Barrick Gold's CEO Discusses Q1 2013 Results - Earnings Call Transcript

Apr.18.13 | About: Acacia Mining (ABGLF)

Barrick Gold Corporation (OTC:ABGLF) Q1 2013 Earnings Call April 18, 2013 7:30 AM ET

Executives

Andrew Wray – Head, Corporate Development and IR

Greg Hawkins – CEO

Marco Zolezzi – COO

Jaco Maritz – CFO

Analysts

Brock Salier – GMP Europe

Alain Gabriel – Morgan Stanley

Tyler Broda – Nomura

Daniel Lian – BOA Merrill Lynch

Cailey Barker – Numis

Peter Rose – Fox-Davies Capital

Dmitry Kalachev – Canaccord

Bart Jaworski – Davy

Charles Gibson – Edison Investment

Tanya Jakusconek – Scotia Bank

Operator

Good afternoon, ladies and gentlemen. Welcome to the African Barrick Gold Q1 Results Conference Call. My name is Dave and I will be your coordinator for today’s conference. For the duration of the call, you will be on listen-only. However, at the end of the call, you’ll have the opportunity to ask question. (Operator Instructions) I’m now handing you over to Andrew Wray to begin today’s conference. Thank you.

Andrew Wray

Great, thank you very much and good afternoon to everybody and thanks for joining the Q1 results call for African Barrick Gold. We got the full ABG team around the table to deal with questions and answers. Greg will give a quick summary of the results which were released first thing this morning and then we’ll go straight into the questions session. So, Greg?

Greg Hawkins

Thanks, Andrew, and welcome everyone. Obviously, you’ve had a chance hopefully to look through our Q1 release this morning and we believe we’ve made a good start to the year. We remain on track to deliver on our guidance that we set out a couple of months ago.

The production as you can see is over 146,000 ounces for the quarter. That’s slightly up versus Q1 last year. This has been mainly driven by the performance, very good performance at North Mara and continuing solid improvement that we’re seeing at Buzwagi.

Obviously, Bulyanhulu was a bit of a slow start. We will flag that over the last few months that we had a couple of issues in regards to numbers of personnel in the underground mining area that we were getting back up to full complement and also dealing with the paste fill issues that we had.

So as we said, at the start of the year, we expect to have a slow quarter with Bulyanhulu, but we’d expect to start to see that improve during the second quarter and we remain on track with that. We obviously made the decision to shut down Tulawaka during the quarter.

If you put aside those small number of ounces which were quite expensive, then our cash cost per ounce for the operations in Bulyanhulu, Buzwagi and North Mara the ongoing operations was below $900 an ounce and that is certainly the right direction of travel that we need to sustain and build on from this point.

The EBITDA was over $81 million. Our cash balances remain over $400 million. We start to draw down a little bit on the facility that we’ve got in place as we build the CIL plant at Bulyanhulu.

In regards to the operational review, we announced a couple of months ago or so, it’s progressing in line with expectations. We’ve done a fair amount of review work on all of the operating costs. A real focus over the last month or two in terms of the organization structure.

We reviewed each of the offices. We’ve already made some step changes there. You can see that if you go through the data in terms of corporate G&A is already running lower. We’ve reduced capital that is going into this year and we are looking ahead in terms of the reductions of capital and rescheduling that we can do over the future years. We’ve trimmed down the exploration budget, but it is still a pretty healthy budget with a real focus on Kenya for our future.

We’ve also started to look at a number of other projects outside the organization. So that’s the life hazard of the organization spend and those should be getting well under way as we get into the second quarter. So, I think, obviously the gold prices have come off fairly dramatically in the last few days.

That gives us a bit of extra impetus if you like to really push hard on the operational review. But we are certainly pleased with the progress we’ve made. But we must continue to restructure the business such that it is able to survive lower gold levels, lower even than today, but – and that we can actually make some money in reducing cash flow out of these assets.

So, you are seeing some positive trends in regards to say an asset like Buzwagi which has been always a high cost mine for us. In the first quarter, that is certainly an improvement. That is really about its operating performance improving. Now we need to see the benefits of the operational review as that flows through.

As part of the operational review, there is obviously also a full technical review of the life of mine plans and the three year plans that is underway and that will also give us some additional, basically information over the next few months to start to work out.

If this gold price, taking a view on the gold price, if this is sustained, what is the flexibility, what are our operations in terms of the mine planning; we’ll look at all those sorts of things as well.

In regards to our projects, the CIL project as mentioned will be moving on. That’s pretty well on track. We still expect first production from that in the first quarter of 2014. The Upper East project at Bulyanhulu, the feasibility study to complete. We are now going to take that to peer review and we expect to continue to take that afterward in the first half of the year as we previously said.

