Barrick Gold's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 1.13 | About: Barrick Gold (ABX)

Barrick Gold Corporation (NYSE:ABX)

Q2 2013 Earnings Conference Call

August 1, 2013 09:30 am ET

Executives

Amy Schwalm – Vice President-Investor Relations

Jamie C. Sokalsky – President and Chief Executive Officer

Ammar Al-Joundi – Executive Vice President and Chief Financial Officer

Kelvin Dushnisky – Senior Executive Vice President

Ivan Mullany – Senior Vice President-Capital Projects

Michael Lepore – Vice President and Controller

Analysts

Stephen Walker – RBC Capital Markets

Anita Soni – Credit Suisse

Greg Barnes – TD Securities

Patrick T. J. Chidley – HSBC Securities USA, Inc.

Kerry Smith – Haywood Securities, Inc.

Dave Hove – Stifel, Nicolaus & Co., Inc.

Tanya Jakusconek – Scotiabank

David Haughton – BMO Capital Markets

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Barrick Gold Q2 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 call is being recorded, Thursday, August 1, 2013.

I’d like to turn the conference over to Amy Schwalm, Vice President, Investor Relations. Please go ahead.

Amy Schwalm

Thank you, operator and good morning everyone. Before we begin, I would like to point out 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 can be different from the estimates contained in our forward-looking statements, please refer to our latest year-end report or our most recent AIF filing.

With that, I'll hand the call over to Jamie.

Jamie C. Sokalsky

Thanks Amy. Good morning and thanks to everyone for joining us today. I’d like to take this opportunity to introduce our new Head of Investor Relations, Amy Schwalm, who you just heard. Amy has been with Barrick for over 11 years and I know many of you listening on the call know her well. Welcome to your new role Amy.

I am here today also with our Senior Executive Vice President, Kelvin Dushnisky; our CFO, Ammar Al-Joundi; the Senior VP of Global Exploration, Rob Krcmarov, and the Senior VP of Capital Projects, Ivan Mullany as well as other members of senior management, all of them will be available to answer questions after the presentation. I should also mention that our COO, Igor Gonzales retired in the second quarter and we’re in the process of a global search to fill this position. In the interim, the regional Presidents are reporting directly to me. We thank Igor for his significant contributions to the company over the past 15 years.

Today, we announced a net loss of $8.6 billion, which mainly reflects $8.7 billion in after-tax impairment charges for Pascua-Lama, goodwill and other assets. First, I’d like to say how disappointed we are with these charges. The impairment charges and related fair values reflected and were largely driven by a sharp decline in metal prices over a relatively short period of time, most of which has happened just since April. However, despite these write-downs resulting in lower valuations, we are confident our assets will generate substantially more economic benefits overtime to shareholders than the current valuation levels apply and we will address that a bit later in the presentation.

What this quarter does, clearly demonstrate though is that the fundamentals of our business remain strong. We had an excellent operating quarter, exceeding our plan in a number of areas, which allowed us to reduce our cost and CapEx guidance for the year, while also maintaining production guidance.

In the first quarter, we reduced our 2013 budgeted capital by about $500 million. Then in this quarter, we further reduced budgeted CapEx and cost by another $1.5 billion, which brings us to a total of about $2 billion of reductions from budgeted spending in the first half of 2013 for the full year. These cuts have offset the impact of the decline in gold and copper prices that have occurred this year.

As part of our portfolio optimization process, we also sold Barrick Energy and are well advanced in the process to divest certain Australian assets. During the quarter, we also termed out $3 billion in debt, long-term debt had attractive rates and Ammar will talk more about this later.

Finally, in addition to the significant improvements to cash flow, we decided to lower the quarterly dividend. We recognize the importance of dividends to our shareholders and it is our goal to return more capital to investors in the future, but at this time, we believe this is the prudent course of action.

Turning to more of the results for the quarter; on an adjusted basis, net earnings were $663 million or $0.66 per share. The significant adjusting items net of tax and non-controlling interest effects for the quarter include a $5.1 billion impairment charge for Pascua-Lama, $2.3 billion in goodwill impairments and $1.3 billion in other asset impairments as well of a loss of approximately $500 million related to the sale of Barrick Energy.

