Vancouver Oct 29, 2015 (Thomson StreetEvents) -- Edited Transcript of Goldcorp Inc earnings conference call or presentation Thursday, October 29, 2015 at 5:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Jeff Wilhoit Goldcorp Inc. - VP of IR * Chuck Jeannes Goldcorp Inc. - President & CEO * George Burns Goldcorp Inc. - EVP & COO * Lindsay Hall Goldcorp Inc. - EVP & CFO ================================================================================ Conference Call Participants ================================================================================ * Andrew Quail Goldman Sachs - Analyst * John Bridges JPMorgan - Analyst * Chris Terry Deutsche Bank - Analyst * Greg Barnes TD Securities - Analyst * Patrick Chidley HSBC - Analyst * David Haughton CIBC World Markets - Analyst * Andrew Kaip BMO Capital Markets - Analyst * Anita Soni Credit Suisse - Analyst * Tanya Jakusconek Scotiabank - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning, ladies and gentlemen. Welcome to the Goldcorp Inc Q3 2015 results conference call for Thursday, October 29, 2015. Please be advised that this call is being recorded. I would now like to turn the meeting over to Mr. Jeff Wilhoit, President, Investor Relations of Goldcorp. Please go ahead, Mr. Wilhoit. -------------------------------------------------------------------------------- Jeff Wilhoit, Goldcorp Inc. - VP of IR [2] -------------------------------------------------------------------------------- Thank you. I am Vice President of Investor Relations, but thank you anyway. Welcome to the Goldcorp third-quarter conference call. Among the senior management in the room with me today are Chuck Jeannes, President and Chief Executive Officer; Lindsay Hall, Executive Vice President and Chief Financial Officer; George Burns, Executive Vice President and Chief Operating Officer; Russell Ball, Executive Vice President, Corporate Development and Capital Projects. For those of you participating on the webcast, we've included a number of slides to support this afternoon'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 amounts of estimated future production, cost of production, capital expenditures, and cost 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 Chief Executive Officer. -------------------------------------------------------------------------------- Chuck Jeannes, Goldcorp Inc. - President & CEO [3] -------------------------------------------------------------------------------- Thanks, Jeff, and thank you, everyone, for joining us today. Back in 2011, Goldcorp embarked on an ambitious program of concurrently financing and building two new high quality gold mines in two very different jurisdictions. Eleonore in Quebec, and Cerro Negro in Argentina. Today, our third-quarter results illustrate the operational and cash generating strength that we envisioned when we first set out on this now completed mine construction program, even as the gold price has significantly weakened over the past four years. These capital investments have greatly enhanced our asset portfolio and positioned Goldcorp to provide strong free cash flow generation, even amid the current gold price environment. This cash flow also allowed us to pay off our revolving credit facility this quarter, enhancing what we believe is the strongest balance sheet in the gold sector, and positioning us for long-term success, regardless of metal prices. We are pleased to report record quarterly gold production of 922,000 ounces for the quarter, as these new mines assumed a greater proportion of overall production, and our flagship Penasquito mine continued its steady run pf strong performance. We also reported all-in sustaining costs at $848 per ounce. We had inventory write-downs at our two Mexican mines, primarily due to gold price, and excluding these non-cash write-downs, all-in sustaining costs were an even stronger $802 per ounce. Adjusted operating cash flow met expectations, totaling $374 million or $0.45 per share, and we saw another quarter of growing free cash flow, as I said, reaching $243 million or $168 million after payment of our dividend. Looking more closely at our operational performance, I continue to be extremely pleased with the performance of Penasquito, and we'll exceed our production guidance there between 700,000 and 750,000 ounces for the year. We also saw strong production at Cerro Negro and Musselwhite. At Eleonore, production doubled from the prior quarter, despite some teething pains. Eleonore is a very high-quality gold mine that is only going to get better, as the team there works through the issues. Remember, this is a big underground mine with a two-year ramp-up to full production, and we are on track with those overall expectations. At all of our mines, as well as at the corporate office, everyone at Goldcorp is 100% focused on cost control and productivity enhancements. What we call operating for excellence, or O4E. As I've said before, we are well aware that in a flat gold price environment, the only way we can provide