Goldcorp CEO on Growth, Prices and Inflation

HOLLYWOOD, Fla. ( TheStreet ) -- Goldcorp ( GG) is planning for explosive growth in 2011 after an explosive fourth quarter.

The gold miner made 57 cents a share in the fourth quarter by producing 689,600 ounces of gold at net cash costs of $164, including any silver or other by-product sales. The company saw record production at three of its mines and the first full quarter of production from its Penasquito mine in Mexico, which is one of the biggest silver mines in the world, which produced 4.6 million ounces of silver.

Cash flows came in at $1.7 billion for the year and Goldcorp grew its reserves by 23%. Although Red Lake, Canada's largest gold mine, is still the company's bread and butter, Penasquito is quickly becoming the icing on top.

The mine has 18.6 million ounces of proven and probable gold reserves and 1.1 billion ounces of silver reserves. Compare that to Hecla Mining ( HL), one of the oldest silver miners in the world whose proven and probable silver reserves are 142.1 million ounces, according to the company's Web site.

Goldcorp doesn't get to keep all that silver, the company has a royalty agreement with Silver Wheaton ( SLW) which gets 25% of all the silver mined annually for the life of the mine. The expectation is that Penasquito will produce 28 million ounces annually, giving 7 million ounces to Silver Wheaton and leaving 21 million ounces to Goldcorp.

The massive amount of silver Goldcorp can produce is helping the company contain its cash costs, as inflation pressures mount on gold miners. The company is expecting to produce between 2.65-2.75 million ounces of gold in 2011 at net cash costs of $280-$320 an ounce, counting sales of silver and other metals.

Despite increasing its annual dividend by 11% to 40 cents share, Goldcorp will spend $1.8 billion on its operations and projects this year as well as $170 million in exploration.

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The stock is up 9% since Goldcorp reported earnings. I sat down with CEO, Chuck Jeannes, during BMO Capital Markets Global Metals and Mining conference in Hollywood, Fla. this week to check in on Goldcorp's explosive growth plans.

So blowout quarter, I literally have no other word for it. Is there anything that you want to improve on for next quarter?

Jeannes: Well just continuing to operate the mines as well as we have been is always a challenge. Things went very well during the quarter and we see them continuing in that respect but it's really a matter of the quality of the mines that we have and we see continued strong performance going forward.

I remember I talked to you in Denver in September and you were saying how great your quarter was going to be and I just couldn't believe it. I said 'well something has to be wrong' but you totally delivered so are there any risks that you're looking at for the short and long term? The biggest one in my mind is cost, rising cost and inflation .

Jeannes: Actually we've really done a lot to de-risk the company in the last little while. Our big new project, Penasquito, the mine in Mexico that we talked about previously, is one of the largest new mines in the world. We finished construction there last year so a big check mark for the success of building that on time and on budget. That's now behind us and Penasquito is an operating mine and it performed extremely well during the quarter and we look for that to continue to grow.

On the cost side, company-wide we're looking at about a 6% absolute dollar increase year-on-year and that's as a result of the inflation certainly. You've heard a lot about it this week -- fuel, power, consumables, labor -- but we feel like we've got a good handle on that and some measures in place to impact the cost increases as well.

What's the most painful and what are you doing to mitigate that?

Jeannes: I would have to say the concern right now about fuel because we don't know what the oil price is going to do with all the volatility and turmoil in the Middle East. So there's an issue there that we're keeping a very close eye on. But we've always had a hedging program in place on a lot of our diesel fuel. Most of our fuel is actually used in Mexico at our large operations there and the price is set by the government so it's one step removed from the international market price.

#1 Problem For Gold Miners

In terms of your hedges, where are you hedged at?

Jeannes: It's per liter price of about 70 cents but it's a small portion of our overall exposure this year.

Are you looking into any alternative energy or natural gas for the long term if we do see more unrest in North Africa and the Middle East and oil prices keep rising?

