penasquito. It’s geologically a little different, and so we spend a lot of time on metallurgical testing to make sure that we understand all the details before we go into pre-feasibility.
The pre-feasibility study is going to start at the end of this year and we look forward to pretty exciting things from Camino Rojo as we go forward. So, look for news in 2015 and beyond.
And then finally at our newest mine, well, second newest now that Cerro Negro is in production. And that's Pueblo Viejo in Dominican Republic. We're looking for strong production there of over 400,000 ounces this year. And that's just to our account.
This is joint venture, the Barrick operates and they’re doing and excellent job operating it. It's a complex plan, but operations are progressing well and no new news on Pueblo Viejo which I think is good.
Turning to the quarterly results, you can see on the slide that we’ve seen steady improvement and I really don’t see - think that there is any surprise's here. We put a pie chart over on the right side, you can see the breakdown by metal and that about 87% of our revenue comes from precious metals at present.
It's interesting that as we add, almost pure gold production from Cerro Negro, Éléonore and Cochenour, that portion or proportion of gold as our revenue mix is going to go up significantly over the next couple of years.
I want to talk about costs a little more closely. Certainly in a gold price environment that's been pretty range bound for the last year or so. We’ve been focused on trying to add value on the cost side and I think we’ve done a pretty good job of it as you can see here.
We had a steady reduction in our all-in sustaining costs both last year and again for the first half of this year. Now, I just need to make sure everybody understands we’re continuing to guide our all-in sustaining cost for the full year at $952,000, which means that the second half is going to be higher than the first half.
And, the reason for that is the sustaining capital piece of all-in sustaining cost. Our operating costs are fine. It's just the timing of a big purchase of new trucks at Penasquito, and the push of the development of the Hollinger project in the Northern well field at Penasquito means that a lot of sustaining capital is reporting in the second half versus the first half.
But it was as planned and we continue to be very comfortable with the overall guidance that we provided at the beginning of the year. And then of course going forward with the addition of the new production, we expect to see this number go down considerably in 2015 and beyond.
If you look at our full year guidance, you can see the details here. We had to beat all of our guidance in 2013 and expect to do so again this year. I do want to mention the high volt issue at our El Sauzal mine in Mexico. We reported that earlier this week.
We’ve got movement in the high volt and as a safety precaution we've seized operations and taken all the personnel and equipment out of the pit. And at this point, we're watching it, it’s continuing to move. We haven’t had a failure but we don’t know when we’ll be able to get back into the pit.
The way I am looking at it, it maybe weeks, it maybe months, it maybe that we in a worst case scenario don't get back in there. What that would mean to us is between 60,000 ounces and 70,000 ounces of production this year that we were expecting from El Sauzal that we don’t get.
And, so if you combine that with the shutdown we had at Los Filos earlier in the year, that would push us towards the bottom end of our guidance range as a whole for the company for 2014, but we remain comfortable that we’ll be within that guidance range. So no changes there.
Here’s the growth profile over the five year plan. You can see this is something, I said we’re very excited about, this is certainly part of it. And there are so many organic opportunities within the company to enhance that growth in the latter years, 2017 and 2018, that I’ll talk about just in a moment.
And here it is. So, despite the fact that we’re still in the midst of delivering these three new mines this year and into 2015, I am starting to get the question more and more from investors is okay, what comes next. And as we've always said, we’ll look both internally at organic opportunities and we’ll look at acquisition opportunities externally, we’ll line them up side by side and whichever provides the most value is the way we’ll go.
Well, we’ve got a lot of pretty exciting organic opportunities within the company. If you look at the two boxes on the right hand side, the things that are in pre-feasibility or in the scoping or advanced exploration stage, I think there's lot of places where we can add value.
But the biggest of course is Camino Rojo that I already talked about. But don’t discount the ability of things like the Los Filos expansion, where we want to take the mill that we already own at El Sauzal when it finishes either this year or next year and move it to Los Filos along with an expansion of the underground operations there – there’s significant value that we can see.
Or, as I said, a close by discovery like HG Young that can hit the mill much sooner at Red Lake than Greenfield project.
So, a lot of things, I won’t get through them all, but, we’re pretty excited about the organic opportunities around the company.
Here we go. Okay, just, as I mentioned, we’re nearing the end of the capital spend. You can see here that on the new projects, we're down to about 13% left of the total initial capital to complete those. And so, that means that after a period of some pretty significant investment over the past several years, we expect to see that capital spending come down quite significantly next year.
We generally view our sustaining capital piece of total capital at around $1.1 billion maybe a little more as we add the new mines and add in the sustaining capital from them. So, if you combine that – as I said earlier in the introduction, the increasing cash flow from higher production and lower costs, we look for very strong financial returns. So, the other question I get is how we’re going to spend that.
Certainly, we'll complete the funding of our existing growth. We’ll advance the many organic opportunities I talked about. We’ll look for smart acquisitions and we’re definitely going to look at both continuing and increasing our dividend.
If you look at the dividend, I think we've been pretty good at increasing it, whereas we saw our cash flow go up and then having done it in a way that was sustainable, so that we didn’t have to decrease it when the gold price dropped in 2013.
So, we’re paying what I think as a pretty healthy dividend now. But, as that free cash flow increases, we’ll certainly look to that as one of the ways to spend some of that money.
I just put this slide in because it’s another reason I think that we’ve been successful in managing our balance sheet. As we’ve been pretty smart at the way we disposed the assets over the past several years. And I am not going to go through all this. But $4.3 billion and that isn’t just the value that we've received. It’s the gain for our shareholders that we received on these assets.
And we’ll continue to look to be smart in areas like that. And you can see the strong only BBB+ balance sheet in the business.
Gold - I see him running short on time. I do want to say that I believe that we will see steadily increasing gold price. I am not one that looks for explosive growth, I just think that the fundamentals, you're going to see increasing demand both physical demand out of Asia primarily and investment demand when we get into the more inflationary environment.
And, the gold supply, there’s just no question that supplies got to go down, given the lack of investment in our business over the past several years in new mines.
So, Mike, I'm going to stop there. Certainly, we think Goldcorp provides a great opportunity relative to gold, given the leverage that we have in our cost structure and the fact that we have organic growth and the dividend. And you can see that in a way we've performed relative to gold this year.
Michael Jalonen - BofA Merrill Lynch Research
Thank you, Chuck. Well, time for one question, and [Marcello] (ph) in the back corner there, back center?
Hi, Chuck. Can you give us an update on the resource tech - the per ounce resource tech in Argentina? And when you think, you'll be able to go back in and drill some of the prospects that you have there?
Yeah. We do have drills churning, but only in in-fill and mine planning capacity. In terms of pure exploration, we’re holding back as the discussions continue with the governor in Santa Cruz with respect to this resource tax that was inactive last year that we don’t think is constitutional and we’re challenging it. But until it’s resolved, there’s just no incentive to go out and add to our resources and reserves.
I think that things are going well. We have a loosening of the tension if you will in Santa Cruz, the [speculative] (ph) money that was shut off from the federal government into that province last year has now been opened up again. And so the pressure is off and we’re having much more reasonable and thoughtful discussions with the governor.
So, I am hopeful that we’re going to get through a good resolution there.
Michael Jalonen - BofA Merrill Lynch Research
So I think, unfortunately, it is end of our time. But you can all join me to thank Chuck and Goldcorp for the excellent presentation. Thank you for the fine comments at the start - posting this conference. In 2000, I think we had about 45 investors in the room. Chuck was with Glamis I think, we had a lot of people there.
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