margin growth is through declining costs. As you saw in our all-in sustaining cost performance this quarter, we continue to meet this challenge. And cost control will continue to be a prime focus, as we complete preparation of our 2016 budgets. Reflecting our confidence in the portfolio, we reconfirmed our production and cost guidance this morning, with production expected to be at the upper end of between 3.3 million and 3.6 million ounces, at all-in sustaining costs of between $850 and $900 per ounce. We decreased our DD&A guidance to $450 an ounce from prior guidance of $425 per ounce -- sorry we increased. Lindsay will elaborate on those accounting items shortly. With our new project capital investment spend winding down as planned, we've also reconfirmed overall capital spending between $1.2 billion and $1.4 billion. We remain well-positioned for a strong finish to a great year. As I'm sure you're aware, the market performance of the gold miners has outperformed the price of gold over the last several months, as investors begin to absorb the reality of improved operating and financial performance of the sector at a lower price environment. We believe there's more room for relative out performance, but we also believe we're getting close to the end of the gold bear market. US Fed actions and inactions, Asian economic data and the other factors have done little to dampen the world's appetite for owning gold. Regular participants on our quarterly earnings calls may be familiar with this slide, depicting the likelihood of a peak gold scenario, and I include it here again to illustrate what I believe is an emerging trend in support of a higher gold price over time. As at least one of our counterparts in the base metals world has recently reminded us, the best cure for low commodity prices is low commodity prices. This is certainly true in the gold industry, where we've seen that it's nearly impossible to make a new discovery that's economic at $1,100 gold. The message here is simple. Gold supply will be tightening going forward, and those companies like ours with the best assets will be uniquely positioned to benefit from this trend. Looking ahead, we remain focused on what we can control, delivering safe production at low all-in sustaining costs to achieve our 2015 guidance. We will also seek to translate the exploration success we've seen this year at Cerro Negro, Eleonore and other sites to at least replace mined gold reserves, even at a lower reserved price. In terms of news flow, we are in the midst of work on our 2016 budgets and updated mine plans, and we look forward to providing our guidance expectations for 2016 and beyond, early in the new year. I remain extremely excited by the opportunity to sustain Goldcorp's compelling investment proposition further into the future, and look forward to speaking with you then. And with that, I'm going to turn it over to George. -------------------------------------------------------------------------------- George Burns, Goldcorp Inc. - EVP & COO [4] -------------------------------------------------------------------------------- Thanks, Chuck. I am very pleased to report Goldcorp's mines delivered safe third-quarter gold production of 922,200 ounces at low all-in sustaining costs of $848 per ounce, or $802 per ounce excluding impairments. Chuck has pointed out our strong execution at Penasquito, Cerro Negro and Musselwhite, but most of the portfolio delivered at or near production cost expectations quarter to quarter. We also continued to see wins from our operating for excellence program. Through the first nine months of the year, we have realized benefits of approximately $250 million. Some good examples across the organization include higher gold and silver recoveries at Cerro Negro, further deployment of remote mucking and drilling at our underground mines, mechanization of the historic Upper Red Lake into lower-cost bulk mining and lower unit cost mining at Penasquito in the mine. Importantly, our teams see further opportunities to lower cost and increase productivity across the sites. At Penasquito, the largest gold mine in Mexico remains on track for a record year. For the third quarter, safe gold production was 236,800 ounces at an all-in sustaining cost of $467 per ounce. As we discussed last quarter, the higher sulfide gold grades resulted from positive model reconciliation, as mining took place in the heart of the deposit. Gold grades are expected to continue to moderate into the fourth quarter, as we move into a new phase of the ore body. The team at site has done a good job of increasing the mining rate, which is driving down our mine unit costs. In addition, we are realizing cost savings following the start-up during the quarter of the [Energen] electric generating plant. Conversion of natural gas-fired electric power generation will also contribute to a reduction of Penasquito's carbon footprint. Construction of the northern well field remained suspended throughout the third quarter of 2015, due to an illegal