The technical work at Manage and the pre-feasibility study is now complete. The pre-feasibility study itself is close to completion. Again we should get close that out in the next month or two. So pretty much what we said out, a couple months ago in terms of our expectations on the production, the progress on the projects and the progress particularly on the operational review been able to do all those things and advance them.

With the operational review, we expect to come back much fuller with a lot of that implemented or that to be implemented basically by the time we come to the half year results and give a detailed presentation around that sort of time in regards to the impact and what that does for our cost profile going forward.

With that, I’ll pause and open to questions through Andrew.

Andrew Wray

Thanks, Greg. Yes, if we can go, operator, to the Q&A please?

Question-and-Answer-Session

Operator

(Operator Instructions) Our first question is from Brock Salier from GMP. Please go ahead.

Brock Salier – GMP Europe

Morning guys, focusing on Buzwagi, your unit cost there have come to pretty well a record low. I know you guys are on four days to back up then, now sustainable are those unit costs going forward?

Greg Hawkins

I think, with Buzwagi we are pleased with the performance. Again it’s back getting a lot of things right over the last three quarters getting the mining sort of out on the long hole, the drilling blast, getting the mill sort of that. We are running pretty much exclusive back up powers, which obviously does add to our cost but the benefit of the try up there is obviously that you can run the mill efficiently.

You avoid a lot of the downtime. You can see in terms of the recovery rates and the throughput rates as they will come up and that’s just being able to run on consistent path over the try up there on a cost basis. But we’d hope to at least sustain at this level.

But obviously with the operational review as we move through that process, our expectations at the time improve this. Buzwagi is highly sensitive to the amount of capital that we have to invest in it, particularly with the capitalized stripping.

And so we have very strong focus in terms of the mine planning as to the timing and the scheduling of that stripping and also any additional capital and as we said a couple of months ago, we are looking very, very hard at what additional capital Buzwagi should get given its high cost, but certainly we are pleased with the progress so far.

Brock Salier – GMP Europe

And just another quick one on North Mara, obviously had a fairly big jump in grade there given your land acquisitions could potentially be delayed, when do you expect that grade to start falling back into the twos and how – at your low end stockpiles and how low you expect it to go until such time as the land acquisitions are complete?

Greg Hawkins

Yeah, a lot of the – I suppose we said out at the start of the year that we expected the average grade to be around 2.5 grams, 2.6 grams a ton, which is obviously a blend of blustery gram materially directly mined and a blend of how much we take our stockpiles.

And we expect that the mix to be around 1.7 million tons over 3 grams or around 3 grams coming out of the Gokona pit mainly and a little bit out of the – pit and then with the million tons of stockpiles, let’s say 1.5 grams, 1.6 grams and you get a blend in the 2.5 grams 2.6 gram range.

We’re not changing our expectations. We had a very good quarter. We did a little bit more ore production out of the Gokona pit than we’ve initially scheduled. And that will balance out over the first half I would expect. In terms of the border land acquisition, it obviously is a long-term constraint for us.

We are working hard primarily around land acquisition in regards to the Rama pit, a third of the pit and because we’ve got that in the mining schedule to be up and running basically in the middle of next year. So it’s very important that we see some progress over the balance of this year in regards to land acquisition.

Otherwise that will ultimately become a constraint for us in terms of being able to mine that area. Ultimately, in the long-term, land acquisition is also required for additional dumping space. So the Rama area is more about the closeness of the community to the actual active mining operations. So we need a buffer zone. But longer-term, obviously we need additional land dumping space up to the north. And that program is also a part of that land acquisition program.

There was a taskforce formed by the government earlier this year to look at national assets in Tanzania, mainly with the oil and gas but also North Mara, because they are realizing that companies themselves were struggling to get these things completed. We’ve had those guys on the ground for the last three or so weeks, basically doing surveying and assessing and trying to work with the communities to try and get an onus broker if you like to resolve these issues.

So we are pleased that taskforce got set up. We are pleased we’ve got people on the ground. But we don’t underestimate the difficulties given that we had the same difficulties in trying to negotiate and get that land acquired. But we are just going to track the progress during this year.

It shouldn’t – in terms of land acquisition for this year and this year’s production shouldn’t be an issue. But, if you get into the middle of next year and we haven’t got secured a buffer zone at Rama, then we are going to have to relook at rescheduling again.

Brock Salier – GMP Europe

Thank you very much.

Operator

The next question is from the line of Alain Gabriel from Morgan Stanley. Please go ahead Alain.

