Take physic, pomp

Thoughts on Goldcorp (GG) (from IKN377)

One of the minor pieces in IKN377 out last night was this, a musing on a couple of aspects of Goldcorp (GG) after its rotten Q2 results last week.



If you care about the large cap miners you’ll already know that the negative
vibes for GG we mentioned a couple of weeks ago in IKN375 turned into nasty
reality on Wednesday. The company reported a stinker of a quarter so I won’t do
the big details here, save to say that on a pure production basis the main hits
came from production problems at Peñasquito and Cerro Negro.
One-time hits? Well yes they happen
and aren’t good, but they happen to them all over time and that’s no reason to
judge the new CEO negatively on that alone. GG is “under new management” and
you could cut David Garofalo slack if you consider that he inherited a
company badly in need of restructuring. Take for example the implicit message
of “we were high grading the crap out of Peñasquito last year and it’s going to
take until 2019 to repair the damage” in the NR. But there are other things
that make me wonder whether this new direction for GG is going to turn out like
Spinal Tap’s new direction of free-form jazz. Example one, Garofalo said (13)
during the prepared notes at the Conference Call:
“While lower production was expected in the second
quarter, the decision to accelerate a significant organizational restructuring
had a short-term, negative impact on gold production.”
And though blandly put, that’s one
helluva thing to say. It’s one thing to swallow the cash hit from a
much-vaunted re-organization and in this case, CEO Garofalo’s new broom has
cost U$39m in restructuring charges to date. It’s quite another to see
production hit by the changes, the actual amount of gold and other things affected
by the upset of staff redundancies and so forth. The whole point of corporate
restructuring is to make a company more efficient, not less efficient! I
honestly thought that here in the 21st century we’d moved on from
the ‘beatings will continue until morale improves’ method of corporate
The second thing that concerns me,
the analyst on the outside looking in, is the decision to sell Los Filos, as
well as Marlin and Alumbrera. Here’s how Garofalo put it:
“Los Filos, Marlin
and Alumbrera are smaller scale mines. They don’t have the economies of scale
that our existing five camps offer us” or that a newly acquired gold
project, Coffee, “potentially offers us once it’s built out”.
And here’s what it says in the
quarterlies (with CODM = Garofalo):

Effective January 1, 2016,
the Company’s CODM reviewed the results of its mines and associate that have
short mine lives and are headed for closure together as one operating segment.
Accordingly, the Company has grouped Los Filos and Marlin into one operating
segment, Other mines, and presented its 37.5% interest in Alumbrera as the
Other associate operating segment.
So I understand the decision behind
Marlin, there may be something for a smaller mining company to explore and
re-define there but for the GG size of company it’s now depleted (not to
mention the crappy political risk of operating in Guatemala). I also understand
the Alumbrera decision, it’s also near closure and a minority stake.

But Los Filos? Really? This is a 250,000oz to
300,000oz gold per annum mine that’s very profitable (in 2q16 op. Cash cost
U$704/oz, AISC U$822/oz). Those cash costs are slightly above the GG average,
but both production and costs ae a darned sight better than Eleonore. It can
hardly be called depleted either, with the potential to go underground on the Bermejal
Deep deposit with 1.3m oz M+I plus 1.1m oz inferred (and open along strike and
at depth). However, Garofalo has decided it’s up for sale and if it goes, it’s
another 10% sliced off an already sharply depleted corporate production rate.
Can somebody please tell this man we’re in a bull market?

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