Even the Masters of Gold Face Challenges

The process of mining minuscule gold particles out of tons of solid rock presents its fair share of challenges even when everything goes smoothly. So when every miner in turn faces one or more of those inevitable unexpected setbacks, sometimes you just have to chalk it up to the risks of the trade. As I've quipped before: If mining were easy, they'd call it "scooping".

As investors in mining stocks, that's where a long-term-investment horizon becomes critical to wait out the occasional bump in the road. Goldcorp (NYS: GG) shares dipped violently last week to a fresh 52-week low after the major producer revealed setbacks at two of its key operations: the famous Red Lake mine in Ontario upon which the company's legendary success was built, and the world-class Penasquito mine in Mexico.

At Red Lake, recent seismic activity has slowed efforts to perform "de-stressing" cuts in portions of the underground mine where pressure needs to be relieved to ensure a safe work environment. The delay in completing those maintenance operations means production in the mine's High Grade Zone has been hampered. Combined with an encounter with "inconsistent mineralization" in the mine's Footwall Zone, these setbacks forced Goldcorp to reduce 2012 production guidance at Red Lake by roughly 25% to between 460,000 and 510,000 ounces of gold.

In the aftermath of Agnico-Eagle Mines' (NYS: AEM) rough experience at its Goldex operation, where portions of that mine's hanging wall grew unstable, some investors were likely spooked by the following statement from Goldcorp this week: "Over the balance of 2012, the Company will evaluate the impact of these conditions on Red Lake's long-term production profile." Markets detest uncertainty, and a statement like this leaves us all hoping any changes to the long-term outlook at Red Lake will not be severe.

Goldcorp's troubles at Penasquito were weather-related, as portions of central Mexico are experiencing drought conditions of late. Mill throughput suffered as a result of inadequate water supply during June, and the shortage is expected to continue affecting the operation during the second half. Small-cap silver miner Great Panther Silver (NYS: GPL) noted drought conditions at its Topia plant likewise affecting mill throughput.

Goldcorp lowered its 2012 production forecast at Penasquito by about 11% to between 370,000 and 390,000 ounces. That shortfall will impact Penasquito royalty holder Royal Gold (NAS: RGLD) , and particularly silver stream holder Silver Wheaton (NYS: SLW) . Silver Wheaton had anticipated 7 million ounces of silver from Penasquito for its 25% share of 2012 production, but based upon Goldcorp's adjusted outlook it looks as though they'll receive 6 million ounces or less.

Fortunately, Goldcorp possesses an impressive portfolio of robust gold operations paired with an exciting growth pipeline in the works to help absorb these recent setbacks. As a result, Goldcorp still expects consolidated gold production for 2012 to exceed 2.35 million ounces of gold. And while reduced production volume will push costs upward for the time being, the miner still will remain near the top of the industry with a low by-product cash cost between $310 and $340 per ounce. Although my near-term outlook for Goldcorp's stock performance has been scaled back accordingly, my long-term outlook remains decidedly bullish. Since I still believe Goldcorp is one of the finest specimens one can place within a precious metals investment portfolio, I will not alter my long-term bullish CAPScall on the stock that I've had in place since 2008. To stay tuned for more coverage on Goldcorp and the full suite of precious metal miners, please bookmark my article list or follow me on Twitter.

At the time thisarticle was published Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Goldcorp and Silver Wheaton. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.