July 26, 2012 / 2:13 PM / in 5 years

UPDATE 3-Goldcorp profit falls on operational woes

* Adj Q2 profit $0.41 v Q2 2011 $0.52

* Revenue falls to $1.1 bln on lower gold output, sales

* Water shortage to hit second-half output at Penasquito

* Shares closed up 4.76 percent at C$36.50 on TSX

July 26 (Reuters) - Goldcorp Inc 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, 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.”

Topping noted that Goldcorp’s current development push has focused primarily on projects with lower capital costs.

The company did note its 2012 capital costs could be slightly higher than the $2.6 billion budgeted as spending at Pueblo Viejo originally anticipated for 2011 was bumped to this year.

The miner also boosted its exploration spending for the year to $226 million from $200 million on good drilling results at numerous projects.

Goldcorp’s shares closed up 4.76 percent at C$36.50 on the Toronto Stock Exchange. The stock is still down more than 20 percent so far this year.

PRODUCTION, SALES FALL

Sales in the second quarter fell to 532,000 ounces on production of 578,600 ounces. That compared with sales of 606,400 ounces on production of 597,100 ounces in the same period of 2011.

Cash costs doubled to $370 an ounce, including by-product credits, from $185 an ounce.

Goldcorp’s profit dropped to $268 million, or 26 cents a share, in the quarter ended June 30, from $489 million, or 52 cents, a year earlier. Removing one-time items, profit dropped to $332 million, or 41 cents a share.

Analysts, on average, had expected earnings of 42 cents a share, according to Thomson Reuters I/B/E/S.

Revenue fell to $1.1 billion in the second quarter from $1.3 billion on lower gold output and sales.

Goldcorp reaffirmed its revised production outlook of between 2.35 million and 2.45 million ounces in 2012, with cash costs in the range of $310 to $340 an ounce of gold on a by-product basis.

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