Alain Gabriel – Morgan Stanley

Hi, good afternoon gentlemen. Just my question is on Tulawaka and do you expect any incremental costs – closure-related costs in the third – in the second, third, and fourth quarter of this year or is it all we have seen in Tulawaka in Q1?

Greg Hawkins

In relation to closure, we’ve got a provision for about $22 million of reclamation for that site. We’d expect to pay around $13 million of that this year and the balance pretty much next year in 2014 maybe a little dribbles over into 2015.

So, it’s – if you like no longer really in commercial production as with the end of Q1. So there is a bit of cleanup work and things of that, but a lot more of the cost will be going through the reclamation provision from this point and obviously we are trying to rapidly scale down the mine and the workforce around the mine.

We are also obviously looking to try and redeploy a lot of those guys; particularly at Bulyanhulu where we’ve had some hauls in relation to the underground mine. So, we are trying to shrink that down pretty quickly. But obviously there is a provision in place to do the reclamation over the next couple of years.

Alain Gabriel – Morgan Stanley

Okay, that’s very clear. Thank you.

Operator

The next question is from Tyler Broda from Nomura. Please go ahead, Tyler.

Tyler Broda – Nomura

Hi guys. I have three quick questions if I may. The first question is, in terms of Bulyanhulu, and the transformer for the winders, just wonder if you can give a little bit of color on that and perhaps when you expect to get back up to about a 250 kilo ton per quarter level? Secondly, can you just quickly let us know how much is left on the CIL project and if any of that is already committed and then lastly just wondering what your thoughts on that hedging are? Thank you.

Greg Hawkins

Sure, I’ve got Marco Zolezzi. Chief Operating Officer sitting with me. So he might throw one or two his way. The transformer, I mean we are back up and running on that. Obviously, so that issue has recovered. The issue of back getting up towards more 250 ton a quarter, at Bulyanhulu resulted with having the manning and the scope.

And those two issues are well on their way to being resolved. We expect to start to see an upward trend in the second quarter and pretty much start looking back towards that sort of run rate in the second half of the year and that’s what we said at the start of the year that that would be the progress throughout this year.

On the CIL with 29%, 30% complete, Marco, how much have we committed there?

Marco Zolezzi

That’s just $50 million been committed – over $180 million.

Greg Hawkins

So it’s early stage, but we are reasonably well on track with that and the final one thought that was on hedging. As far as what we’ve done over the last three years is talking to our major investors. They’ve generally been pretty strong about that’s what they wanted the company to do that they wanted the exposure to the gold price.

Obviously, that makes everybody feel a little bit uncomfortable at this particular juncture that they want to be upside if you like and so, you had to live with the downside. Their expectations with management and the company is that we should run with the business and be able to make profits and cash flows no matter what the pricing environment and we kind of across the suit.

So, we obviously were getting our margins squeezed since the operational review launch couple of months ago and said, with the current gold price, well, that just gives us further push on that. If that’s sustained over the longer term, then you have to look at your mine planning at each of the sites and work out what you can do with that.

So, I don’t – it will be a matter for the Board and we’ll probably discuss it further, but at the moment the feedback got – we haven’t had recent feedback in the last couple of days on the matter consistently over the last few years our investors don’t want us to sort of be looking at that.

Marco Zolezzi

That’s entirely fair. Thank you very much.

Operator

The next question is from Daniel Lian from BOA Merrill Lynch. Please go ahead, Daniel.

Daniel Lian – BOA Merrill Lynch

Hi, guys. I think most of my questions have already been answered already. But just on the CapEx and for Buzwagi, do you mind breaking down how much of that CapEx or increase in that CapEx is due to the reallocation of stripping cost on the new IFRIC accounting rules? And then secondly, your 15% lower budget for G&A expenses this year, maybe you could just outline where the savings come from and how much scope there is for further cuts there and post the operational review? Thanks.

Greg Hawkins

Sure, I’ve got Jaco Maritz, our acting CFO here. So he might be able to give me the breakout on the IFRIC 20 number for the capital hopefully.

Jaco Maritz

As with – we had about $24 million of capitalized strip during the year in Q1. So that’s the main impact and North Mara, North Mara we had about $7 million of capitalized strip. Buzwagi, Daniel, last year Buzwagi was about $8.5 million in Q1 for capitalized strip. There is a big difference.

Greg Hawkins

Okay, thanks. And Daniel, for your second question on G&A, we had – we spent about $51 million last year in G&A. We budgeted this year at about $43 million. That took into account some of the hiring phase we did late last year. We had a fairly – budget process over the G&A earlier this year in terms of various personnel costs, some of the contracting and consulting cost and as a general sort of run through I’m trying to find idle $9 million out of that.

