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Barrick Gold Corporation (NYSE:ABX)

Q2 2009 Earnings Call

July 30, 2009 09:30 AM ET

Executives

Deni Nicoski - Vice President, Investor Relations

Aaron Regent - President and Chief Executive Officer

Jamie C. Sokalsky - Executive Vice President and Chief Financial Officer

Peter J. Kinver - Executive Vice President and Chief Operating Officer

Analysts

Kerry Smith - Haywood Securities

Greg Barnes - TD Newcrest

Victor Flores - HSBC

John Tumazos - John Tumazos Very Independent Research

Barry Cooper - CIBC World Markets

Heather Douglas - Thomas Weisel Partners

David Haughton - BMO Capital Markets

Operator

Ladies and gentlemen thank you for standing by and welcome to the Barrick Gold Corporation's Q2 2009 Results Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question and answer session. (Operator Instructions). As a reminder this conference is being recorded Thursday, July 30, 2009.

I would now like to turn the conference over to Mr. Nicoski, Vice President of Investor Relations. Please go ahead sir.

Deni Nicoski

Thank you, operator and welcome everyone to the Barrick Gold second quarter 2009 results conference call. Before we begin, I will to your attention the facts that we will be making forward-looking statements during the course of this presentation.

For a complete discussion of the risks, uncertainties and factors which may lead to our actual financial results and performance being different from the estimates contained in our forward-looking statements, please refer to our year-end report or our most recent AIF filing.

With that, I'll hand it over to Aaron Regent, President and CEO of Barrick.

Aaron Regent

Thanks, Deni and going morning. Like in previous calls, Jamie Sokalsky, our CFO and I will make some brief formal remarks and then open things up to questions. In addition to Jamie and me we have other members of senior management here as well including Peter Kinver, our COO, Pat Garver, our Head of Corporate Counsel and Kelvin Dushnisky Head of Corporate Affairs.

So turning to the quarter, I am pleased to report that we had a solid second quarter which exceeded our plans. In summary, strong operating results translated into good financial results. Net income was $492 million or $0.56 per share and on an adjusted basis net income was $431 million or $0.49 per share. Operating cash flow rose 42% to $718 million brining our year-to-date cash flow to over $1 billion.

Our project development pipeline remains on track. Our Buzwagi project in Tanzania poured first gold on time and in line with budget. Cortez Hills was well advanced, with production commencing within six months. Pueblo Viejo is proceeding well. And we are particularly pleased that we were able to make a go ahead decision on Pascua-Lama earlier in May. Pascua-Lama is arguably one of the best undeveloped gold projects in the world and will be a low cost contributor to Barrick for decades to come.

Second quarter operating results were ahead of plan with production of 1.87 million ounces at a net cash cost of $360 per ounce or total cash cost of $452 per ounce. The North American region exceeded expectations with production of 765,000 ounces at a total cash cost $484 per ounce. The Goldstrike operation produced 408,000 ounces at a total cash cost of $441per ounce.

With continue mining of higher grades from both the open pit and underground. Second half production from Goldstrike will be lower however, than the first half as the money sequence shifts and like I said the first half will be moving more ways and mining lower grades.

The Cortez mine also had an improved quarter so there are improvements to production and costs are at Cortez are expected in the second half the year with access to higher grade material.

Our South American business unit exceeded plan producing 442,000 ounces in the second quarter, at a total cash cost of $277 per ounce. The Lagunas Norte mine delivered another quarter of excellent results with production of 261,000 ounces at a total cash cost of $134 per ounce.

Production at Veladero was better than expected; second half production will also increase with access to higher grade ore and higher throughput resulting from the completion of the crusher expansion, which will increase our processing capacity from 50,000 to 85,000 tons per day. The crusher expansion is now about 90% complete and is on track for commissioning in quarter three.

Production from our Australia Pacific business unit was 488,000 ounces at a total cash cost $552 per ounce. The Kalgoorlie mine showed better results as we continued access high grade ore and benefited from improved productivity from the mining fleet.

The African region contributed 163,000 ounces at a total cash cost $539 per ounce. Included in these numbers is 36,000 ounces from the new Buzwagi mine which was produced at a total cash cost of $357 per ounce. The ramp up of Buzwagi continues and for the years to contribute around 200,000 ounces.

Our copper business produced 96 million pounds at a total cash cost of $1.25. So in total we are pleased with our operating performance and are well positioned to meet our original 2009 guidance for both gold and copper.

Turning to our projects. Buzwagi is the first of a new generation of projects to start production. First gold was poured in early May on schedule and inline with the 400 million capital budget. Buzwagi is now the sixth mine Barrick has constructed on time in the last six years. As I said earlier, the mine is expected to continue to ramp up production in the second half and to produce about 200,000 ounces this year at a total cash cost of $385 per ounce.

