Vancouver Jul 31, 2015 (Thomson StreetEvents) -- Edited Transcript of Goldcorp Inc earnings conference call or presentation Thursday, July 30, 2015 at 5:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Jeff Wilhoit Goldcorp Inc. - VP-IR * Charles Jeannes Goldcorp Inc - President, CEO * George Burns Goldcorp Inc. - EVP, COO * Lindsay Hall Goldcorp Inc. - EVP, CFO ================================================================================ Conference Call Participants ================================================================================ * Patrick Chidley HSBC - Analyst * Andrew Quail Goldman Sachs - Analyst * David Haughton CIBC - Analyst * John Tumazoshe John Tumazos Very Independent Research - Analyst * Jorge Beristain Deutsche Bank - Analyst * Andrew Kaip BMO Capital Markets - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning, ladies and gentlemen. Welcome to the Goldcorp Inc. Q2 2015 Results Conference Call for Thursday, July 30, 2015. 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. -------------------------------------------------------------------------------- Jeff Wilhoit, Goldcorp Inc. - VP-IR [2] -------------------------------------------------------------------------------- Thank you, Donna, and welcome to the Goldcorp second quarter earnings conference call. Among the senior management in the room with me today are Chuck Jeannes, President and Chief Executive Officer; Lindsay Hall, Executive Vice President and Chief Financial Officer; George Burns, Executive Vice President, Chief Operating Officer; and Russell Ball, Executive Vice President, Corporate Development and Capital Project. For those of you participating on the webcast, we have 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 amount of estimated future production, costs of production, capital expenditures, and costs and timing of the development of new deposits. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause the actual results to be materially different from those expressed or implied by such forward-looking statements. Accordingly, you should not place undue reliance on forward-looking statements. With that I will now turn the call over to Chuck Jeannes. -------------------------------------------------------------------------------- Charles Jeannes, Goldcorp Inc - President, CEO [3] -------------------------------------------------------------------------------- Thanks, Jeff, and thanks everyone for joining us. Before I move to our quarterly results, I need to report that we received news late last night of a tragic vehicle accident in the town of Mazapil, in Zacatecas, Mexico. That resulted in numerous fatalities and many more serious injuries. We understand that some of the affected include one of our employees and several family members of our employees from the nearby Penasquito mine. Some of you on the line of have been to the town of Mazapil during a previous Goldcorp investor tour. It's about 15 kilometers from Penasquito and all of us at Goldcorp are grieving this morning for the victims of this tragedy and for the friends and family members that are today dealing with such a terrible loss. Our emergency response teams of Penasquito were on site to provide assistance immediately after the accident and we're making available every resources at our disposal to aid the victims and their families. So we are coming to you today from Quebec City, where we just concluded our quarterly Board meetings. This afternoon we'll be heading up to Eleonore to celebrate its inauguration. And checking on its accelerating ramp up. Turning right to our second quarter performance, we were very pleased to report strong operating and financial results. Gold production was a record 908,000 ounces. With all-in sustaining costs continuing to trend downward at $846 an ounce, adjusted operating cash flow was $358 million or $0.43 a share. Very importantly, I'd highlight that we have now turned the corner from investment to harvest mode, as we delivered free cash flow of $174 million for the quarter or $50 million after the payment of dividends. All in, it was an outstanding quarter and sets us up for a successful year. George will walk through the excellent operating results where record production from the heart of the ore body at Penasquito plus strong performances at Cerro Negro, more than offset a slower ramp up at Eleonore. Beyond the operations, our second quarter was also notable for a number of successfully executed initiatives as part of our strategy to remain well positioned for success in any gold price environment. We substantially enhanced the Company's liquidity through $1 billion increase in our credit facility up to $3 billion at very attractive terms. We added to our long-term track record of creating value through the divestment of non-core assets with the sale of our interest in the South Arturo project and then through the sale of our 26% stake in Tahoe Resources. Another key element of our strategy was right-sizing our dividend to more appropriately allocate free cash flow in light of weaker metals prices. As we reported this morning, we reduced the dividend per share by 60% to $0.02 per month. Absent this change, at current metal prices, we'd be paying an inordinate amount of our free cash flow to fund our dividend. So the Board has taken this step to ensure that we preserve the flexibility to fund our many organic growth opportunities. Turning to the guidance we provided this morning, with the overall portfolio performing very well, we expect a trend towards the upper end of our gold production guidance of between 3.3 million ounces and 3.6 million ounces for 2015. As a part of that updated outlook in light of Penasquito's strong quarter and outlook for the second half, we expect production there to be towards the upper end of the 2015 guidance. And then conversely at Eleonore, the slower ramp up is expected to result in 2015 production at or below the low end of guidance. On the cost side, continued focus on cost reduction along with favorable currency effects in our Canadian and Mexican operations helped drive our all-in sustaining cost downward for the fourth consecutive quarter. Our Operating for Excellence program continues to deliver wins in the form of productivity