Jeannes: Actually, we just announced that we are building a new power plant in Mexico, natural gas fired 200 megawatt combined cycle plant. One of the reasons for doing that is the certainty of supply but another, of course, is just cost. We think that we can cut about a cent to cent and a half per kilowatt hour off of our cost requirements at Penasquito in Mexico, which translates into several million dollars a year of cost savings.

Now in terms of labor costs, is there anything you're trying to do?

Jeannes: We need to treat our people very fairly and it's a competitive market and so we're dealing with that. What we're more focused on is the long term impacts to the market and so we're working very closely with mining schools. We're supporting schools in the U.S., Mexico and Canada trying to help them graduate more technical people, mining engineers, metallurgists, geologist those are the people we need for the future of our company so we are trying to think very long term on the labor side.

And what are your true cash costs?

Jeannes: Last year we were under $700 an ounce and if you look at statistics you'll see that the average for the industry is about $950 so we feel very fortunate. As I said at the beginning of the talk, its primarily due to the fact that we've had a very deliberate strategy over the past several years to focus on high quality operations. In our business, high quality means low cost and that's where we find ourselves today.

Is it at all your strategy to replace Red Lake with Penasquito down the road?

Jeannes: No, not at all. I hope that Red Lake continues for another 60 years which is how long we've been mining there now. One of the big news items that we just put out in our reserve and resource update is for the first time since 2004 we actually more than replaced reserves in the deep high grade zone at Red Lake. It's taken us some time to get the infrastructure down to the level where we can regularly drill below ourselves and extend the high grade zone and as far as we can drill we see it there. So it will continue indefinitely.

In terms of Andean Resources which you bought for $3.4 billion in 2010, when we talked before you said it would come on stream in late 2012 .

Jeannes: Mid 2013.

So you are still on track for that target?

Jeannes: Yeah actually we'll have a feasibility study out for the market in early April. The old feasibility that Andean resources had, called for production in 2012. We're making the project much larger looking at multiple mining areas increasing the size of the plant so we're pushing that out until 2013.

Now in terms of Penasquito, what's the grade like there I actually couldn't find that?

Jeannes: Well it's hard because we mine four different metals so there's gold, silver, lead, zinc. I don't want to leave without pointing out that Penasquito makes us one of the largest silver producers in the world now. We're expecting 33 million ounces this year growing to 40 million ounces next year because we also mine, produce a lot of silver at our Marlin mine in Guatemala. So grades at Penasquito: you have to look at all four of the metals: it's about half a gram gold, that's the one I always remember, 1% Zinc, 0.50% lead and I can't recall the silver grade.

Now it seems like that's a pretty low grade for gold, so how high does gold have to stay for the gold in Penasquito to really stay profitable?

Jeannes: Oh it's an extremely profitable mine. We had $83 million in operating profits just in the first quarter of production in the last year , in the fourth quarter. We test all of our mines down to very low price sensitivities. Yes, its low grade but it's an extremely productive mine: big volumes, big earth moving equipment so its low cost. We're moving material there for $1.17 a ton.

So what was your cost structure there?

Jeannes: The bi-product cost that we reported for the first quarter and a half of production there was negative $1,000 per ounce, on a bi-product basis. If you look at it just on a co-product basis it was about $600 per ounce in the start-up quarter for Penasquito on gold, so great margins at $1,400 gold.

So as long as gold stays above $700?

Jeannes: You're always going to have to include the revenue for the other metals you don't waste that you actually receive revenue from that.

So how high do gold prices go in 2011?

Jeannes: Well I've said before that certainly I think $1,500 is easily achievable and I have a hard time picking the exact number but I think long term we have to be looking at the inflation adjusted high. All of the supply and demand fundamentals are in place and improving over time and I don't see them changing going forward , so that's $2,300 I don't know when we'll get there but I would be surprised if we don't.


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-- Written by Alix Steel in New York.

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