Melbourne Mining Club - Luncheon
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Transcript of Melbourne Mining Club - Luncheon
Value Creation in the Gold Mining Sector
Melbourne Mining Club
October 9, 2014
FORWARD LOOKING STATEMENTS
This presentation contains “forward-looking statements”, within the meaning of the United States Private Securities Litigation Reform Act of 1995 and applicable Canadian securities legislation, concerning the business, operations and financial performance and condition of Goldcorp Inc. (“Goldcorp”). Forward-looking statements include, but are not limited to, statements with respect to the future price of gold, silver, copper, lead and zinc, the estimation of mineral reserves and resources, the realization of mineral reserve estimates, the timing and amount of estimated future production, costs of production, capital expenditures, costs and timing of the development of new deposits, success of exploration activities, permitting time lines, hedging practices, currency exchange rate fluctuations, requirements for additional capital, government regulation of mining operations, environmental risks, unanticipated reclamation expenses, timing and possible outcome of pending litigation, title disputes or claims and limitations on insurance coverage. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “plans”, “expects” or “does not expect”, “is expected”, “budget”, “scheduled”, “estimates”, “forecasts”, “intends”, “anticipates” or “does not anticipate”, “believes” or variations of such words and phrases or statements that certain actions, events or results “may”, “could”, “would”, “might” or “will be taken”, “occur” or “be achieved”. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause the actual results, level of activity, performance or achievements of Goldcorp to be materially different from those expressed or implied by such forward-looking statements, including but not limited to: risks related to the integration of acquisitions; risks related to international operations; risks related to joint venture operations; actual results of current exploration activities; actual results of current reclamation activities; conclusions of economic evaluations; changes in project parameters as plans continue to be refined; future prices of gold, silver, copper, lead and zinc; possible variations in ore reserves, grade or recovery rates; failure of plant, equipment or processes to operate as anticipated; accidents, labour disputes; delays in obtaining governmental approvals or financing or in the completion of development or construction activities and other risks of the mining industry, as well as those factors discussed in the section entitled “Description of the Business – Risk Factors” in Goldcorp’s annual information form for the year ended December 31, 2012 available at www.sedar.com. Although Goldcorp has attempted to identify important factors that could cause actual results to differ materially from those contained in forward-looking statements, there may be other factors that cause results not to be as anticipated, estimated or intended. There can be no assurance that such statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements. Goldcorp does not undertake to update any forward-looking statements that are included in this document, except in accordance with applicable securities laws. All amounts are in U.S. dollars, unless otherwise stated.
2
1,223
1,154
1,050
2012 2013 2014E
Cost Improvements
All-In Sustaining Costs are Trending Lower
3 Source: TD.
Industry AISC ($/oz)
• AISC is forecast to be 14% lower in 2014 than in 2012
Peak Gold Discoveries peaked in 1995
4
• Peak gold discovery occurred in 1995 at ~175 million ounces • Annual discoveries have fallen to less than 50 million ounces in recent years • This trend is in spite of much higher exploration budgets
Peak Discovery
Gold in Major Discoveries 1990 - 2013
Source: SNL Metals Economics Group.
Peak Gold Development time is approaching 20 years
5
• Average development times have been steadily increasing • In the next few years average development time is expected to be ~20 years
• Increased environmental regulation, social obligation and land-use restrictions have contributed to longer lead times
Average Development Time (Discovery to Production)
~20 Years (recent average)
Source: SNL Metals Economics Group.
70
75
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100
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03
20
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An
nu
al P
rod
uct
ion
(M
oz)
Peak Gold Peak production is expected ~2015
6
• Peak Gold production is expected in ~2015 • This coincides with a ~20 year development cycle from peak discovery
Peak Production
“Peak Gold”
Source: Consensus estimates. Includes CPM Group, GFMS, and Metals Focus.
Peak Discovery
+ 20 years average development time
Source: SNL Metals Economics Group.
3-y
ear
run
nin
g av
erag
e go
ld d
isco
vere
d (
Mo
z)
Gra
ssro
ots
+ 7
5%
of
late
-sta
ge e
xplo
rati
on
bu
dge
ts (
US$
M)
850
900
950
1,000
1,050
1,100
1,150
1,200
1,250
(500)
(300)
(100)
100
300
500
700
Q3-12 Q4-12 Q1-13 Q2-13 Q3-13 Q4-13 Q1-14 Q2-14
Overall Demand Components of Demand
7
• Physical demand spiked as ETF redemptions increased • Technology and central bank demand has remained flat
Quarterly Demand
Ton
ne
s
Ton
ne
s
Source: World Gold Council.