Cortez Hills in Nevada is a key project for Barrick, and it was on track for the first production in the first quarter of 2010. The Cortez property is expected to deliver 1 million ounces per year at cash cost of around 350 to $400 per ounce in its first four-five years, once Cortez sales is an operation. Construction of the heap leach pad is progressing well and substantial progress has been made on erecting the primary crusher as you can see in this photo.

Pre-stripping of the open-pit is ramping with a new fleet of trucks and shovels, construction of the Carbon Column plant, which is associated with the heap leach process is well underway and significant process is being made on the truck shop. The 15 kilometer cross valley compared system is about 35% complete and is entering the pre-commissioning stage and construction of the 120KV power line and sub-station are near complete. Overall construction is approximately 60% complete and is progressing on schedule and inline with the $500 million capital budget.

Our 60% of Pueblo Viejo project in the Dominic Republic is another key asset for the company once it enters production. PV is expected to be plus 1 million ounce producer in its first four-five years of operation contributing about 600 to 650,000 ounces to Barrick at a total cash cost of around 275 to $300 million per ounce. Good progress was made during the quarter and the project is also on track with a $2.7 billion pre production capital budget of which our share is $1.6 billion.

The Engineering and design phase of the project is more than two thirds complete and construction of the autoclaves and oxygen plant is progressing on schedule. Mining and auxiliary equipment have been deployed and structure steel and rebar are arriving at the site. And we are in active discusses with the group of export credit agencies for the $1 billion of project financing and expect to have this in place in the fourth quarter.

The construction decision on Pascua-Lama announced here in early May is a milestone event for Barrick and is a combination of a three pronged approach involving a receipt of key construction permits and satisfactory resolution on cross board and fiscal matters and a financing strategy that is well advanced.

Pascua-Lama is a world class deposit on the border of Chile and Argentina prudent and probable gold reserves are about 18 million ounces with an additional 4.7 million ounces in measured in indicated resources and contain silver within gold reserves of about 718 million ounces. This is a low cost long life project which is expected to have a significant impact on our future production, cash cost, cash flow and earnings. As we have mentioned previously, if Pascua-Lama was in production today it would have the affect of reducing Barrick's overall of total cash cost by about $40 per ounce.

Average annual production in the first four, five years is expected to be 750 to 800,000 ounces of gold and 35 million ounces of silver at a total cash cost of 20 to $50 per ounce, making it one of the lowest cost gold mines in the world.

By the end of the quarter the mills, mining fleet and other processing and earth moving equipment have been ordered and the project team anticipates mobilizing to the size in the third quarter to install construction infrastructure including additional cap facilities and to begin upgrade in the access road.

Commission in Pascua-Lama is expected to occur in late 2012. Pascua-Lama has strong government support from both countries at the local, regional and national levels. And we're also extremely encouraged by the employment interest at Pascua-Lama having received more that 145,000 job applications to-date. 22,000 of which have arrived since we announced the go ahead decision.

Pascua-Lama is expected to create about 5,500 jobs during the construction phase and about 1,500 jobs when in operation. And for each direct job an additional 2.5 to 3 indirect jobs are estimated to be generated. We expect these new jobs and associated ripple effect fact to provide significant economic benefits in this area and in other regions where we are constructing new mines that currently have high unemployment rates.

Before turning the call over to Jamie, I'd like to spend a moment discussing our strategy to control and reduce costs. Our cash cost have been in an upward trend for the past several years, as a result of the changes in our production mix, lower average grades and inflationary pressures in wages, energy and other consumables. Taxes and royalties have also increased as a result of the increase in the gold price.

We're at a point now where we believe this trend will start to reverse. The biggest impact will come from the commissioning of our next generation of projects which will all be produced at lower cash cost than our current production. But we will also benefit from our efforts to reduce cost and improve efficiencies as well as some lower commodity prices and a less competitive marketplace compared to last few years.

For example, on the labor front which accounts for about 25 to 30% of our cost, the economic slowdown has lowered turnover rates considerably. Average 12 months total turnover in North America is down to 10% from 16% last year. And in Australia its down to 13% from 20% last year. While labor costs tend to be sticky, we expect less inflationary pressure in the foreseeable future.

The lower turnover also had a positive impact on productivity and provided us with the opportunity to stand vacant positions with high quality personnel there were available even a year ago.

Our supply chain team has been renegotiating contracts to reflect current market conditions. Bad insurance have been realized for a variety of consumables including for cyanide, sulphuric acid grinding media and explosives to name of few.