That all really was done as part of the budget process. Over and above that is the operational review and as far as your question was what else can we do. We do think there is some further movement to be down there in terms of the personnel and that’s what we’ve done our considerable amount of work on in the past four, five weeks.

And we’d expect to be moving on that in the second quarter as we effectively restructure the Johannesburg and the Bay. So, we know, in the budget, we are 59% down but the expectation is there is further to go there. I wouldn’t put a pin on it yet but we certainly have a firm number by the time we get to the interims.

Daniel Lian – BOA Merrill Lynch

Okay, sure. So, and also look at the other areas you can talk about for example cutting down on security costs, so that’s kind of additional to the 15% savings you’ve already…

Greg Hawkins

Absolutely, security, we’ve sort of isolate that as – what we’ve done with the operational review is, we’ve come up with, I think it’s about ten different projects. And security is actually a specific project in itself. Each one of these projects has a lead; it’s got a team underneath it.

We are scoping them up and there is work under way on each one of them. We’ll probably more advanced if you like on the corporate G&A and exploration and some of the capital work, but security in itself is a project we having a look at the whole model as it exists both in the G&A cost but also down into the sought model.

And looking at the staffing of that, the way it controls, also just we’ve invested a lot in capital over the last year or so in terms of physical security, in terms of building walls, putting security systems. So, perhaps, we are now at a transition point to try and lessen the reliance on the number of people, given that we’ve got lot of those walls in place.

North Mara will get into to a point where the wall should be complete by around the middle of this year. So, we’ve certainly done at Buzwagi. Taking advantage of some of that work as well, so security, I think last year we spent around $37 million, $38 million across the whole company. So it’s certainly a big number that we think we can tackle as well.

Daniel Lian – BOA Merrill Lynch

Okay, great. Thank you.

Operator

The next question is from Cailey Barker from Numis. Please go ahead, Cailey.

Cailey Barker – Numis

Thanks very much. Hi, guys. Just a couple of quick ones from me. One is just on the grade at Bulyanhulu, you had a jump, it came back a bit this quarter. Are you expecting it to stay at this sort of level or come higher later in the year?

Greg Hawkins

It should come higher later in the year. What we are saying on a week in or even a month in month out basis is that, it’s a little bumpy. We are still in the mode or have been in the mode for the last six months of sort of scrambling around find areas to mine from given the lack of paste fill.

So, as we get back to a more normal complement of finance, get back caught up with the paste fill, get back caught up with the development. You should come back to a more normal run rate on that grade. So, it’s a little hard to put a finger on a monthly basis at the moment. I’d say, the first quarter is probably not a bad guard, but the second quarter should slightly improve, I think, particularly in the last month.

It’s probably late May, early June, we should see and it will start to become a bit more consistent. But we are starting to looking really for the second half to much more normalized and probably, in the second half, probably somewhere between 8.5 grams and 9 grams a ton would be our expectation.

Cailey Barker – Numis

Okay, great. And then just on some of the costs, the CapEx the $50 million saving, is that just I’m clear, is that against a 4, 4.5, I think that you originally budgeted?

Greg Hawkins

Yes, that’s – that was included to get it down to 4, 4.5, and separate that 4, 4.5, I mean you’ve got 130 odd tied up with the sale. So we had sustaining capital of just over $300 million. I think it’s about $310 exactly that it got bumped because of the IFRIC 20. But when we looked at it year-on-year, the $50 million basically came out of – if I put aside capital development and this stripping, it came about on the sustaining capital we are investing.

So, last year, we invested somewhere in the ratio of about $140 million to $150 million of sustaining capital. This year we should be down to around a $100 million and that’s – so that’s in the sustaining capital development at Buly is stripping that’s sort of put the one side, because those things fluctuate year-on-year and then the project capital has to do with the Buly CIL and a little bit on the Buly Upper East.

But obviously all of this – I mean the project capital, we are also looking at the way we manage the stripping and the order and the mine scheduling we do that as well had probably more less impact on that this year, but more as we go through the technical views on the mine plans and particularly the focus on 214 to 216 that three year cash flow is how you schedule out that sort of capital and also the sustaining capital that comes into it and trying to optimize that.

Cailey Barker – Numis

Got it. All right. Thanks very much.

Operator

The next question is from Peter Rose from Fox-Davies Capital. Please go ahead, Peter.

Peter Rose – Fox-Davies Capital

Good afternoon gentlemen. I’ve got two questions. The first one relates to Buzwagi and the site power. Is the mains power reliable off peak, so from midnight to six o’ clock in the morning and could you operate on mains power during that time period and save money?