Jewellery
Bars and coins
ETFs
Central Banks
Technology
Total Demand
(6,000,000)
(4,000,000)
(2,000,000)
-
2,000,000
4,000,000
6,000,000
Imports (oz)
ETF Change (oz)
Chinese Demand Gold Imports Through Hong Kong
8
• Gold has flown from West to East as ETF liquidations were offset by Chinese buying
Source: Bloomberg.
China Imports vs ETF Change (oz)
Ou
nce
s
Chinese Demand Shanghai Premiums
9
• Chinese investors stepped in and aggressively purchased gold during the price drop from March – December 2013
• Premiums reached a high of ~$50/oz in April 2013 and have averaged $9/oz since 2010
Gold Spot vs. Shanghai Premiums ($/oz)
Source: Bloomberg. Premium calculated as 5-day rolling average premium between Shanghai 99.999 Au price and international Spot price.
1000
1100
1200
1300
1400
1500
1600
1700
1800
1900
2000
-20
-10
0
10
20
30
40
50
60
Spo
t P
rice
($
/oz)
Pre
miu
m (
$/o
z)
Premium
SPOT
The Gold Sector
Gold equities have underperformed gold the last 10 years
10 Source: Bloomberg
0
50
100
150
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250
300
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400
450
500
Goldcorp
Equities
Gold
Gold +189%
Goldcorp +79%
Gold Stocks
10 Year Price Performance
• Rising costs and compressed margins led to lower cash flow than expected
The Gold Sector
What will we do differently this time?
11
Exercise financial discipline: • Cost control • Deferral of marginal new projects and expansions • Generate Free Cash Flow • Smart allocation of Free Cash Flow:
• Sustainable dividends • High-return new projects
Understand the investment proposition: • Investors expect leverage to gold price • Do not allow marginal production increases to destroy the margin growth
expected with gold price increase
All-in Sustaining Costs and Margins
Costs have risen in proportion to the gold price
12 Source: TD.
Industry AISC Margins vs Gold Price
• Cost inflation has kept pace with the gold price
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
200
400
600
800
1,000
1,200
1,400
1,600
1,800
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04
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E
AIS
C M
argi
n (
%)
Go
ld P
rice
($
/oz)
Gold Price AISC Margin
All-in Sustaining Costs and Margins
Margins have not increased with the gold price
13 Source: TD.
Industry AISC Margins vs Gold Price
• AISC margins took a big hit in 2013 when the gold price dropped
-
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1,000
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1,800
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2.0
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2.2
2.3
04 05 06 07 08 09 10 11 12 13
Ave
rage
Go
ld P
rice
($
/oz)
Ave
rage
Gra
de
Min
ed
(g/
t)
Year
Average Grade of Gold Mined Average Gold Price ($/Oz)
Lack of Margin Growth
Chasing marginal ounces
14 Source: CPM Group.
• The industry rapidly lowered mined grade as the gold price increased • Average head grade has moved with an ~80% inverse correlation to gold price
R-squared: 0.77
Industry – 10 year average grade vs gold price
Lack of Margin Growth
Mining above average reserve grades
15
• The industry has consistently mined ore above average reserve grades
Industry – 10 year Reserve Grade vs Processed Grade
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
04 05 06 07 08 09 10 11 12 13
Ave
rage
Gra
de
(g/
t)
Year
Average Grade of Gold Mined Reserve Grade (g/t)
Source: CPM Group and Bloomberg. Average grade mined is global average. Average reserve grade is for senior gold companies.
Lack of Margin Growth
Example - Effect of grade on margin
16
• Lower grades in response to higher gold price lead to lower margins • The example below increases throughput and production but actually lowers margin
even with a rising gold price
Year 1 Year 2
Gold Price ($/oz) 1,000 1,200
Grade (g/t) 2.00 1.60
Ounces (oz) 100 120
Throughput (tonnes/year) 1,600 2,400
AISC ($/oz) 800 1,000
Cost ($) 80,000 120,000
Cash Flow ($) 20,000 24,000
Margin (%) 20% 17%
Lack of Margin Growth
Example - Effect of grade on margin
17
• Lower grades in response to higher gold price lead to lower margins • The example below increases throughput to sustain production at lower grades
Year 1 Year 2
Gold Price ($/oz) 1,000 1,200
Grade (g/t) 2.00 1.60
Ounces (oz) 100 100
Throughput (tonnes/year) 1,600 2,000
AISC ($/oz) 800 1,000
Cost ($) 80,000 100,000
Cash Flow ($) 20,000 20,000
Margin (%) 20% 17%
Financial Discipline
Opportunity to restore valuations
18
• P/NAV multiples averaged ~1.8x for about 30 years since 1985 • Multiples have come down , and are much lower than at previous lows in the gold
price
Industry – Historical P/CF Industry – Historical P/NAV
Source: Scotiabank.
Value Creation in the Gold Mining Sector
Melbourne Mining Club
October 9, 2014