Our energy costs has gone down significantly from a combination of lower commodity prices and efforts to improve our energy efficiencies which includes where possible shifting from higher costs energy sources to lower costs energy sources.

Well the full benefits from some of these changes will take time to be realized as we workout existing inventories and contracts the trend is in the right direction. So as the gold price increases we're better positioned to see a increase in our margins with more the benefits of higher prices going to the bottom line.

I'll now hand it over to Jamie to discuss our financial results in more detail.

Jamie C. Sokalsky

Thanks Aaron. Our realized gold price for the quarter with $931 per ounce, which was $9 higher than the average stock price of $922 per ounce, and we also benefited significantly from our copper hedge position realizing a price of $3.18 per pound, which was 50% higher than the average market price of $2.12 per pound.

Net income for the quarter was a healthy $492 million or $0.56 per share compared to $485 million or $0.56 per share a year ago. On an adjusted basis, net income of $431 million or $0.49 per share compares to $442 million or $0.51 per share a year ago. We benefited from higher realized gold prices and lower project development and exploration expenses and that was offset by higher cash costs during the quarter.

Adjusted income primarily excludes gains recorded on the Hemlo acquisition. The gains are largely the result of new accounting requirements on step acquisitions requiring us to compare the fair value of the assets and liabilities acquired with the purchase price and re-measure our existing 50% interest at fair value.

Our second quarter operating cash flow of $718 million was 42% higher than a year ago. Reflecting strong earnings and also the lower income tax payments due to the production mix and the use of tax loss carry forwards.

As Aaron mentioned, year-to-date cash flow was over $1 billion and year-to-date EBITDA is over $1.6 billion. This robust cash flow generation resulted in a cash balance of $2 billion at the end of the quarter, essentially unchanged from the $2.1 billion as of the end of the first quarter, despite investing about $0.5 billion in capital during the quarter.

Our cash margins have expanded significantly over the past five years. And you can see that has continued in 2009. On a net cash cost basis, which incorporates the full non-gold credit against our cash cost we have maintained our cash margins in the first half of 2009 at about 60% of sales, a level which combined with the industry's largest production is driving the strong financial results that I just discussed.

On a total cash cost basis, cash margins have risen to about 50% of sales. And with the introduction of our lower cost projects and our focus on cost control that Aaron spoke about, as well as our bullish outlook on gold, we are very well positioned to deliver robust margins in the future.

I'd like to make some comments about the gold price as well. We continue to have a positive outlook on the gold price for a variety of macroeconomic and sector specific reasons. There continue to be a lot of reasons to buy gold. Gold has performed strongly in 2009, when you consider the U.S. dollar strength in the first quarter and it's resumed its traditional inverse trading pattern in the second quarter. We think it is very reasonable to expect additional dollar weakness as global monetary and fiscal inflation will remain necessary for years to come.

Global imbalances remain an excessive global U.S. reserves appear to be a concern to countries such as China and Russia. This should continue to be support of the gold price. Particularly as we move out of a seasonally weak summer period for jewelry demand. And clearly investment demand by the Gold ETF appears to be in a long-term up trend and has remained sticky despite some flowing in the last quarter.

On the supply side, mine production has been in decline since 2001 and it continues to be constrained and we still feel that supply could continue to decline over the next five to 10 years. There has also been a significant change in settlement by Central Banks who are reducing their gold sales or like Russia and China have been purchasing gold to diversify their currency reserves.

With just two months ago until the Central Bank Gold agreement expires, signatories have only sold 140 tons, well under the 500 ton cap. And as we heard just yesterday, a senior IMF official mentioned that future IMF sales will take place within a new Central Bank Gold agreement, currently being negotiated. And no sales could take place over two to three years. Some analysts have also speculated that China may be interested in buying some or all of the IMF gold. So we continue to be very optimistic for the gold price and against this backdrop for the strong gold price market, Barrick is positioned to be a major beneficiary.

I'll now hand it back to Aaron to wrap up.

Aaron Regent

Thanks, Jamie. So in summary, we had a good quarter and remain on track to meet our production cost guidance for the year. We're also on track to see an increase in our production in 2010 particularly as a result of the commissioning of Cortez Hills early next year. Our projects remain on schedule and within budgets. Buzwagi and the first of these projects is now complete and is ramping up production. And after many years, the word-class Pascua-Lama project is now under construction.

Collectively, Buzwagi, Cortez Hills, Pueblo Viejo and now Pascua-Lama were 2.6 million ounces of new production at significantly lower cost and our current production base. As a result, our cash cost profile should continue to improve as we complete and commission these projects and also from our efforts to manage and reduce our costs from existing operations.