blockade by a local community. The site continues to seek a fair resolution of this matter, while taking steps to enforce our contractual rights. Penasquito is also advancing alternatives for completion of the project by rerouting the infrastructure. Contingency planning is ongoing for additional water supply to the Penasquito mine until the well field project is operational. I am confident water that we need to sustain operations until the resolution will be reached or [solemn]. The metallurgical enhancement project feasibility study progressed during the quarter and is on track to be completed early in the new year. This study includes both a pyrite leach circuit, and our proprietary concentrate enrichment project, each of which will be separately considered for advancement. During the quarter, pilot plant testing was completed, and work continued to confirm capital and operating costs. At Camino Rojo, work continued to advance the pre-feasibility study which is on track to be completed in 2016. An update of the geologic model continued during the third quarter and metallurgical testing of sulfite transition and oxide zones also advanced. Cerro Negro continued to ramp up successfully with the third-quarter safe gold production totaling 135,700 ounces at an all-in sustaining cost of $731 per ounce. Increased production resulted from further ramp-up of mining rates at the Mariana Central and Eureka underground mines. Total tons milled increased, resulting in average throughput during the third quarter of 3,700 tons per day. Average milling rates in September surpassed nameplate capacity of 4,000 tons per day, ahead of schedule. On the exploration front, the news continues to be very positive. We continued our resource definition drilling program, expanding resources at Mariana Central complex, particularly in the newly Emilia vein, where we are seeing strong grades. We are well-positioned to grow gold reserves this year at Cerro Negro. Turning to the work stoppage we announced at the end of September, we are having constructive discussions with the union that represents the mine workers, while maintaining normal operations. Turning to Eleonore, third-quarter safe gold production totaled 86,700 ounces, at an all-in sustaining cost of $974 per ounce. As Chuck mentioned, this was a doubling of the prior quarter as a result of the expansion of the underground mine from two to four horizons, additional mine optimization efforts and continued ramp-up of the mill throughput. Throughput during the quarter averaged 6,500 tons per day, and some days we have exceeded nameplate plant design of 7,000 tons per day. As throughput is ramped up, the presence of pyrrhotite and iron sulfide has intermittently impacted concentrate leaching circuit kinetics, leading to lower than expected recoveries during the quarter. We are making good progress to overcome this recent issue. As previously announced, prior to our site tour in September, in situ ore grades and initial stopes in horizon four have been as expected, but folding is being encountered. Mining in these areas is resulting in higher dilution and therefore lower than planned mine grades and gold production. The folding is of varying intensity, and is estimated to affect approximately 10% of the overall Eleonore deposit. The Eleonore team continues to work on adjusting stope designs to minimize these impacts. Include in that work have been smaller stope designs, improved fragmentation, and better material handling. The folding and recovery issues have the potential to negatively impact 2015 production guidance of between 250,000 and 270,000 ounces. We continue to overcome typical ramp up challenges, and I am confident that these are short-term issues that will not affect the long-term performance of Eleonore. We continue to receive good news on the exploration front at Eleonore as well that support our expectation for reserve growth again this year. Work on the Eleonore Crown Pillar pre-feasibility studies continued to advance during the third quarter, with completion expected by the end of the year. On this slide, you can see quarter over quarter, the increase in gold production, and the throughput, showing consistent performance from the plant. As we move towards the end of the year, and the depletion of the low-grade stock pile, the key focus continues on the ramp-up of the underground. Turning to Red Lake, safe gold production totaled 77,600 ounces at an all-in sustaining cost of $1,028 per ounce. Production was lower than the prior quarters as a result of lower grades from remnant mining at the Campbell complex, mining in the lower grade sulfide zone, and lower than expected grades in the foot wall zone. At our HG Young discovery, exploration continued to advance north from the 14 level at the Campbell complex. This trip provides new drill platforms for follow-up underground drilling on several positive intercepts from the ongoing surface exploration program, and we are working towards initial resource by the end of the year. At