and efficiency enhancements and we remain on track toward our goal of $175 million in additional realized benefits in 2015. Consequently, we've improved our all-in sustaining cost guidance to between $850 and $900 per ounce. We're working on cost containment throughout the organization, including our corporate offices. And our corporate G&A guidance has also been reduced to approximately $170 million compared to our prior guidance of $185 million. With our capital investments tracking as planned, we've also reconfirmed capital spending of between $1.2 billion and $1.4 billion for the year. As I mentioned earlier, our job and our strategy is to manage the company to thrive regardless of what price environment we find ourselves in. Our focus continues to be on what we can control, our costs and at a time of flat or declining metals price, that's the way we must protect our margins. So we entered this cycle in a pretty strong position. Our balance sheet is in excellent shape, providing us great liquidity and financial flexibility. Our costs are declining, allowing for that margin protection I just mentioned. We see a particular benefit from having so many of our operations in Canada and Mexico where the FX movements are partially offsetting the gold price reduction. And as you can see on the slide, we have a clear plan as to how we'll manage our business if we see even lower metals prices. We've already taken some of these steps, we're prepared to take further action if necessary. The bottom line is that we're confident we can successfully weather any conceivable gold price environment. So turning to the gold market itself, you've certainly seen the concerns over Chinese capital markets and slowing growth rates, combined with the strong US dollar that had a negative effect on the gold price. But I continue to believe that the long-term trends in support of gold remain intact. Central banks continue to remain net buyers, and long-term fundamentals point to growth in the Chinese and Indian physical markets. Recall that in just the first quarter of this year, Chinese consumer demand was the fourth largest on record. On the supply side, we see lower mine supplies of gold next year and continuing indefinitely, and I think as this new reality begins to take hold, there must be a market response. Our focus remain on those things we can control, as I said, execution of our growing low-cost gold production profile, the growth of gold reserves that will drive strong financial returns over time. With a stable portfolio of high quality long-life assets and strong investment grade balance sheet, we're well positioned for success in the current gold price environment and so with that I'm going to turn it over to George. -------------------------------------------------------------------------------- George Burns, Goldcorp Inc. - EVP, COO [4] -------------------------------------------------------------------------------- Thanks, Chuck. I'm very pleased to report Goldcorp's mines delivered second quarter gold production of 908,000 ounces at low all-in sustaining cost of $846 per ounce. Record gold production was driven by Penasquito and Cerro Negro as well as solid performance at most of the mines. At Penasquito, an extremely strong second quarter was driven by higher sulphide grades as a result of positive model reconciliation as substantial mining took place in the heart of the deposit in Phase 5C. With continued focus on operating for excellence, we delivered another quarter of declining costs. Musselwhite in particular deserves special mention for success in bringing down their cost. Musselwhite had been among our highest cost mines. And Bill Gascon, our Mine General Manager and his team amongst the lowest in the portfolio this quarter at $761 per ounce is an outstanding accomplishment. I believe we have the right people in place to continue to unlock efficiency and productivity improvements across all of our mines. Penasquito gold production was a record 298,000 ounces at an all-in sustaining cost of $416 per ounce. The particularly higher grades in the second quarter are expected to moderate later in the year and we are maintaining our production guidance albeit toward the high end between 700,000 ounces and 750,000 ounces. Construction of the Northern Well Field is on hold until a fair resolution of social issues with the local community can be reached. We are confident we can achieve a resolution in the near-term. However, we have mitigation strategies in place which include additional 50 watering, that will give us adequate freshwater. The Metallurgical Enhancement Project feasibility study for Penasquito remains on track for completion in early 2016 with permit application submitted in May. During the quarter, the pilot plant construction was completed and we commenced testing with positive results. At Camino Rojo, we continue to advance the pre-feasibility study, which is on track to be completed in 2016. An update of the geologic model continued during the quarter and metallurgical testing of the sulphide transition and oxide zones also progressed with positive results. With the successful ramp up at Cerro Negro well underway, second quarter safe gold production totaled 131,300 ounces at an all-in sustaining cost of $792 per ounce. Increased production resulted from planned ramp up of the higher grade Mariana Central mine and an increase in haulage capacity that we achieved following the arrival of additional surface oil trucks. The mill continued to perform well during the second quarter. Throughput averaged about 3,300 tons per day. Hopefully, efforts continue to be a great success story at Cerro Negro as gold and silver recoveries improved further as a result of optimizing grind size and reagents. At the drill bit, we continued our resource definition drilling program, expanding resources with strong results at the Marianas Complex, Bajo Negro and Vein Zone. Turning to Eleonore, safe quarter gold production was below expectations, totaling 43,800 ounces at an all-in sustaining cost $1,656 per ounce. As we work through the start-up issues, we saw improving performance towards the end of the quarter and continuing into July. Mining of ore continue to take place in the first two main production