Financially, we have over 3.5 billion of liquidity, strong cash flows and a solid balance sheet, which will allow us to support our operations and fund new growth opportunities. So overall, as Jamie said, we are well positioned to be a major beneficiary in a scenario of rising gold prices. Execution of all these initiatives is a focus at Barrick, and we look forward to providing you with progress updates in subsequent quarters.

That concludes our formal remarks and operator we'd now be happy to open up the call to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from Kerry Smith from Haywood Securities. Please proceed.

Kerry Smith - Haywood Securities

Thanks operator, I joined this time. I have just two questions and the first one, what's your strategy now going forward on future copper hedging, is the hedge you have expires basically at the end of this year, I'm just curious what strategy would be?

Aaron Regent

I think that our strategy outside of gold, but our strategy with respect to copper and some of the other -- the input cost we have whether it be overall currencies is to actively and opportunistically hedge. And so, I think with respect to copper we will look at copper to do that and in fact have been putting on some positions with respect to our 2010 production.

Kerry Smith - Haywood Securities

Okay. So you have done a little bit of hedging to 2010, is that disclosed in MD&A or you guys missed it?

Aaron Regent

I don't believe, we actually, specifically disclose at MD&A.

Jamie Sokalsky

Kerry its Jamie. As at the end of June, we haven't done any hedging for 2010, and we disclose our positions on a quarterly basis so there wasn't anything as of June at the end of June.

Kerry Smith - Haywood Securities

Okay, okay. And how would you would that just be selling forward Jamie and how would you do that?

Jamie Sokalsky

The approach that we take is to maintain upside Kerry, so as we did was the 2009, hedge option using option related strategies to buy downtime protection and selling core options to finance the purchase of those puts. So pretty much collar type arrangement downside with upside participation.

Kerry Smith - Haywood Securities

Okay. And then second thing, if you look at and see '07 your cost average, your total cash cost was 345 an ounce and for the six months its been 467, so that's like a120 bucks roughly incrementally. Can you just give me roughly; I'm just trying in get a better sense on how much benefit you might get as input costs come down?

How much of that $120 roughly would have been just related to say declining grades or highest ratios or sort of operating issues that you can't control versus how much that $120 would have say consumables and fuel and the rest of those kinds of costs? And just a rough number Jamie.

Jamie Sokalsky

Kerry, probably about, I'd say, very rough about two thirds of the cost would be related to consumables, inflationary increases and lower grades. We'd also have slightly higher hedge rates on Australian and Canadian dollar. And then the remainder would be related to the gold price with royalties and net proceeds tax.

So very rough but and there is a lot more way stripping as well that would in that, as you recall we went through a number of periods, particularly at the Goldstrike mine where we had to move to a significant amount of weight. So lot more deferred stripping, some grade related issues. And that's partly driven by the higher gold price. We benefit from higher gold price on a revenue side.

But what that means is we're producing some lower grade material at the mines, which makes the dollar and so we do that. And as because it's lower grade then we're obviously have an impact on costs as well. So pretty much a benefit a net benefit on the margin line, it but has some pressure on the cash costs.

Kerry Smith - Haywood Securities

All right, okay. And just one last question on the project that probably holds. Have the lenders that you've been talking to both PRI or hedging strategy and it would relate to that project there?

Jamie Sokalsky

No, the lenders are looking at the overall credit of the company. And so there is not a requirement for hedging on that project that the sponsors being us in Gold Corp. have such a good credit standing that there's not hedging required for that budget financing.

Kerry Smith - Haywood Securities

Okay. And would you need PRI or not, probably not I presume?

Jamie Sokalsky

Well, the PRI comes from the participants in the financing. So we have IDB U.S. XN, EDC, so they are providing incessancy blanket of political risk insurance over the entire project through their participation.

Kerry Smith - Haywood Securities

Okay, great. Thanks a lot.

Jamie Sokalsky

Yeah thank you.

Operator

Our next question comes from the line of Greg Barnes from TD Newcrest. Please proceed.

Greg Barnes - TD Newcrest

Yeah. Thank you. Aaron, in Gold Corp's report last night they noted that the SLA that probably has been there has been an agreement reached and are submitted to the government in the Dominican Republic, can you tell us anything about what's contained in that agreement?

Aaron Regent

I think that's right, the SLA agreement is in front of Congress right now and we expect to get that approved in the third quarter so things are going well. I think the main changes to the SLA relate to fiscal. So the fiscal issues that were contained it in the previous one. And so there is an amendment to do that which ensure that before some things like anti-right kick in that there is a base rate of return of the project that insurers that we get a double-digit rate of return before those kick-in. There are other things related to various preliminary matters, but from a fiscal perspective that's probably the most significant one.