Cochenour, our exploration drilling continued to assess the core areas of deposit as well as the tram level, where a change in the orientation of the veins was detected. We are advancing detailed interpretation on analysis to support final mine planning and optimal placement of the infrastructure to set this mine up for long-term success. Processing of mill feed from the initial sill development work was consistent with expectations. Drilling is confirming preacquisition results in the upper portion of the deposit. We believe Cochenour will be a strong contributor to Red Lake in the future. Work is ongoing to define the timing of initial stope production and ramp-up of Cochenour feed for processing at Red Lake. With that, I will turn the call over to Lindsay. -------------------------------------------------------------------------------- Lindsay Hall, Goldcorp Inc. - EVP & CFO [5] -------------------------------------------------------------------------------- Thanks, George. As demonstrated with our record quarterly gold sales, the growth and the contributions of our recent Los Filos gold mine helped onset the downward pressures the industry is experiencing in the current commodity price environment. At an average realized gold price of $1,114 per ounce on gold sales of some 942,000 ounces, the Company generated adjusted revenues of $1.3 billion and adjusted operating cash flow of $374 million for the quarter. Byproduct and coproduct cash costs for the third quarter were $597 and $670 per ounce respectively, compared to $547 and $656 per ounce in the prior quarter. The increase in cash costs is due primarily to the impact of the inventory write-downs of the lost heat leach value. All-in sustaining costs for the third quarter were $848 per ounce, compared to $846 per ounce in the prior quarter. As Chuck has mentioned, it would have been $46 an ounce lower without stockpile inventory write downs. We reported a net loss in the quarter of $192 million or $0.23 per share. Excluding the usual impact of unrealized losses from the foreign exchange translation of deferred income taxes, adjusted net loss totaled $37 million or $0.04 per share in the third quarter of 2015, compared to an adjusted earnings of $65 million or $0.08 per share in the previous quarter. Both reported and adjusted net loss were impacted by lower realized metal prices during the quarter, and a $40 million or $0.05 per share reduction in the inventory carrying values primarily at Los Filos. We also experienced higher depreciation quarter over quarter due to a change in the mix of our production, with more production coming from our newer and higher DD&A per ounce mines, like Penasquito, Cerro Negro and Eleonore. Additional assets were placed in service that were not forecasted, and the $19 million related to the non-cash portion of the inventory write-downs. The Company generated adjusted operating cash flows $374 or $0.45 per share which is before the positive change in non-cash operating working capital of $132 million. Given these operating results and capital expenditures on a cash basis of $263 million for the quarter, the Company generated positive free cash flow of $243 million in the third quarter. Turning to provisional pricing, we had a negative $15 million provisional pricing impact at Penasquito, and a negative $1 million impact at Alumbrera. The provisional sales at September 30, 2015 at Penasquito include 155,270 ounces of gold priced at $1,114 per ounce, 4.2 million ounces of silver at $14.65 per ounce, 68 million pounds of zinc price at $0.75 per pound, and 28 million pounds of lead, priced at $0.75 pound. While at Alumbrera, we have 18,567 ounces of gold, priced at $1,115 per ounce and 14 million pounds of copper priced at $2.35 per pound. Regarding depreciation and depletion, or DD&A per ounce, we expect it to increase to $450 per ounce for the year, from the previous guidance of $425 per ounce, due primarily to the impact of the mix of our production with more production coming from our newer and higher DD&A per ounce sites like Penasquito, and additional assets such as the Overland waste rock conveyor at Penasquito placed in service earlier than anticipated. Goldcorp's DD&A per ounce is higher than most of our peers, primarily a result of the fact that we have newer, younger mines like Penasquito, Cerro Negro and Eleonore. The costs associated with acquiring or building these assets are amortized over the existing reserve base, to determine a DD&A per ounce. With these younger new mines, the DD&A per ounce will start out high, and as exploration success converts more ounces to reserves, which increases the denominator that these costs are amortized over, the DD&A per ounce is expected to decrease. So while the depreciation expense in the early years will have a negative effect on a reported earnings, it doesn't dilute the abilities of these new mines to generate free cash flows. We are pleased to have generated positive free cash flow after dividend of $168 million in the third quarter. As