horizons and we expect to commence production from the next two production horizons this quarter. These additional horizons set us up for a strong second half with improved flexibility and higher ore grade. Longhole stopes in Horizon 4 have been drilled and development is progressing which support substantially higher grades, as expected. Following the shutdown in May, mill throughput of Eleonore's averaged about 5,100 tons per day and it's performing very well. As a result of our slow start, we expect production at or below the low end of guidance range for the year. Included in this slide and our investor deck and have updated it with the current location of the decline and production at the end of the second quarter. This outlines where each of the horizons are and you can see the yellow stopes that we expect to mine by year-end. On the exploration front, two more drills were added in May for a total of four, which are focused on infill drilling in the lower portion of the deposits in horizons 5 and 6. Work on the Eleonore crown pillar pre-feasibility study, continue to advance during the second quarter. Major activities included progression of the trade-off study between pit and underground mining, determination of the dike location and permitting and stakeholder engagement efforts. The completion of this pre-feasibility study is expected by the end of 2015. Turning to Red Lake, safe gold production totaled 90,800 ounces at an all-in sustaining cost of $879 per ounce. Production was lower than the prior quarter's result of lower grades from fewer tons mined and the high grade zone due to mine sequencing. For the second half of 2015, we expect higher tonnage, as we ramp up the upper Red Lake zone where mechanized bulk mining is being deployed. At our HG Young discovery, exploration continue to advance north from the 14 level of the Campbell complex. This strip provides new drill platforms for follow-up drilling at several positive intercepts from the ongoing surface exploration program. And we're working towards an initial resource by year-end. At Cochenour, intersected gold grades remain consistent with expectations, however recent drill data and newly discovered mineralized zones indicate a change in orientation of some of the veins compared to our existing model. Additional advance exploration and analysis is underway and we need to finish that work to provide information to complete the final mine planning and infrastructure. We still plan to process mill feed for the first -- from the first test stopes by the end of this year. Before I turn it over to Lindsay, I have to say I'm very pleased with our second quarter and with the way the year is shaping up. We have a strong portfolio of mines with good opportunities ahead of us. Our focus remains on execution. Lindsay? -------------------------------------------------------------------------------- Lindsay Hall, Goldcorp Inc. - EVP, CFO [5] -------------------------------------------------------------------------------- Thanks, George. Our excellent operating performance resulted in $528 million of operating cash flows for the quarter, fully funding our capital expenditures and dividend payments. So a really good quarter of financial performance. We renewed our revolving credit facility for another five years through to 2020 at the same rates of 17.5 basis points undrawn, LIBOR plus 120 basis points drawn. With repayments made in the second quarter and the application of Tahoe net proceeds in the third quarter, we expect the revolver balance to be down to zero by the end of the year. That will leave us with about $2.5 billion of long-term debt with first scheduled repayment in 2018. We were also pleased that S&P restored our stable triple B plus rating which reinforces their view that we have the financial strength to comfortably weather periodic downturns in the commodity cycle, which we find ourselves in today. Turning to the income statement. Record gold sales of 903,000 ounces resulted in over $1.3 billion at adjusted revenues for the quarter. All-in sustaining cost for the quarter was $846 per ounce, compared to $885 per ounce in the prior quarter. The decrease is mainly due to higher gold sales volume. While the Company's operating cost benefit from foreign exchange effects of our Canadian, Mexico operations, the currency hedging program previously placed on 2015 mutes these effect somewhat. The Company generated $358 million or $0.43 per share of adjusted operating cash flows which is before a positive change in working capital of $202 million. Given that both Cerro Negro and Eleonore are now in commercial production, we've included most of the new capital spend and you can see that we generated a positive $174 million of free cash flow showing the financial strength of our portfolio of mines. For the quarter, we reported $392 million of net earnings or $0.47 per share compared to a net loss of $87 million or $0.12 per share in the first quarter of 2015. Excluding the impacts of dilution in realized gains on the sale of Tahoe (inaudible) and the unrealized losses from the foreign exchange translation of deferred income tax assets, adjusted net earnings totaled $65 million or $0.08 per share in the second quarter compared to $12 million or $0.01 per share in the previous quarter. Regarding provisional pricing, we had a positive $6 million impact at Penasquito and a negligible impact at Alumbrera for the second quarter. For the third quarter provisional sales at June 30, 2015 at Penasquito, we had 205,600 ounces of gold, priced at $1,172 per ounce, 4.7 million ounces of silver at $15.57 per ounce, 45 million pounds of zinc priced at $0.90 per pound and 33 million pounds of lead priced at $0.80 per pound. While at Alumbrera, we have 4,590 ounces of gold priced at $11.70 per ounce and 4.2 million pounds of copper priced at $2.61 per pound. We've also reported today we've increased our guidance for the rest of the year regarding DD&A per ounce. That's depreciation, depletion and amortization. We now expect it to be approximately $425 per ounce for the year. The cost associated with acquiring and building assets are amortized over the existing reserve base to determine the DDA per ounce. With these new mines, the DDA per ounce will