Goldcorp GG reported decent fourth-quarter results, with slight production growth partly offset by significant cost inflation. The firm’s two flagship mines, Red Lake and Penasquito, generated higher production in the fourth quarter compared with the third quarter of 2012; however, management doesn’t expect these improvements to be fully sustained in 2013. While Goldcorp’s outlook for 2013 left something to be desired, we were encouraged by the fact that the company’s three key growth projects remained on schedule. We will likely maintain our fair value estimate of $29 per share for Goldcorp.
Goldcorp produced 700,000 ounces of gold during the quarter at a co-product unit cost of $621 per ounce, up 2% and 17%, respectively, from the year-ago quarter. Red Lake bounced from rock-destressing issues earlier in 2012, with production during the fourth quarter increasing 39% from the third quarter. Penasquito continued to see weaker results during the fourth quarter as the mine is still recovering from lingering water shortage issues, and mining was focused on lower-grade ore bodies during the quarter. For 2013, management expects to generate between 2.55 and 2.8 million ounces of gold at cash costs between $700 and $750 per gold ounce on a co-product basis. This 2013 production guidance implies no growth from the 2012 fourth quarter’s production run rate, and also implies another significant round of cost inflation for Goldcorp’s mines, which we do not find very encouraging. Goldcorp’s cost position near the middle of the industry cost curve is the primary reason we don’t think the company enjoys an economic moat.
The company was able to deliver some good news on the development project front, as all three of Goldcorp’s major growth projects, Cerro Negro, Eleonore, and Cochenour, remained on track during the quarter. Cerro Negro is scheduled to deliver first gold by the end of 2013, and 55% of detailed engineering for the project was completed at the end of 2012. The Eleonore project in Quebec is scheduled to follow shortly thereafter by pouring its first gold in late 2014, with the Cochenour project (located very close to the existing Red Lake mine) following on its heels with first gold production still scheduled for the front half of 2015. We think these three projects should drive significant production growth going forward for Goldcorp; however, the firm’s development pipeline after this trio seems a bit empty. We believe that as Goldcorp continues to grow 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 continue maintaining its rapid historical growth path over the long term.
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