Goldcorp touts large, low-cost Penasquito project

Just two years after acquiring its Penasquito property in Mexico, Goldcorp (G-T, GG-n) poured its first gold from the project’s oxide circuit and expects the planned open-pit mine to reach full production by late 2009.

“Penasquito will be Mexico’s biggest project, and our biggest project,” Kevin McArthur, Goldcorp’s president and chief executive declared during a presentation to the Denver Gold Forum in early September. “We’ve increased an immense amount of value following discovery.”

McArthur said the next step is to get the mill up and running and produce concentrates by the end of next year.

“We’re building new mines, we’re not relying on tired old mines,” he told analysts and investors at the prestigious gold conference.

Penasquito lies in the northeast- ern portion of Zacatecas state in north-central Mexico and is made up of two main deposits, Penasco and Chile Colorado, which contain gold, silver, lead and zinc deposits.

“Think of it as a one-third gold, one-third silver and one-third zinc mine,” McArthur explained.

In June 2007, Goldcorp updated its reserve and resource estimate for Penasquito. Proven and probable gold reserves jumped 31% to 13 million oz. and reserves of silver increased 50% to 864 million oz.

Measured and indicated gold resources, inclusive of proven and probable reserves, climbed 39% to 17.8 million oz., while the silver resource rose 55% to 1.3 billion oz.

Of the 917.5 million tonnes of proven and probable reserves, oxide gold graded 0.18 gram gold per tonne and sulphide ore graded 0.48 gram gold. Oxide silver graded 18.1 grams silver and sulphide silver graded 30.8 grams.

Oxide ore makes up 110.4 million tonnes or 27% and sulphide ore 807.1 million tonnes or 69% of the total proven and probable reserves.

The calculation was based on 240 drill holes following the earlier reserve update released in June 2006.

Goldcorp says it plans to publish a new reserve estimate by the end of this year. But based on the current numbers, the mine life is expected to be about 19 years.

Late last year, Goldcorp approved a plan to expand the mill throughput by 30% to 130,000 tonnes of ore per day.

Construction of the project remains on schedule and on budget. Once commercial production is achieved, Penasquito is expected to produce more than 400,000 oz. gold and 31 million oz. silver each year. In addition, substantial amounts of zinc (189,000 tonnes) and lead (2.7 million tonnes) will be produced.

Goldcorp believes Penasquito will be the largest and lowest-cost precious metals mine in North America. Goldcorp has estimated that total cash costs will be negative US$488 per oz. gold, net of byproduct credits.Netpresent value at discount rates of 0% and 5% are projected at US$5.2 billion and US$2.4 billion, respectively. Capital costs have been pegged at about US$1.49 billion.

The Penasquito property is about 27 km west of the town of Concepcion del Oro in a wide, fairly flat valley of coarse grass and cacti.

The region has a strong tradition of mining dating to the mid- 1500s, when silver mining first started and the city of Zacatecas was founded. According to Goldcorp, up until the 19th century, 20% of all silver mined in the world was reportedly mined from the Zacatecas region.

Ashort shaft and two shallow drill holes were the only work that had taken place at Penasquito until the late 1950s. It wasn’t until Kennecott started a comprehensive exploration program there in 1994 that the size and potential of the mineralization become apparent.

Kennecott undertook geochemical, geophysical and drilling programs to evaluate the area, primarily for large-tonnage porphyry copper skarn deposits.

Drilling along the southern edge of the Azul pipe in 1996 resulted in the discovery of the Chile Colorado silver-lead-zinc-gold zone, which was not of interest to Kennecott on a standalone basis.

Western Silver acquired Penasquito from Kennecott in March 1998, completing nine holes focused on Chile Colorado and the adjacent Azul breccia pipe the same year.

Glamis Gold acquired Western Silver in May 2006 and Goldcorp acquired Glamis in November that year.

In an Aug. 20 research report entitled: “Goldcorp: Our New Favourite Large Cap Gold,” Michael Curran of RBC Capital Markets described Penasquito as the “new engine” to drive Goldcorp’s earnings and cash flow per share higher in the future.

“We expect this large, open-pit, polymetallic mine to become the next core asset of the company in addition to the Red Lake (Ontario), El Sausal (Mexico) and Marlin (Guatemala) gold mines.”

In addition to Penasquito, Goldcorp owns the El Sauzal gold mine in Chihuahua state, and the Los Filos mine in Mexico’s central Guerrero state.

Outside Mexico, Goldcorp owns three mines in Canada as well as the lonore development project in the James Bay region of Quebec. It also owns mines in the United States, Argentina and Guatamala, and is looking to develop its Pueblo Viejo project in the Dominican Republic. The project is a joint venture with Barrick Gold (ABX-T, ABX-n), which holds 60%.

“We have a tonne of cash, zero debt and no hedges and we’re in safe places,” McArthur concluded during his presentation in Denver, noting that 74% of Goldcorp’s reserves are in NAFTA countries.

“The reserves we have we can rely on, compared with the kleptocracy we’re seeing in many other parts of the world,” he said.

The company has a US$180-million exploration budget for this year, which was bumped up from US$150 million following the release of the company’s second-quarter results in July. “It’s an embarrassment of riches because we made our investments five to seven years ago,” he said.

Goldcorp grew its reserves 9% last year and expects the same style of growth this year. Proven and probable gold reserves rose 9% in 2007 to 43.4 million oz., while proven and probable silver reserves soared 37% to 1.1 billion oz.

A significant driver of the gold reserve increase included a net addition of 3.1 million oz. at Penasquito. “At Penasquito, we’re finding moreat depth. . . possibly a block cave some time in the future,” McArthur said.

“If we have projects that are going well, we’re going to push the throttle forward because we have the cash to support it,” McArthur said.

In February, Goldcorp sold its 48% stake in Silver Wheaton (SLW-T, SLW-n), generating a windfall of nearly $1.57 billion in cash. Silver Wheaton owns about 25% of Penasquito’s life-of-mine silver stream.

In Toronto, Goldcorp is trading at about $34.43 per share, but has a 52-week trading window of $26.60-52.48.

The Vancouver-based company has 728.6 million shares outstanding.