start out high and as exploration success converts more ounces to reserves, the DD&A per ounce will decrease. In closing, as Chuck mentioned, we are cognizant of the challenges brought by lower metal prices. I am very comfortable with our financial position both today and in any conceivable gold price range. We manage the business for the long-term. With our financial strength, we're making those investments that makes sense both today and for the future when commodity prices rebound. With that, I'll turn it back to you, operator, for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you. (Operator Instructions) Andrew Quail, Goldman Sachs. -------------------------------------------------------------------------------- Andrew Quail, Goldman Sachs - Analyst [2] -------------------------------------------------------------------------------- Thanks very much for the update and congratulations on a very, very strong quarter, operationally. Few questions. Firstly, on Penasquito, (inaudible) doing the model this morning. Given your guidance, 700,000 ounces to 750,000 ounces, and we know you're going through a good part of the ore body as you mentioned and the drive was, I think, probably hard, and most probably expected. Can you sort of give any color on what you think the sort of Q3, Q4, because it's pretty hard to get to even the top end of the year, the guidance. -------------------------------------------------------------------------------- George Burns, Goldcorp Inc. - EVP, COO [3] -------------------------------------------------------------------------------- Sure. Andrew, this is George. You know that the grades were extremely high in the second quarter where we're expecting the grades in the second half to be down around 0.8 gram per ton, and so we have substantially lower production in the third and fourth quarter relative to the second and more in line with our expectations. So we're not expecting that positive grade reconciliation to continue into the second half. -------------------------------------------------------------------------------- Unidentified Participant [4] -------------------------------------------------------------------------------- Got it. Yes, that makes more sense. Seeing what was on the dividend, I suppose it's prudent what you guys have done (inaudible) relatively hard versus piece. And then we have seen last week or so that gold prices have corrected. Chuck, do you think, if we do get through this period of pain and prices do increase, do we -- is that flexible to sort of increase again and what sort of decisions (inaudible) you guys have to say and how long would you have to say middle prices sort of, I suppose, rebound? -------------------------------------------------------------------------------- Charles Jeannes, Goldcorp Inc - President, CEO [5] -------------------------------------------------------------------------------- Yes, it's good question, Andrew. Because we have a very long-term view in our business, we make investments that take three years or four years and then build mines the last 20 years. But when it came to this decision, at a $1,100 gold, it's hard to keep that dividend up where it was. If you assume that price continues for the rest of the year, it means that we're having to borrow money to pay the dividend, which just makes no sense. So I think that as we do, as we've always done, the Board will look at the dividend on a quarterly basis and we'll take everything into account that we have in front of us, including metals prices, our view on the future, our investments that we have coming up, we like putting money back into high returning high quality investments and we've got some nice organic opportunities out there in front of us that we're continuing to advance. So you take all those things into account, then you make a decision and I really can't predict what might happen in the future, we just have to see as we go. -------------------------------------------------------------------------------- Andrew Quail, Goldman Sachs - Analyst [6] -------------------------------------------------------------------------------- Okay. And the last one, just on Pueblo Viejo. Just going back a couple of quarters, there's sort of -- there's seems to be a timing difference between south and production. And is that -- I look back the last few quarters that is, do you think these are going forward, is that going to become more consistent look at it historically or do you sort of that variability being consistent but being (inaudible)? -------------------------------------------------------------------------------- Charles Jeannes, Goldcorp Inc - President, CEO [7] -------------------------------------------------------------------------------- Yes, Andrew I think it should be normal. There's nothing untoward. I know quarter-over-quarter we had a lot less sales at PV than the first quarter just because we had inventory at the end of 2014 year that we sold in first quarter, but there is nothing -- there shouldn't be really much of a lag quarter-over-quarter. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- Patrick Chidley, HSBC. -------------------------------------------------------------------------------- Patrick Chidley, HSBC - Analyst [9] -------------------------------------------------------------------------------- Just a question on the Northern Well Field, halting activities there and yet you're confident that in the short term, you could get a resolution. Those two things don't seem to gel. I mean what's the timing on this and how -- what kind of downside is there, for example, if there is no resolution in the next sort of 6 to 12 months? -------------------------------------------------------------------------------- Charles Jeannes, Goldcorp Inc - President, CEO [10] -------------------------------------------------------------------------------- So Patrick, just a couple of facts. We're about 88% complete with the construction. So there's not a lot of work left. We could wrap the whole thing up in four months. And so when you look at our hydrologic modeling, increased pit dewatering that's underway, we've got plenty of flexibility well into next year. In terms of negotiations, it's like any negotiation, we've got to get through