Goldcorp profit falls on operational woes

Thu Jul 26, 2012 5:34pm EDT
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(Reuters) - Goldcorp Inc (G.TO: Quote) reported a big drop in second-quarter earnings on Thursday as cash costs doubled and operational setbacks at its Peñasquito mine in Mexico and Red Lake mine in Canada cut into gold output.

Canada's second-largest gold miner had flagged the problems at the two projects earlier this month and lowered its production forecast for the year. Quarterly adjusted profit, however, came in in line with analyst estimates, sending shares up more than 4 percent.

At Red Lake, the company has encountered lower grades and de-stressing work was moving slowly. At Penasquito, water shortages hit milling activities.

"The performance issues at Red Lake and Peñasquito will remain our highest priority in the second half of 2012," Chief Executive Chuck Jeannes said in a statement.

He added that production is expected to rise at Red Lake in the second half of 2012, though the company warned it is evaluating the long-term impact of increased seismic activity and lower grades at the northern Ontario mine.

At Peñasquito, the water shortage that has hampered milling activity is expected to hold back second-half gold production. Goldcorp said it is drilling additional wells and working on improving water efficiency at the project.

The company also said it will review its project development costs in light of the inflationary pressures the mining industry is facing, with an update expected in early 2013.

As a glaring example of those pressures, Canada's No. 1 gold miner, Barrick Gold (ABX.TO: Quote), said on Thursday that the cost of building its multibillion-dollar Pascua Lama gold mine on the border between Chile and Argentina will likely rise by 50 to 60 percent.

"Of course everyone is looking at Barrick and their blowout and thinking: Hmmm, that sounds pretty ominous," George Topping, an analyst at Stifel Nicolaus, said of Goldcorp's capital cost review. "But I don't think it will be anywhere near as bad as what we've seen at Barrick."   Continued...