Goldcorp’s Eleonore Results Are a Major Disappointment

Source: Thinkstock

Source: Thinkstock

As a shareholder in Goldcorp (NYSE:GG), I was disappointed to read Friday evening that the company released worse-than-anticipated results for its next producing mine in Canada — Eleonore.

Investors had high hopes for this mine, especially after Goldcorp had poured billions of dollars into its development. The company had led investors to believe that the mine would be able to produce more than 600,000 ounces of gold per year for 15 years after an initial “ramp-up” period, during which the company would produce 300,000 ounces. While the mine didn’t have the resources needed in order to produce this much gold, the company was certain that it would be able to substantially expand the resource base so that it could achieve its desired production results.

On Friday, however, we learned that the company grossly overestimated the extent to which it could expend the resource. Prior to Friday, the resource had an estimated 7.7 million ounces of gold. The new resource estimate shows just 8.1 million ounces, or about a 5.2 percent increase. Furthermore, a lot of these 8.1 million ounces are classified as “inferred resources.” Inferred resources are just what the name suggests — they are inferred. Geologists use models in order to make a projection as to how many ounces of gold exist in a certain region, even if it hasn’t been directly measured. In other words, these ounces are speculative and they may not exist.

Furthermore, we learned that the mine won’t be producing for 15 years — rather, it will only produce for about 9 years with a few months of production in 2014. This production will not average 600,000 ounces or more. In fact, it is going to peak out at about 515,000 ounces and average about 400,000 ounces. For a company that will produce a little more than 3 million ounces in 2015, this missing 200,000 ounces is a big deal.

Given all of the money that Goldcorp has spent on the Eleonore project, it almost doesn’t seem to be worth the time and capital, especially if the gold price remains weak. In operating the mine, the company will recoup the capital it spend to build the mine, but little more.

Now this can change. The Eleonore project still has exploration potential. Furthermore, while inferred ounces are speculative, that doesn’t mean that they don’t exist. I think that there is a very good possibility that the mine’s life can be extended, and that it will turn out to be a worthwhile investment in the long run. This will be especially true if the gold price rises.

But, while there is still hope for the Eleonore project, the fact remains that it is turning out to be a disappointment. While the market didn’t really react to this news, I think that the shares did lose some value Friday night due to this weak report, and I think management lost some credibility by claiming that the mine will be able to produce far more gold than the aforementioned report estimates. In fact, these bold claims are still posted on Goldcorp’s website.

Given Goldcorp’s history of creating shareholder value, and given its strong balance sheet, excellent portfolio of assets, and its 2.4 percent dividend, I think it is very difficult to sell the shares over one blunder, although the thought certainly has crossed my mind.

Disclosure: Ben Kramer-Miller is long Goldcorp.