it, but we're confident that will get resolved, I think before the end of the year and we'll just have to see how those negotiations go. We have other alternatives if this negotiation doesn't go as we expect. So that's where our confidence is there, we've got multiple options there. -------------------------------------------------------------------------------- Patrick Chidley, HSBC - Analyst [11] -------------------------------------------------------------------------------- Okay. And is it to do with the actual well field area or is it right access for the pipeline? -------------------------------------------------------------------------------- Charles Jeannes, Goldcorp Inc - President, CEO [12] -------------------------------------------------------------------------------- It's one particular community, it's the pipeline and I think one of the wells, the bulk of the wells, aren't on this particular community's property. -------------------------------------------------------------------------------- Patrick Chidley, HSBC - Analyst [13] -------------------------------------------------------------------------------- Okay. And then on Camino Rojo, you're saying that there is good progress on the met work there. Can you maybe characterize a bit more, is it very Pensaquito sulphide ore? And also what sort of timing and what sort of negotiations will you have to have to enable to treat that as a satellite pit to say if you like for Penasquito? I mean, when do you think that might come into the production scheme at Penasquito? -------------------------------------------------------------------------------- Charles Jeannes, Goldcorp Inc - President, CEO [14] -------------------------------------------------------------------------------- We're on the metallurgical test work. So we have an oxide reserve in place and that's all basically. The work is focused on the transition and sulphide material. In the transition, we've got ongoing test work that there's going to be some positive results on improved recoveries. Essentially (inaudible) that transition, some of it would go to oxide treatment and some of it would go to sulphide. So we're working pretty hard on that and the other sulphide mineralization is similar to Penasquito, our plant, we'll work for that sulphide processing with some modifications. In terms of whether we (inaudible) to put it into production, if we have that direction, we're looking at transportation We've got truck haulage as an option. We're looking at rail options. So all that with - any of the non-highway options would take too many negotiations routing right of ways. So that work is ongoing. Additionally, water, there's another thing we're focused on, we're looking at the Penasquito expanded water district as a source. And particularly now that we're looking at processing the material at Penasquito. So all those activities are underway, and we're feeling pretty good about that opportunity as optionality on Penasquito's mine life and perhaps even an expansion. -------------------------------------------------------------------------------- Patrick Chidley, HSBC - Analyst [15] -------------------------------------------------------------------------------- About timing on the oxide project presumably, that's got to be done first in any case. So the sooner the better really. -------------------------------------------------------------------------------- Unidentified Company Representative [16] -------------------------------------------------------------------------------- Yes. Patrick, maybe I can just jump in and remind you that we have a pre-feasibility study that will be done in 2016 and then still have to get on with the feasibility and detailed engineering and permitting and the like. So we're advancing it, but I wouldn't put it in your model coming in 2017. It's going to take a bit longer than that. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- David Haughton, CIBC. -------------------------------------------------------------------------------- David Haughton, CIBC - Analyst [18] -------------------------------------------------------------------------------- Just sticking with Penasquito, I noticed the recoveries were up in the quarter compared to what we've seen. Is that in relation to the better grades that have gone through or is there some sort of constant tail thing to think about here? -------------------------------------------------------------------------------- Charles Jeannes, Goldcorp Inc - President, CEO [19] -------------------------------------------------------------------------------- David, before I pass it onto George, just wanted to congratulate you on your new posting. It's good to have you back on the file and we'll get used to you coming on behalf of CIBC here pretty quick. -------------------------------------------------------------------------------- David Haughton, CIBC - Analyst [20] -------------------------------------------------------------------------------- There's no profiles on the name yet. -------------------------------------------------------------------------------- George Burns, Goldcorp Inc. - EVP, COO [21] -------------------------------------------------------------------------------- Yeah. And regarding the recovery, for sure that the substantially higher head grade gave us a good tailwind. Unless we see oxidation in that sulfide feed, you can get to a constant tail. So as that head grade goes up, the recovery goes up with it. -------------------------------------------------------------------------------- David Haughton, CIBC - Analyst [22] -------------------------------------------------------------------------------- And should we be sticking with the 110,000 ton per day sort of throughput level given that where you've been recently and some sort of thought to the hold up on the water wells? -------------------------------------------------------------------------------- George Burns, Goldcorp Inc. - EVP, COO [23] -------------------------------------------------------------------------------- Yes, and our throughput right now isn't restricted by water. And so we're going to be in that 110,000, 115,000 ton a day range. -------------------------------------------------------------------------------- David