Goldcorp Incurs Elevated Cash Costs in 1Q While Increasing Production

Goldcorp GG reported disappointing first-quarter results Thursday, with considerable production growth that was met with sizable cost inflation. While the firm’s key growth projects remain on track to boost production, we believe its elevated operating expenses do not show signs of material remission. Goldcorp’s cost position rests near the middle of the industry cost curve, which is the primary reason we don’t think it enjoys an economic moat. In light of the caution that gold miners are taking toward growth given lower gold prices, we are going to review our longer-term gold production estimates. We will probably lower our fair value estimate, though we are still investigating the magnitude of the decrease.

Goldcorp produced 614,600 ounces of gold during the quarter at a unit cash cost of $710 per ounce. This represented a production increase of 17% and a unit cash cost increase of 9.6% from the year-ago quarter. About 12% of the incremental production growth was contributed by the commencement of commercial production at Pueblo Viejo in 2013, with the remainder largely attributed to higher grades at Red Lake, the firm’s largest gold mine. In aggregate, the increased cash costs of Goldcorp’s mining assets were the result of increased wage rates, consumables, and power costs. Management has confirmed its 2013 production guidance of 2.55 million-2.80 million ounces with coproduct costs for gold ranging between $700 and $750 per ounce. For the most part, Goldcorp’s main projects at Cerro Negro, Eleonore, and Cochenour are progressing well, though the permit for power line construction at Cerro Negro was received later than expected and will delay gold production until the first quarter of 2014. We think these three projects should drive significant production growth for Goldcorp; however, the firm’s development pipeline after this trio seems a bit empty. We believe that as Goldcorp continues to expand its production base, growth projects large enough to move the needle for the company will become increasingly more difficult and expensive to find. As a result, we think investors shouldn’t expect Goldcorp to maintain its rapid historical growth path over the long term.

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