Goldcorp's JV Commences Production

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The year 2012 has not been encouraging for Goldcorp Inc. (GG) so far and the company has yet to spread cheers among its investors. The company had curtailed its full-year guidance last month and followed it with a disappointing second quarter report.

In what can be construed as bucking the trend, Goldcorp recently announced that it has registered its first gold production at the Pueblo Viejo mine in the Dominican Republic.

Goldcorp holds a 40% interest in the Pueblo Viejo mine while Barrick Gold Corporation (ABX) holds the remaining stake and also serves as the mine operator. In its recently-reported quarter, Goldcorp stated that it expects production at the mine to commence this month, and the ore is now being processed by the first two out of the four autoclaves.

Pueblo Viejo is expected to contribute around 68,000 to 85,000 ounces of gold to Goldcorp’s production this year. Total cash costs are expected in the range of $400-$500 per ounce. Despite the expected costs at the mine being higher than Goldcorp’s full-year target of $310 to $340 per ounce, they are expected to decline over time as production ramps up.

Goldcorp expects total cash costs of less than $350 per ounce (excluding future inflation) for the first five years of full production. Also, the mine is expected to contribute between 415,000 to 450,000 ounces to the company’s production over the same time period.

Goldcorp is an unhedged producer of gold and as such, it is well-positioned to gain from increase in gold prices. However, declining production and escalating costs have weighed on the company’s performance. Weak production from the Red Lake mine in the first half of the year and lower expectations from the Peñasquito mine for the second half had forced the company to slash its targets.

In such circumstances, the commencement of production at Pueblo Viejo comes as a positive for Goldcorp.

We currently have a long-term Neutral recommendation on Goldcorp. The company, which competes with Barrick Gold Corporation and Newmont Mining Corp. (NEM), holds a Zacks #4 Rank, indicating a short-term Sell rating.

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