Greg Hawkins

We actually sort of tried that in the first half of last year and to be honest, we thought that that was going to work, because when we were monitoring it certainly during 2011, we very much had more impact during the days. So we tried to do that to try and do exactly as you say maximize the opportunities off the grid, sorry – when we are on the grid given the cost differential there.

It didn’t really work. The disruption we get from just going down at any point in time has been so dramatic, but by the time we got into the second half of last year, we more and more got into just saying better off on the running is back-up power. The thing that we are doing is we’ve been looking into basically some management of the voltage dips and flows, some capacitor technology.

We’ve identified some staff with literally with just getting through the board to approve that we will be able to bring in, should have it up and running by the time that early next year to late first quarter, early second quarter next year. And the idea there is, there is a viable power as you rightly say for about 60%, 70% of the time, but it’s so dirty with the dips and flows and it’s unusable for us.

So, the idea behind this technology is it would clean up that power, bring it over the fence and be able to use that and obviously we take the advantage of cleaning it most of the power to make the cost differential work.

So that seems like our best avenue. But we certainly tried what you are suggesting, unfortunately it didn’t quite worked given the fluctuations. The grid has become particularly unstable in its management by TANESCO. So it’s been a frustrating process over the last couple of years.

But you can see the benefit of running, having reliable power, not shutting down the place all the time, having the guys be able to run the mill, the big process plan in a consistent fashion. To be honest, one of the – not only the tonnage, but the recoveries, to be honest, are driven by the fact that you had that working, being able to run with reliable power, because that had a dramatic improvement with that.

Peter Rose – Fox-Davies Capital

Thank you and the second relates to North Mara, where you process through mill 646,000 tons, this mill is capable of sustaining over 800,000 a quarter. Why was it so low? Is it a problem with the power? Or did you have a mill realign or was it some other problem? Because I think it was the lowest quarterly throughput since 2006.

Greg Hawkins

Yes, we had a very good year in 2011 and we got 3 million tons per annum. So that’ll be about 750 a quarter. So it wasn’t, you are right, it was a bit of a down performance this quarter. I’d say, we had a pretty good run in 2011. I would say it’s probably around the 2.8 million ton, 2.9 million tons per annum is about a practical sort of outcome. So it should have been about 700 million ton for the quarter.

Jaco Maritz

During the quarter, damage was done to the main feed conveyor to the crush ore oven. So there was no ore transferred to the crusher through the conveyor to the sag mill for three weeks until it was repaired. The ore was moved via trucks and that reduces the efficiency considerably and as you mentioned, we had some major realigns both on the crushers and on the mills in the first quarter.

Greg Hawkins

So in the second quarter we should see some pick up from what hopefully should be a lower number I think for the whole year.

Peter Rose – Fox-Davies Capital

Given the reliance, I assume your expense and it would cost a lot more money to truck roll and run a conveyor. I’ll begin to see the cash cost per ton milled per ounce whatever come down?

Greg Hawkins

Should see an improvement in the cash cost per ton milled. The cash cost per ounce is going to depend on the grade and as we expect the grade to normalize over this year by earlier but certainly the cost per ton milled, we’d expect to improve on the back of that. Obviously more tons will help, but also, yes, just a little extra spend on that.

Peter Rose – Fox-Davies Capital

Thank you very much.

Operator

The next question is from Dmitry Kalachev from Canaccord. Please go ahead, Dmitry.

Dmitry Kalachev – Canaccord

Good afternoon. Thank you very much for the presentation. Most of my questions have already been answered. Just maybe a quick follow-up on Buzwagi, ounces sold were something like 11,000 higher than ounces produced in first quarter. Should we expect any additional sales in second quarter and going forward in here?

Greg Hawkins

No, I think, obviously these things move around depending on our shipping. Buzwagi and Bulyanhulu to a certain extent are sensitive to that, because of back up concentrate and we struggle to clear the ports early in December. And we had a – if you remember, Buzwagi, we are milling some pretty high grade material late in last year in December.

So we had some pretty high grade stuff that in terms of dore and high production in those last couple of weeks and also we didn’t quite get all the ships out in terms of the concentrate deliveries as well. And it ends up with a bit of a catch up obviously happening in the first quarter, but it should smooth out over the year.

Dmitry Kalachev – Canaccord

Great, thank you.

Operator

Ladies and gentlemen, actually we have another question coming through now from Bart Jaworski from Davy. Please go ahead, Bart.

Bart Jaworski – Davy

Hi, good afternoon everyone. Just had a quick question on the CapEx guidance or at least for this year and next year if you could just sort of shed some light on what you would expect the total CapEx to be over that timeframe?