Greg Barnes - TD Newcrest

Okay. I think recall of the NPIs and the old agreement were pretty confusing and kicked in a very low gold prices, how much they changed?

Aaron Regent

Well, you're right. The previously NPI did kick in at significant gold prices I believe its around $400 per ounce. And so it's based on more a way a return type basis as opposed to specifically tied to gold price.

Greg Barnes - TD Newcrest

Okay. And secondly, you said in your press release this morning that Donlin Creek update on the feasibility study have been approved by the Donlin Board. And if you're moving ahead with pre-permitting what is the next stage for Donlin, what kind of timeframe you're looking at?

Aaron Regent

I think Donlin is really, I'd say two major trusts, one is to keep looking at the capital cost to see if there is ways in which we can reduce those from what was said out in the feasibility study. And we think there is potential to do that. The feasibility study was put together in a period of time when the market hadn't adjusted to the changed economic environment.

So there could be the room for improvement, there as well as for our seller synergies who might be able realized within and utilized some of the other equipment to our accounts we have with some our other projects. So that's one major trust. The other is on the permitting side and permitting is always hard to predict, but probably two year plus timeframe is probably realistic.

Greg Barnes - TD Newcrest

Okay, great. Thanks Aaron.

Aaron Regent

Great. Thanks.

Operator

And our next question comes from the line of Prakash Hisro (ph) from Morgan Stanley. Please proceed.

Unidentified Analyst

Hi, good morning gentlemen. I was wondering, if you could comment on your experience so far with ordering equipments as Pascua-Lama of both cost and delivery time, are they significantly different than one or two years ago? And also if you think it's across the broader mining industry or maybe it's just that some of your suppliers make a particular business with you, because of your stronger balance sheet? Thank you.

Aaron Regent

Sorry, could you repeat the first part of your question?

Unidentified Analyst

It's regarding the ordering equipment at Pascua-Lama and what have you seen so far regarding cost and delivery time?

Aaron Regent

I'll make a comment, then I maybe ask Peter to jump in as well. I think that with respect to order equipment, what we haven't served is that there had been some stickiness on pricing but delivery schedules had declined quite significantly. So it's a major change. But there is and it appears we might be revolving down our pricing and price movements might be potentially realized.

I think that as a general comment, we have excellent relationships with suppliers around the world. I think for a number of reasons; one is the scale of the company and the level of activity that we have. We do have a very active in the project -- very active, a project group -- a number of projects we're constructing now and another generation of projects that we're looking to develop as well. So because of that there is a lot of sequential business and if you will and so that is something that we have been able to lever to get better pricing as well as getting the best team working for us.

Unidentified Analyst

Thank you.

Operator

Our next quarter comes from the line of Victor Flores from HSBC. Please proceed.

Victor Flores - HSBC

Yeah thank you. Good morning. I have one question this morning. You recently announced some changes to the management structure and some changes to management as well. And I'm particularly interested in the exploration in corporate development side of things. And the questions fairly simple; what do you see in terms of the style and substance of the corporate development and exploration process going forward? Is there going to be any change or are we to expect that Barrick to perhaps go in slightly different direction?

Aaron Regent

Sure. The two changes with regards to Alex Davidson, who headed the Corporate Development and Exploration areas and then going fine through head up our organization second is groups. I think that with respect to the corporate development and exploration side, Alex did I think a great job of developing his team both on the corporate development and exploration side.

So we have two very, I think very young and capable guys, who are in those roles. They are not resilient and could, but development real kicking off on the exploration side. And, so I think that to Alex's credit, he has really done a good job of entry and developing in particular both Rob and Darren. So I think common approaching strategy prospective. I don't think you should anticipate any changes. Does that answer your question?

Victor Flores - HSBC

Yeah, let me just ask a follow-up. Alex was basically running both groups and it looks like you've split them. And I'm just sort of wondering what the rationale is behind that, perhaps I am reading too much into it but I'm curious to hear your comment?

Aaron Regent

Well, I think that they reported in to Alex, but they were already separate groups. So should the nature of the reporting relationship and the changes are that both reporting to me. And so in that respect, now I think the key is and what we were doing before, and what won't change is ensuring that there is a very tight level of coordination between our exploration activities and our corporate development activities. And so the groups were very closely today and that something that, if anything I would like to see further enhance to really leverage the broader knowledge base of and the broader global footprint of the company to source and identify opportunities.

Victor Flores - HSBC

Great. That answers my question. Thank you.

Operator

Our next question comes from the line of John Tumazos from John Tumazos Very Independent Research. Please proceed.