planned, we fully repaid our revolving credit facility balance. This, in combination with our positive cash balance leaves us with $3.3 billion of liquidity at September 30, and in a strong financial position with one of the best balance sheets in the business. With our focus on mining safe profitable ounces, our efforts to reduce costs through our O4E and invest sustaining capital into our existing mines where it makes sense to do so, given the current commodity environment, we will continue. We manage the business for the long-term, and with our financial strength, we can make prudent investment choices for today, and for the future, when commodity prices rebound. With that, operator, I will turn it back over to you for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Andrew Quail, Goldman Sachs -------------------------------------------------------------------------------- Andrew Quail, Goldman Sachs - Analyst [2] -------------------------------------------------------------------------------- Good afternoon, Chuck and team. Thanks for the update. First one is on sustaining CapEx. You've obviously, as you said, you're full all this projects which is great. Looking to 2016, do you have, I know you haven't given any guidance, but is there a level of sustaining CapEx that you will be targeting? Is that something reasonable around $800 million? -------------------------------------------------------------------------------- Chuck Jeannes, Goldcorp Inc. - President & CEO [3] -------------------------------------------------------------------------------- Andrew, we are in the midst of our budgeting process right now, and it would be premature to give you any specific guidance. In the past, we've talked generally about $1 billion a year. Not just for sustaining, but for those other expansionary capital things that we spend money on, such as advancing the permitting at places like El Morro and the engineering work at Camino Rojo. Things like that. If you were thinking in terms of around $1 billion overall, that would probably make sense. But of course in a lower gold price environment, we look to find ways to bring those numbers down, and that's what the budgeting process is all about right now and what we're going through. So we'll have those numbers for you early in the new year. -------------------------------------------------------------------------------- Andrew Quail, Goldman Sachs - Analyst [4] -------------------------------------------------------------------------------- Right, at Cerro Negro, obviously it looks like it's almost at, pretty much at steady state. The grades have been very good the last three quarters. Do you expect that high-grade, we have said in the last two quarters pointed to Q4, and then maybe into 2016? -------------------------------------------------------------------------------- George Burns, Goldcorp Inc. - EVP & COO [5] -------------------------------------------------------------------------------- This is George. We're expecting to see further ramp up of Mariana Central, and that's where the higher grade ore is at Cerro Negro. Right now, we're processing low grade stockpiles. Those are depleting and expected to be depleted around the beginning of the year, and at the same time, we continue to see the underground mines ramp up. Mariana Central, as it continues to ramp up, those grades will increase. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- John Bridges, JPMorgan. -------------------------------------------------------------------------------- John Bridges, JPMorgan - Analyst [7] -------------------------------------------------------------------------------- Chuck, I'm sorry you seem to be everybody's favorite short this morning. On Cochenour, can you give us some indication as to what you're seeing down there? We understand the ore bodies is in different shape to what it was before, but does that mean that it's going to be similar levels of profitability once you get there, or is it in a different configuration, such that profitability is going to be different? -------------------------------------------------------------------------------- Chuck Jeannes, Goldcorp Inc. - President & CEO [8] -------------------------------------------------------------------------------- There's really two parts to the deposit we're focused on. At the tram level, where we had the first access per drilling, that's where the orientation is a bit different. Our original scoping was long hold mining method. That's still intact. So from a cost perspective and profitability, we have the same expectations. The upper area, which was the target for the acquisition to begin with, that's the heart of the deposit. We're getting great drilling results there, and our focus next year, we'll be able to touch that part of the lower body and again be able to advance our earnings and earning and planning around that development work. Overall, I would tell you our expectations haven't changed. It's just the timing. -------------------------------------------------------------------------------- John