Greg Hawkins

Yes, we have only given guidance for this year. And that basically that’s in the round of 4, 4.5 mark. And that’s broken down to around $310 million in sustaining capital which obviously includes the capital development at Buly and the capitalized stripping at Buzwagi in North Mara.

And the project capital for around $120 million, $130 million on the Buly CIL project and then the remaining dollars are basically back up with bits and pieces from Bulyanhulu operation that we preordered and some of the study work. Going into next year, we haven’t given guidance on it.

The Buly CIL is pretty much just about complete by that point so that maybe $20 million or so to spend in 2014 on the CIL. It depends what we do, what decision we make with the Buly Upper East is to weather this project capital in relation to that and as I said the operating review, the technical review on a lot of mine plans is really focused on trying to reduce and reschedule at the sustaining capital to bring that number down over 2014, 2015, and 2016. But obviously, we haven’t put out numbers on that yet.

Bart Jaworski – Davy

But would you characterize 2014 as a potentially dramatic drop or more of a moderate tapering off?

Greg Hawkins

I’d say, we’d hope to get some sort of moderate step down on it, but, two caveats. One it depends on if we are pretty Buly Upper East there is a bunch of project capital to come in. So, I put that to one side then if I’m just talking about talking about the 310 and the sustaining capital, we’d be certainly looking to try and step that down.

But there is always going to be ongoing capital development and stripping. The other caveat I’d put on that is to say the recent gold price change would sustain, then we would obviously have a look at – we’d obviously be working at way through scenario planning on the mine plans and then that might add some dramatic change to it.

Bart Jaworski – Davy

Great. Thanks for that. And then just another question, I wonder if you can comment just on the trends on OpEx, are you seeing any deflation starting or coping at least on the labor cost side or maybe on the some of the reagents or any other inputs that you are seeing. Are you seeing any of that starting?

Greg Hawkins

Yes, not out of anything that’s happened in the last few days, but we have been saying for a little while that since about the middle of last year, some of the cost pressures on some of the reagents and consumables seem to ease off. We are obviously, not only just from a business point of view but just as part of the operational review we’ve been working pretty closely with our suppliers in terms of looking at the contract terms and the pricing of a variety of things.

On the labor front, we did have pay reviews, which basically the percentage comes through and starts on the 1st of January this year. It was a lowest overall increase for probably four, five years I would say. So there was clearly pressure out of the system in the labor side.

And look, I’d say that’s only going to accelerate the way things going over the last few months, particularly for the gold sector and the resources sector. That will take a lot of heat out of the system in terms of labor.

So, with labor it always tough to take funds off people, so our focus has been more on the headcount and the numbers and ongoing work that we’ve been doing for over a year now in terms of reducing the number of international workforce because they tend to be more expensive ones. In terms of the other sort of pricing there are other things you can do in terms with suppliers, but that is part of our organizational review.

Bart Jaworski – Davy

And what about engineering cost? I guess with Upper East or anything like that, the contract is termed to ease up a little bit on the costs?

Greg Hawkins

Not yet, but, again if the sector sort of shrinks then contract is one of that obviously people keep equipment moving and all of that. So you potentially get cleaner pricing at that sort of point. But I don’t think that you haven’t seen that sort of come through yet in the negotiations, but we’ll see what happens over the next few months.

Bart Jaworski – Davy

One last one if I may, just, has there been any on North Mara, has there been any – how would you characterize the relationship ongoing right now with the local community since it’s stable or any incidents to report over the quarter?

Greg Hawkins

Yes, I think, probably we then classified as stable, that remains a very, very complex environment. I mean, we launched a renewed strategy on this a couple of years ago in terms of building a proper pyramid which will be complete by around the middle of the year.

Getting the Village Benefit Agreement signed with each of the individual villages, each one of the seven villages that’s around the mine and doing a lot of community development work through the Maendeleo Fund and also executing those Village Benefit Agreements. That had a major impact in terms of much more positive dealings with the community.

We’ve also lobbied very hard and had some success with the government in terms of improving the law and order situation there, but it’s not, it sort of goes in waxes and wines a little bit. We certainly had some dramatic improvement in that, January and February, we’re seeing a bit of a pickup in March.

The land acquisition is a tension, having the government taskforce come in, certainly, we realized that we got to the point where we couldn’t take it much further. So we are pleased that the government has come in from a taskforce, but that has – that will immediately obviously create some tensions as some of the land speculation obviously people realize that is quite going to get what they might have – going to get in the speculation process.

So, yes it remains a complex environment. We are – over the last two years, we’ve made a lot of positive improvements. We get a lot more support out of the government and the rhetoric certainly positive reporting in the immediate for the work that we’ve done.