John Tumazos - John Tumazos Very Independent Research

Good morning. Congratulations on very good results. A couple of your newer projects look like they had a bumpy quarter, Cowal and Storm. Could you give us a little elaboration on this?

Aaron Regent

I want to ask Peter, please.

Peter Kinver

Storm is a very small operation, its very small contribution and Storm's ore has been purchased by the Goldstrike mine. So the numbers that you'll see is obviously the gold produced and that can jump up and down depending on when the ore is processed or not. But I think we do have a couple of grade issues in Storm. But in general it's very much dependant on how we process the ore.

As Cowal, no major issues there. We did have say here we skipped several months to care of that impact where probably gave away under a fair amount of range but that has been remediate and the Cowal mine is now really at a much more steady performance.

John Tumazos - John Tumazos Very Independent Research

Thank you.

Operator

Our next question comes from the line of Barry Cooper from CIBC. Please proceed.

Barry Cooper - CIBC World Markets

Yes. Good day, everyone. Just wondering and the probably more directed to Peter than anyone, Cortez is a or the Cortez complex is going to be a pretty big deal for you guys coming next year. And what I know about it, I almost treated as four separate operations where you've got the old Cortez, you've got pediment area, you've got the Cortez opens that many of the Cortez underground.

I was just wondering Peter without necessarily giving us too much details although I'd love them if you would just kind of flush out for us, just what is first of the orders going to be for these, for your million ounces over the next five years.

And how is that going to change and maybe you might be able to give us some indication of Cortez, here is where the low cost ounces and here is where the high cost ounces. Can we get that one point in time, spend around at the Cortez field's open-pit component conceivably it was a $100 on ounce operating cost for that component of it?

Peter Kinver

Well, I can certainly talk about next two quarters, which is a trend obviously for the next five years. The next quarters where we see the underground mine continues, increase in ounces, we saw in Q1 roughly 15,000 and then 34,000 second quarter, 45,000 roughly 90,000 in Q4 and that's obviously going to continue into the coming years.

And then in January, we then expect to get the first order out of the new pits and basically you got the two together. Then the old mine; the pipeline mine will continue producing at very low levels, higher cost ounces, which we balanced out by the lower cost ounces in the new mine. And the three combined together will be as we said round about a million ounces of production.

Barry Cooper - CIBC World Markets

Okay. So you've basically got settlement in Cortez sales open-pits going to be mined simultaneously, is that correct?

Peter Kinver

They're going to continue for a number of years, but they're getting obviously to the end of their lives and it's still very high grades and we still knows those pits in the previous years as we're not going to see those types of grades. But there will be profitable ounces, but the lower cost ounces will obviously becoming from the new projects.

Barry Cooper - CIBC World Markets

Okay. So on the underground what kind of grades are you seeing as you mine the underground component and how do those compared to the old reserves?

Peter Kinver

We are getting grades of about 0.6, 0.7 ounces per ton which is roughly 20 grams per ton. And they correspond very favorably with the drilling and the planning.

Barry Cooper - CIBC World Markets

Okay. Good enough. And then may be for Jamie, on your hedge position that you have, you give us a bit of delta with respect to the backward Asian and I guess I am struggling a little bit with the calculation of that and what if you, what I would view is the way, I would kind of look at, you tell me where I'm making mistakes. So one of the things the indicates that given a Barrick old price environment that the value of the entire would drop by lets say, as you indicated 18 bucks an ounce in 2011.

If I were to look at interest rates of 0% and lease rates of 2% to implying 2% loss there and multiply that by the $935, I get here $18. But I wouldn't think that that is that would periodically only be applied to the fixed rate forward contracts and not applicable to holding contracts. So when you say the entire book, you basically mean that its somewhere around 35% related to just the fixed rate contract. So makes where those assumptions are kind of awful?

Jamie Sokalsky

Sure. That is the calculation that you've done assumes going forward interest rates and lease rates from today. And that wouldn't take into consideration the fact that in the past we've locked in rates contango etcetera. I would in to the future at much better rates than exist today. So we still have some very good historical rates in the position that offset some of those higher rates or the lower contango rates that you mentioned, Barry.

So it's a combination of existing go forwards plus contracts that we've had in place before the market change that comes up with those numbers that you mentioned that $18 an ounce in 2011, $10 an ounce in 2010 and $1 an ounce in 2009. So that's really the difference.

Barry Cooper - CIBC World Markets

Correct me if I am wrong, is it not only the 5.4 million ounces are being affected by this contango effect the floating spot price contract really not effective by that at all, are they?

Jamie Sokalsky

Yeah, they are because of the financing charge. So, it is on the entire position. So we do pay a financing charge, LIBOR based financing charge on the floating rate contract as well. So the calculation does apply to both the fixed and the floating rate contracts. So be because of the fact that we look at the overall weighted average rate that includes the spot adjustment, they reflect both.