Bridges, JPMorgan - Analyst [9] -------------------------------------------------------------------------------- You going to be ready to talk about that early next year? -------------------------------------------------------------------------------- Chuck Jeannes, Goldcorp Inc. - President & CEO [10] -------------------------------------------------------------------------------- As they come out with our guidance for the year and our production plans, we'll be giving everybody an update on Cochenour. -------------------------------------------------------------------------------- John Bridges, JPMorgan - Analyst [11] -------------------------------------------------------------------------------- I'm curious, Hurricane Patricia t hit the West Coast of Mexico, it deluged Mexico, and you seem to be on the track. Did you get a lot of rain? What you affected at all at Penasquito? -------------------------------------------------------------------------------- George Burns, Goldcorp Inc. - EVP & COO [12] -------------------------------------------------------------------------------- I will take that, John. We were all very focused on that, and it was quite dangerous, because it was headed right toward Manzanillo where we have our concentrate warehouse and loading facilities. Fortunately, the hurricane turned at the last moment, and missed Manzanillo and we had some very slight damage there and nothing that impacted our concentrate loading or any of the boats. There was actually a ship in Port at the time, being loaded. And then as the storm went through the rest of Mexico, yes, we got some more rain at Penasquito, but nothing that impacted us, and it essentially missed Filos and El Sauzal. -------------------------------------------------------------------------------- John Bridges, JPMorgan - Analyst [13] -------------------------------------------------------------------------------- Any rainfall feelers to dilute the solutions? -------------------------------------------------------------------------------- George Burns, Goldcorp Inc. - EVP & COO [14] -------------------------------------------------------------------------------- We've had the normal wet season at Filos, and it continued with the storm, but nothing abnormal. -------------------------------------------------------------------------------- John Bridges, JPMorgan - Analyst [15] -------------------------------------------------------------------------------- Great. I'll get out of the way. Thanks and best of luck. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- Jorge Beristain, Deutsche Bank. -------------------------------------------------------------------------------- Chris Terry, Deutsche Bank - Analyst [17] -------------------------------------------------------------------------------- It's actually Chris Terry. Two questions to close out on the D&A that Lindsay spoke about. Would you expect that next year's going to be at a similar run rate to the upgraded guidance to the end of 4Q? Is it going to be sometime before that then comes down with exploration success like you said? The second question maybe for Chuck, just more of a strategic nature. With the costs coming out of the industry and you've done a really good job at continuing to strip those out, and generating free cash flow now, if we do see, and you're right about the gold price starting to bottom out, and we do see the price rise, where will you spend the marginal dollar from here? Is it on a combination of debt payback, new projects, dividends, more exploration spend? Or do you have a priority out of those that are listed? -------------------------------------------------------------------------------- Lindsay Hall, Goldcorp Inc. - EVP & CFO [18] -------------------------------------------------------------------------------- I will take the first part of the DD&A, again we are getting our budgets together for 2016. I don't expect that to be higher. It will be lower because I don't anticipate impairments of stockpiles which is costing $10 or so an ounce. Also, we feel pretty good about replacement of reserves that will effect the denominator, which should drive that number down. Generally speaking, it should be lower, but we're still working on that. -------------------------------------------------------------------------------- Chuck Jeannes, Goldcorp Inc. - President & CEO [19] -------------------------------------------------------------------------------- As far as how we manage increasing cash flow in a rising gold price environment, the one thing I can tell you that we are absolutely certain of is that were not going to make the same mistakes that the industry made in the past cycle, where we lowered cutoff grades and chased top line growth at the detriment of margin growth, and instead just allowed the cost to go up concurrent with goal price. That's not what our investors are looking for. They've made that very clear. Certainly, I've been around long enough to understand that. |