But ultimately all of that needs to come together such as we have a proper, what we described as a social license to operate out there and that’s it’s an asset. It’s a valuable asset from an operating and technical point of view, but we now must have a social license there to be able to run it going forward.

Bart Jaworski – Davy

Great, thanks very much. Very helpful.

Operator

And the next question is from Charles Gibson from Edison. Please go ahead, Charles.

Charles Gibson – Edison Investment

Thanks very much. Good afternoon chaps. I just want to – if I could ask quickly, you had official dividend guidance I think in the past 15% to 30% payout ratio. I just wonder if you are still happy with that.

Greg Hawkins

Yes, I think, we are happy with the dividend policy. We set that out, as you say 15% to 30% of earnings, on the basis that if the gold price goes up we are able to push more dividends in cash terms out to shareholders as they would expect that it comes off while obviously it’s got a natural impact on earnings and that would tie that up.

What we decided to do obviously kind of in the final part of 2012 was maintain the cash dividend level at the same level as it was in 2011. We just gone through a pretty long difficult process with substantial sale. We felt it was – that the business may send a message in terms of that it could generate sort of cash flows that would justify the dividends that we did in 2010 to 2011 and so that’s why we continued it on.

But obviously as we go forward, there is a dividend policy there that continues on. If the earnings, justifies then, you push up the dividends. Obviously, you then have to factor that all in with – well, obviously at the top of these levels that puts pressure on earnings and that has an impact on it. But we are comfortable with what we’ve set out.

Charles Gibson – Edison Investment

Okay, thank you.

Operator

We now have a question is from Tanya Jakusconek from Deutsche Bank. Please go ahead Tanya.

Tanya Jakusconek – Scotia Bank

Okay, I think that’s Tanya from Scotia Bank. Anyhow, great, thank you very much for taking my question. I just wanted to come back and focus on some of these cost reductions that you are looking at. First off, just on labor, because it is 40% of the cost structure. Can you just remind me your wage negotiations that you said you just completed in January, what was the increase?

Greg Hawkins

From, off the top of my head, for the local Tanzanian workforce, it was around 13% and the reason for that is, the very high cost inflation in the Tanzania and Chile in-country mainly on food and fuel rising through the costs in that environment. So we did that. I think for our international workforce and the various offices, it was around 2.5%, 3%, 3.5% around that sort of mark.

And previously with the international organization, those numbers have been in the 6% to 8% range for the previous couple of years. So, that pressure come off a little bit. so the overall number I think for the salary increase in terms of our overall labor bill go up by – think of averaged about 6.5% in the overall wage bill. But it was a bit of a mix – obviously less than the international.

Tanya Jakusconek – Scotia Bank

Yes, and then maybe just what percentage of the workforce is ex pat just maybe that’s the easiest for me to work with?

Greg Hawkins

The percentage, that’s changing dramatically, it was about a year ago about 13% of our workforce was ex pat, that will be down to just over 8% basically by the end of this month. So we’ve been on a year campaign, out of a three year campaign to push more and more Tanzanians, localize the workforce.

That’s got subsumed if you like into the operational review, we keep up with salary to get more of a push and we’ve been certainly working down that path because it’s obviously quite expensive. By the time you low the mean – terms of the travel, the camp accommodation and the rest of it, fully loaded costs.

Tanya Jakusconek – Scotia Bank

And maybe just to come back to some of these costs, because I understand the labor side of it and so forth, but then obviously consumables which are about 25% of a general cost structure, I think it was about 20%. Just looking at that and maintenance, obviously cyanide, tires, steel et cetera within the consumables, can you just kind of give us a feel for like how can you cut back on those pricing?

I mean, I know cyanide is very much tied to the gold price. So maybe we have a weakness there that will come off, but from tires, would be that will you try and run your tires longer, steel you try to use that as long as you can before changing? Just maybe, qualitatively what you are trying to do on your consumables?

Greg Hawkins

Within these prices, we basically and principally split it up. There will be some site-based projects which really look at efficiency of usage. So you try to cut down on volume. And as you described, we look at the tire management and there is – to be honest lot of improvements in tire management get down to improving the quality of roads.

Tanya Jakusconek – Scotia Bank

Of roads, yes.

Greg Hawkins

So, there will be specific projects around that, particularly around the open pit. To an earlier question, there was little bit more softness if you like in the pricing market for a lot of these things and obviously supply chain guys work in conjunction with the site guys.

We will be actively pursuing over. Again, you focus on the top 20 and you work your way through those processes. And again, not only just when you are getting to the consumables, the reagent things that using the mill, the guys then focus on just the usage and so, making sure and again where we get some impact.