Barry Cooper - CIBC World Markets

Okay, that's what I was thinking here. I thought it was the delta there would be only applicable to the fixed rate contracts and the new as per the amortized level for the whole position. So basically what then the assumption would be as that you would be kind of 2% is that right 2% under water with respect to the rates in 2011, is that the forecast that would have?

Jamie Sokalsky

No.

Barry Cooper - CIBC World Markets

To get to the $18?

Jamie Sokalsky

We look at the existing LIBOR rate and lease rates are about 75 basis points, that's the assumption that we're using. So on the fix rate contracts there would be largely a flat type of contango assumption or maybe slightly negative that we didn't corporate. And then we look at on the floating rate contracts, we'd be looking at something in the neighborhood of a 5 to 6 % financing rate on that. So all and I guess you'd look at something around that I guess that 2% that you mentioned.

Barry Cooper - CIBC World Markets

Okay. I didn't realize the floating rates were as high as that. Okay, thanks a lot to explain that.

Jamie Sokalsky

Okay. You're welcome.

Operator

Our next question comes from Greg Barnes from TD Newcrest. Please proceed.

Greg Barnes - TD Newcrest

Thank you, operator. And this is I guess a more conceptual question that, as your gold production ramps up or increases over the next several years as new projects coming in your way; your base metal depends as your revenues coming down by our estimate down to about 10% of your revenue going forward. Would you be comfortable bringing that back up to one point here at 20-25% to revenue?

Aaron Regent

I think that the I think the key things again from that prospective is, we have a lot of competitive strengths, which I think we can apply to create values. I think, we're clearly focused on gold projects and in bringing gold project in to production and offer them efficiently like that. And I think as we develop new projects, there are going to be other revenues streams that with come it, it could be copper, it could be silver Pascua-Lama is an example that we'll have more silver.

So I don't think that we have a specific target in mind about what our revenue mix should be. If there are projects that perhaps have more from a revenue perspective, perhaps have 50-50 type shift between gold or copper or silver, something like that. I mean that would fit within the company, I think quite nicely. But we don't have a specific target in terms of what the revenue mix should look like.

Greg Barnes - TD Newcrest

Okay. Along lines that you predict where it is really more of a copper project than a gold project. And there are other projects like that out there.

Aaron Regent

Right.

Greg Barnes - TD Newcrest

That have a decent gold credit but a lot of cost there, clearly there is a lot of value in those deposits that I think Barrick could bring to the table with that. Would you pursue more vehicle dig type deposits?

Aaron Regent

I think we'll look at them. I think the real attraction of the deposits like that is I'm sure there is a gold-copper mix. But it's the gold with copper gold both rates is the life of these deposits. It can be very long with a long life. And so I think those type asset world class deposit like that have should have you should room within your company for them. So I think we will look at those.

And the gold industry is of other size. So I think we have to be creative in terms of we have to be open minded and that's the way we should look and I think the record deep can't fit in that category.

Greg Barnes - TD Newcrest

I agree with this. The gold industry mines that does appear to be shrinking or has a problem growing so you're going have to branch out look at other how the deposits are going to maintain some kind of growth profile?

Aaron Regent

Right. I think, but that being said, I think, where we are positioned today, we have a lot on a played as it is with existing projects we are currently developing we have got next generation of projects which we'll like to move along and as part of our strategy, we need to look at, and hopefully discovering or acquiring new deposits which will basically provide some growth and support our production for the future.

Greg Barnes - TD Newcrest

Okay, great. Thanks Aaron.

Aaron Regent

Thanks Greg.

Operator

Our next question comes from Heather Douglas from Thomas Weisel Partners. Please proceed

Heather Douglas - Thomas Weisel Partners

Hi. Good morning, I have a couple of quick questions. And I apologize if a couple of them might be covered in the release because I didn't really get a lot of time to go through it. And first can you give us what you expect for costs in 2010? You give us production guidance, but do you have a ballpark of range as what do you think cost will be rather till 2010?

Aaron Regent

Heather we haven't provided cost guidance for 2010. We have provided some production guidance. And we will provide obviously more specific guidance at the end of the year as we discus it from here. But I think in the remarks that Jamie and I've made I think what we'll or what you can take from that is we see our cost trending -- are trending down so you can take that as a bit of guidance or direction and sort of what we expect from cost.

Heather Douglas - Thomas Weisel Partners

And in Q1 you mentioned that it has the input hedging had added $45 an ounce to your cash costs in Q1, do you see equivalent number for Q2?