Haughton, CIBC - Analyst [24] -------------------------------------------------------------------------------- And now just flicking over to Eleonore. Clearly a big catch-up in the second half to go anywhere near guidance. I'm not assuming that you do, but I'm somewhat surprised with the grade where it's been around the 4 gram, 5 gram kind of level and do you have an expectation of that stepping up materially three time as well? -------------------------------------------------------------------------------- George Burns, Goldcorp Inc. - EVP, COO [25] -------------------------------------------------------------------------------- Yes, we are expecting a substantial jump in grade both third quarter and fourth quarter. And really when you look at disappointing second quarter, a couple things impacted, there's one, we are dialing in the right drill and blast, stope size and so we had some over size and that material handling difficulty with oversize slowed down the mining and we also had some of the stopes with higher than expected dilution. But what I can tell you, late in the second quarter and coming into the third quarter, we're having an improvement in our fragmentation, our belief is that we've dialed in the right drill and blast techniques on these stopes, so as the material handling will happen well, the stopes we have lined up in the second half are substantially higher grade. And so, you are going to see a lot stronger third and fourth quarter. -------------------------------------------------------------------------------- Andrew Quail, Goldman Sachs - Analyst [26] -------------------------------------------------------------------------------- And also in your remarks earlier, George, I think I heard you say that you have hit from time to time 5,000 tons a day, which is ahead of what I would have expected. And I guess the next question is what kind of level, do you feel comfortable with at the moment on a sustained basis? -------------------------------------------------------------------------------- George Burns, Goldcorp Inc. - EVP, COO [27] -------------------------------------------------------------------------------- So we're comfortable at the 5,000 ton a day range based on what we're currently achieving and we've actually exceeded 6,000 tons a day on a single-day basis. So we know that plant is edging very close up to design a 7,000 ton a day and it's really getting the underground ramped up, that's going to deliver strong second half. -------------------------------------------------------------------------------- Andrew Quail, Goldman Sachs - Analyst [28] -------------------------------------------------------------------------------- And when we're I'm looking at the costs, very hard obviously to judge in the first quarter of commercial production. But with the higher throughput and the better grades, then your fixed cost base should be coming down pretty quickly in the second half, is that a fair interpretation? -------------------------------------------------------------------------------- George Burns, Goldcorp Inc. - EVP, COO [29] -------------------------------------------------------------------------------- That's correct. -------------------------------------------------------------------------------- Operator [30] -------------------------------------------------------------------------------- John Tumazoshe, John Tumazos Very Independent Research. -------------------------------------------------------------------------------- John Tumazoshe, John Tumazos Very Independent Research - Analyst [31] -------------------------------------------------------------------------------- Thank you very much. While we too are very optimistic about the gold, there are forecasters in the market under $1000 now and we're not that far from it. Any event the price of gold were $900 or $1,000, are there any business leverage you would, core policy should change or would you just continue managing for the long-term because your balance sheet is strong and you've got room to breathe? -------------------------------------------------------------------------------- Charles Jeannes, Goldcorp Inc - President, CEO [32] -------------------------------------------------------------------------------- That's certainly a key question. We thought a lot about it. We always try to sensitize our business and make sure we're prepared for a wide range of external scenarios, including metals price of course. So we put up this slide number 7. I don't know if you saw it, but over time we've had a strategy. So what are the kinds of things that we would do in a declining price environment to make sure that we kept the company strong and we've already done some of them. We've reduced our corporate G&A, we reduced our enhanced -- certainly enhanced liquidity and strength of our balance sheet by selling the Tahoe shares and upsizing the revolver and now reducing the dividend. We have the opportunity in front of us to start deferring capital projects at mines. We haven't done that at this point. We're still going full speed ahead with things like the Hollinger project and the Hoyle Pond deep wins and the near-pit crushing and conveying at Penasquito. And so we have opportunities on particular projects like that that if we had to, we could start slowing down. And I don't mean those specifically, but I just used those as examples. And we're also working to make sure that our G&A out of the regional sites and at the mines is appropriate. We can optimize our production and make sure that we're focusing only on ounces that make money and sometimes that means that you reduce production, but the ounces you're making are turning a profit for you. And then if things really get down below $1,000 and then stay there for a while, you've got to start looking at reconfiguring and shutting down pieces of mines or parts of operations to make sure that you're not in an ongoing net cash deficit. I guess one thing I would say is that we'll be pretty proactive. Even though we have a strong balance sheet, we're not going to operate in a mode where dollars are going out the door for an extended period. That just doesn't make sense. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- Andrew Kaip, BMO Capital Markets. -------------------------------------------------------------------------------- Andrew Kaip, BMO Capital Markets - Analyst [34] -------------------------------------------------------------------------------- I have two questions. One is regarding Red Lake. You indicated on the call that you're revising your interpretation of structures at the Cochenour deposit and I'm just wondering in consideration of that, do you have a sense of how long it's going to take geological department to reconcile or resolve what those structural orientations are going to be? And then what are the implications from a development standpoint as you move that zone forward? -------------------------------------------------------------------------------- George Burns, Goldcorp Inc. - EVP, COO [35] -------------------------------------------------------------------------------- It's George. So on the first question, over the next quarter or two to I'm sure we'll have an understanding of what we're seeing in the development. Essentially from the drill information, we've opened up some of the cells that will support the initial stopes and we're seeing -- we're seeing some of the vanes with a different orientation. So we're doing some current development and additional drilling to help the geologists get that well understood. And it's really about ensuring we get the infrastructure in the right place. So to the second part of the question, we've got a ramp that we want to ensure is in the right location. And we also want to make sure these cells are properly located. So we still expect to have first stopes out in the fourth quarter again over the next quarter or two, I'm sure we're going to have this well understood and finalize the mine plan for next year. -------------------------------------------------------------------------------- John Tumazoshe, John Tumazos Very Independent Research - Analyst [36] -------------------------------------------------------------------------------- All right, thanks very much. And then the second question has to do with the El Camino deposit and the transitional material. What are the key challenges from a metallurgical perspective that you're encountering? You indicated that there is going to be some ore -- selective mining that's going to take place in reference to oxide and sulphide material, but transitional material can be problematic with recoveries and I'm just wondering where those problems are arising in your studies at this point in time? -------------------------------------------------------------------------------- George Burns, Goldcorp Inc. - EVP, COO [37] -------------------------------------------------------------------------------- So in the recent work, it's more of an opportunity than a problem and essentially in the prior work, that transition material was all deemed to be reach. And what we're finding is a fair portion of that transition material is amenable to pretty good sulphide recoveries and economics. So that's where the focus is, is how can we improve the overall economics at Camino Rojo by processing a portion of that transition material through the sulphide process. So we expect that to have some positive impacts as we continue our metallurgical work. -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- Jorge Beristain, Deutsche Bank. -------------------------------------------------------------------------------- Jorge Beristain, Deutsche Bank - Analyst [39] -------------------------------------------------------------------------------- Hi guys. Jorge Beristain with Deutsche Bank. I have a few questions. Maybe the first one for Chuck. The dividend you intoned that you're really trying to balance it towards free cash flow and you do not want to be in a position to borrow to pay the dividend, if in 2016 we continue to see a weak gold price, is that what you're going to manage your dividend policy towards? In other words, you don't want to borrow to pay the dividend? -------------------------------------------------------------------------------- Charles Jeannes, Goldcorp Inc - President, CEO [40] -------------------------------------------------------------------------------- Yes. Like I said, Jorge, there is a lot of factors that go into the Board's decision each quarter as it looks at the dividend and decides what to do going forward. And certainly a big part of that is what our models show in terms of our cash generation and how much of that cash is going to pay the dividend versus going into the bank or to pay for the organic opportunities that we have in front of us. So if the gold price stays low, what we've done today, we think that this makes sense in a spot price environment that we find ourselves today for an extended time. And I can't get into projecting what the Board might do in 2016 or beyond other than to say this action that was taken today, we think makes sense for as far as we can see going forward, assuming similar gold price environment. -------------------------------------------------------------------------------- Jorge Beristain, Deutsche Bank - Analyst [41] -------------------------------------------------------------------------------- And in terms of sustaining cost per ounce, I'm just trying to get a good kind of benchmark. Obviously your unit output volume is going up year-on-year and 2016 versus 2015. Is $200 an ounce a good number? And I'm kind of surprised that we haven't seen more in the cost out in terms of you are receiving a lot of oil tailwinds and lower FX as well. And if you could just also comment, have you guys done enough heavy lifting in the cost department? We've seen a lot of your global mining peers recently start to announce some pretty large layoffs to their work forces to balance their cost. And I'm just wondering when do you think that the gold industry starts to cross that threshold? -------------------------------------------------------------------------------- Charles Jeannes, Goldcorp Inc - President, CEO [42] -------------------------------------------------------------------------------- Well, maybe I'll answer that last one first. I don't want to sound cocky, but you don't have to lay people off if you didn't get carried away hiring them in the first place. And I think we've got a right sized organization