Let’s say Buzwagi for example is if you got consistent power, you can consistently run the mill, which means the guys can dial in the consumables and much tied to what they were doing before, whenever in case you throw as much in there as you like to try and get a result. And if you keep losing power, you don’t think you don’t have the stuff on the floor, then you can say the wastage that creeps into that.

So, this gets pretty data out and we’ve got to find every dollar in the equation. But that’s the sort of data that’s been gone into and that we can push down on every site and that has to happen. So, a fair amount of focus initially on the volume side. The supply chain going to working on the price, seeing some softness in that, see where the gold price takes us that you can get sharper on the pricing side.

Tanya Jakusconek – Scotia Bank

And then just on your maintenance, what can be cut there?

Greg Hawkins

In some cases, we do our own maintenance in case of contracts with external providers. To be honest again, the focus particularly in the more recent times has been on availabilities. When we’ve looked and benchmarked our maintenance practices, we weren’t getting the availabilities out of some of the fleet.

And that got down some of the maintenance practices, focus areas on the maintenance and the prioritization of what things got maintained and the order in which they cut down. So there is a fair amount of work has been done on that in the last little while. So that has improved the availabilities and you are seeing that particularly somewhere like Buzwagi, you’ve seen the tonnage movement come dramatically often, part of that’s the maintenance story.

And then you start to focus internally within the mining department on the utilization of that. So, again a lot of efficiency, again with the contractors who provide the services were certainly looking at the pricing mechanisms around that as they come up for renegotiation.

Tanya Jakusconek – Scotia Bank

And cannot be done in-house, do you think?

Greg Hawkins

Some maintenance we do, do in-house, some of it we do externally.

Tanya Jakusconek – Scotia Bank

You think it take on more do you think or?

Greg Hawkins

You got to be a little careful. Some of the big equipment to staff up and then the other cost factor in there is if you taken on yourself caught often, you’ve obviously then got to bring on a bunch of suppliers. And so, sometimes it’s justified and sometimes contractors sort of you just kind of get to a pricing point where you do bring it in-house and we’ve done that in the past.

And those are other aspects where we just do, we can do a better job anyway and there is more discipline on it. Because some of the bigger equipment it tends to be outsourced just into work better. As far as the experience we’ve had in Africa and obviously from the operating guys is, that tends to work better at the moment.

Tanya Jakusconek – Scotia Bank

Okay, and then just my final question. Where would security fit in? Would that fit in your G&A at the mine site or is that cost also in your corporate G&A?

Greg Hawkins

It’s a little bit in the corporate G&A but predominantly it’s allocated into the site. So there is obviously security function in each of the site.

Tanya Jakusconek – Scotia Bank

So that $37 million to $38 million would be allocated accordingly to all of the mine sites and just a little bit ahead of us?

Greg Hawkins

Yes, off the top of my head, very much would be in corporate G&A. That $5 million stay in corporate G&A and the balance in spread in mines and sites. But we are tackling the whole package, that’s a separate project.

Tanya Jakusconek – Scotia Bank

Yes, good luck with the project. Thank you.

Greg Hawkins

Thank you.

Operator

We now have a question is from Cailey Barker from Numis. Please go ahead Cailey.

Cailey Barker – Numis

Sorry guys, I just forgot to ask one more, it’s just on the tax that went through the P&L. I just felt you had a – I calculated that about 47% for this quarter, is that – are you expecting that to come down? Or what’s the level you are expecting for the year?

Greg Hawkins

A little bit of an odd one, because Tulawaka made a loss and because each of those sites is ring fenced for tax purposes. We don’t get a – effectively you end up with a higher rate of effective tax and it looks like it on the phase of it, because you have to effectively add back that loss and then do the calculation.

Cailey Barker – Numis

Got it. So it’s going to, let’s say – it’s going to be back to sort of normal rate from Q2, is that fair?

Greg Hawkins

It should normalize as we basically stop Tulawaka and then the money that we are expending at Tulawaka, as we get through Q2 and particularly in Q3, Q4 should start going into the reclamation provision and therefore not going through the P&L. Therefore it’s not an add-back to the effective tax rate.

Jaco Maritz

If you normalize the Tulawaka impact outage, it’s 32% 33%.

Cailey Barker – Numis

Got it. All right, thanks very much.

Operator

(Operator Instructions) We currently have no further questions. So I’ll hand back to your host to wrap up this call.

Andrew Wray

Great, thank you very much. Many thanks to everybody, thanks for taking the time. If there is anything else that occurs post the call give Giles or myself and we will get back to you. Thank you very much and look for speaking shortly.

Operator

Thank you for joining today’s call. You may now replace your handsets.

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