Jamie Sokalsky

$17 an ounce in Q2.

Heather Douglas - Thomas Weisel Partners

Okay, good. And my last question is just on, it looks like your project spending has dropped a lot. Will you be changing guidance, I saw one note that you're now capitalizing I guess Pascua-Lama I am not sure, so will that guidance change?

Jamie Sokalsky

The project spending is, we've have actually increased the amount to the top of the range that we've indicated. Once we had a guidance range of 1.3 to $1.5 billion, and with a go ahead of Pascua, we'll be spending some more money there this year. So our overall guidance for project spending is approximately $1.5 billion for the year.

Heather Douglas - Thomas Weisel Partners

I didn't clarify my remarks, so actually the parts that goes into your income statement. So you'd had a project spending guidance of 250 million for the year, but you only spend 14 this quarter, only expense for 14?

Jamie Sokalsky

The project expense?

Heather Douglas - Thomas Weisel Partners

Yeah.

Jamie Sokalsky

The project the expensed amount, sorry, I misunderstood the question. We've actually lowered the project expense guidance slightly too, but we will be spending approximately $200 million this year overall on project expense, which is at the low end of the guidance range. But we will continue to make some significant expenditures in that area.

Heather Douglas - Thomas Weisel Partners

Okay. So its back end loaded there?

Jamie Sokalsky

Yeah.

Heather Douglas - Thomas Weisel Partners

Okay, great. Thank you.

Jamie Sokalsky

You're welcome.

Operator

Our next question comes from David Haughton from BMO Capital Markets. Please proceed.

David Haughton - BMO Capital Markets

Good morning and thank you. I have noticed that you are still working on some of those non gold projects in the form of contango with your partner in the case of contango. Some feasibility studies expected to be completed in the third quarter or perhaps fourth quarter of this year, do you intend to put that information out when it becomes public or do you intend to make it public, I should say?

Aaron Regent

The feasibility studies?

David Haughton - BMO Capital Markets

Yes.

Aaron Regent

Result of feasibility studies. I think the answer is, we will provide more disclosure on the results of those, sure.

David Haughton - BMO Capital Markets

Can we expect that at the back end of this year of timing?

Aaron Regent

With respect to record, the previous will be I guess finalize this year, but the feasibility will be the early next year. And with the respect to contango basically same or early next year.

David Haughton - BMO Capital Markets

All right. Going from that topic to something little bit more detail, I think to look at the data with the expansion is gone underway there. Just wondering what sort of profile we should be thinking about going forward here. Whether its step change or steady ramp up? And the kind of production that you'd expect once you get to full throughput right?

Aaron Regent

I think for this year the production profile is really back end loaded. So we should see a significant step up of production in the fourth quarter. As we compare, the production expansion projects become fully utilized.

David Haughton - BMO Capital Markets

And then expectation into next year, could we see well over 600,000 ounces per annum out of this?

Aaron Regent

Yeah. I think you should anticipate to see higher production next year.

David Haughton - BMO Capital Markets

And consequently lower costs?

Aaron Regent

And yes.

David Haughton - BMO Capital Markets

Okay. Because the cost have been running up quite a bit high then what we have seen in the early part but could we expect to see sub 500 cost you may add what we're doing?

Aaron Regent

I think, that's not a bad assumption. But we will provide more detail as we know that we are you doing in the New Year.

David Haughton - BMO Capital Markets

Alright, okay. Thank you very much.

Aaron Regent

Great. Perhaps we can take one more question please, thanks.

Operator

Our last question comes from Steve Fajardo from CDT. Please proceed.

Unidentified Analyst

Hi its Steven Kipsy (ph). Just regarding the oil provision; I realized you treated as a natural hedge; but I'm just wondering in terms of accounting could you give us a better idea, how that's treated, what is it's impact on the earnings, the cash flow, the cost. And again on disclosure, where do we find details, I mean is it another income. So if you just give us a better understanding of how it's treated in the financial statement.

Jamie Sokalsky

Sure Steven, its Jamie. It's treated as another income item. And the net operating cash flow of the company is expected against our cash cost. It's not a significant amount. And in the first half of the year, our cash cost would have been reduced by about $2 an ounce. And that's the operating cash flow component, the margin of the company that we credit against cash cost per ounce. So it's really not a material amount in our financial statements.

Unidentified Analyst

Thank you.

Aaron Regent

Okay. There is no more questions. We will conclude the call. And again we want to thank you everybody for showing interest in the company and look forward to speaking to you at the end of the third quarter. Have a good day.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation. And ask that you please disconnect your lines. Have a great day everybody.

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Source: Barrick Gold Q2 2009 Earnings Transcript
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