and I think if you look at our four consecutive quarters of declining costs, and look at not just all-in sustaining cost, which include sustaining capital and as we know that can be chunky and you can move that around, you can defer projects, you can defer investments and trucks and engine rebuilds and all that sort of thing. But look at the actual cash cost per ounce, which I think we've done a very good job of managing those basic cost on a unit basis. So we think that we have the ability to continue to attack that. We've got a lot of opportunities in front of us. George's (inaudible) teams continue to find ways to enhance efficiency and productivity and cut cost. So we don't think we're by any means to the end of that and where we can and should go. And we're going to keep at it very hard. As far as sustaining capital, we've told you that we run somewhere in the $875 to $1billion a year range based on how we see our world right now and the portfolio of mines we have, and so you can do the math to figure out what that comes out to on a per ounce basis. -------------------------------------------------------------------------------- Jorge Beristain, Deutsche Bank - Analyst [43] -------------------------------------------------------------------------------- And so if I could squeak one last one in for Lindsay. Could you just help us reconcile just the thought process on page 23 of your PowerPoint where you detail for budgeting purposes like you're running at $1,200 gold scenario $18 silver and $3 copper versus your reserves, which I believe are booked at, I'm not sure if I'm speaking correctly, if it's $1,200 to $1,300, but I just wanted to understand why there may be a difference between the budgeting price you're running and then the reserve cut off-price? And then secondly, what your sensitivities would be to say a $100 lower gold price, one of your peers, Newmont recently put out a graphic that was pretty plain and simple showing the range of reserve life relative to different gold scenarios. So if you could just maybe walk us through that thought process? -------------------------------------------------------------------------------- Lindsay Hall, Goldcorp Inc. - EVP, CFO [44] -------------------------------------------------------------------------------- I'll attempt to, I'll probably use George as well. But two different process, one setting the budgeting. For the revenue line, one year $1,200 that's what we've used for 2015 budgets. And we obviously run it at various gold prices. So that's really for budgeting and cash flow and how I set up the balance sheet from a financing perspective. And I think -- so that's clear to you. And I think when you talk about reserves and resource and price setting, I'll pass it over to George and it's a different process, resetting of reserves and resources obviously, Jorge, in the sense that it's more of a long-term view what he's going to mine in the future years. -------------------------------------------------------------------------------- George Burns, Goldcorp Inc. - EVP, COO [45] -------------------------------------------------------------------------------- Okay. So on reserve basis, we've previously disclosed that if there was $100 an ounce decrease in the gold price to $1,200 an ounce versus our reserve price assumption of $1,300, that would have about a 2% impact on our reserves and that doesn't include the offset that we see, particularly in Canada, and Mexico with the exchange rates. So the way it's reacting now that $100 an ounce is largely offset with FX in both Canada and Mexico where big chunk of our reserves sit. -------------------------------------------------------------------------------- Jorge Beristain, Deutsche Bank - Analyst [46] -------------------------------------------------------------------------------- Is that linear, if we were to say, run it down to $1,100 you'd be talking about a 4% hit to reserves? -------------------------------------------------------------------------------- George Burns, Goldcorp Inc. - EVP, COO [47] -------------------------------------------------------------------------------- No, that's not linear and I don't have that number at a $1,000. Actually, it's about 5%. Yeah. -------------------------------------------------------------------------------- Unidentified Company Representative [48] -------------------------------------------------------------------------------- And that excludes the impact of FX, it's just toggling the gold price and leaving everything else the same, which is not the case is what's happening in our world today is we get a big kickback on the FX to offset some of the gold price reduction. -------------------------------------------------------------------------------- Operator [49] -------------------------------------------------------------------------------- Thank you. There are no further questions registered at this time, I'd like to turn the meeting back over to Mr. Jeff. -------------------------------------------------------------------------------- Jeff Wilhoit, Goldcorp Inc. - VP-IR [50] -------------------------------------------------------------------------------- Okay. Thank you very much and thanks everyone for joining us on the call today. As I said, this is certainly a strong quarter for us at Goldcorp and sets us up for a successful year. We'll remain focused on the things we can control and work to deliver the increasing production, reduced costs and then maintain our financial flexibility to succeed and evolve the gold market. And I do want to emphasize that again, we are long term bullish on the gold price. The short-term impacts will come and go, they always have, I've been in the business a long time and I'm confident we're going to be cycling up again. So we will be prepared for that eventuality. So thanks everybody. Have a good summer and we'll look forward to speaking to you in the fall. -------------------------------------------------------------------------------- Operator [51] -------------------------------------------------------------------------------- Thank you. The conference has now ended. Please disconnect your lines at this time and thank you for your participation.
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