Operating cash flow was about $900 million and adjusted operating cash flow was about $800 million. The average realized gold price in the quarter was $1,411 per ounce and that was in line with the average spot price, and our average realized copper price of $3.28 per pound exceeded the spot average of $3.24 per pound and that benefited from some of our copper collar hedge positions that we have for the year.

Our operations produced stronger than forecast gold production of 1.8 million ounces at lower than forecast all-in sustaining costs of $919 per ounce and adjusted operating costs of $552 per ounce. Our copper assets produced 134 million pounds at C1 cash costs and C3 fully allocated costs of $1.75 per pound and $2.27 per pound respectively as a result of an improved performance from the Lumwana mine. These operating results demonstrate clearly that the improvements and cost cutting measures we have been and continue to implement are having a substantial impact.

We adopted our disciplined capital allocation framework a year ago now, and I’d like to review it again here because it forms the basis of how we are managing this Company and also how we will manage it going forward.

This framework is something I feel very strongly about and its implementation was one of the first actions I took when I became CEO. With this discipline, we began focusing on cost control well before metal prices declined. But more than that, we started a process of evaluating our entire portfolio and that work done out of that discipline even in the previous higher price environment has allowed us to respond quickly and decisively to show so much progress. As I’ve said, cost reduction is an integral part of the disciplined capital allocation framework, which means we will continue these efforts even if gold prices recover. But as I’ve said many times, we can’t depend on higher prices to manage our business.

I’m also proud that this framework has become an increasing part of the operating culture at Barrick. Simply we could have not reduced $2 billion in budgeted CapEx and costs and drop our all-in sustaining cost guidance mid-year by $100 an ounce in the first half alone for the full year without engaging and working with some of the most talented, functional and operations leaders in the business. These leaders had a clear focus on the goals and delivering on them. And as I’ll discuss later, we have many assets in our portfolio which give us the operational flexibility to make that happen. I’d like to go over this in more detail, what we’ve done, what we’re doing now and what we’re doing in the future.

First, what we’ve done. Total reductions of about $2 billion to the 2013 budgeted capital and costs have offset the cash flow impact of the decline in metal prices that have occurred this year as I have mentioned. And these reductions puts us in a significantly better position in the event that metal prices decline further. Our 2013 budgeted capital and cost reductions include approximately $600 million in operating costs; $200 million in sustaining development and mine expansion capital, $600 million in project capital primarily related to Pascua-Lama and $50 million in exploration and evaluation expenditures.

So you can see we are taking action to reduce operating cash flow sensitivity to lower gold prices by optimizing all of the mine plans, and that could involve increasing cut-off grades as well as shortening mine lives and other changes to improve cash flow.

We are very pleased by the fact that we have been able to further reduce cost guidance in a few very important categories for 2013. Our total CapEx guidance is now $4.5 billion to $5 billion, compared to the original guidance range of $5.7 billion to $6.3 billion. Our cost of sale for gold is now $6.1 billion to $6.5 billion, compared to the original range of $6.7 billion to $7 billion. Our cost of sale for copper is now $1.1 billion to $1.3 billion, that is also down from the previous range of $1.2 billion to $1.4 billion.

We have revised our outlook for all of sustaining costs to $900 to $975 per ounce. And that is down significantly from our initial guidance of $1,000 to $1,100 an ounce. We have reduced our adjusted operating costs of $575 to $615 per ounce from the previous guidance of $610 to $666 per ounce. That’s a $35 to $45 per ounce reduction for the entire year. We reiterate that our production guidance for gold and we maintained our copper production guidance range, but raised the lower end by 20 million pounds to 500 million pounds to 540 million pounds. We reduced our C1 cash costs guidance for copper to the $1.95 to $2.15 per pound from $2.10 to $2.30 per pound, that’s a $0.15 per pound reduction for the full-year. Our C3 full-year allocated cost guidance has also been lowered to $2.50 to $2.75 per pound.

So, let’s move to what we’re doing now. We continue to pursue opportunities to optimize our portfolio through divestitures. We just completed the sale of Barrick Energy for total consideration of $442 million, and that was cash of about $400 million, and royalty of about $50 million. And we’re well advanced in our process to sell certain Australian assets.

We started work on optimizing all of our mines sometime ago, and we’re developing mine plans to maximize cash flow at every mine. We’re also running our new life of mine plans at $1,100 per ounce, and this process will run through the fall of this year. We’re managing the business to maximize cash flow in our lower gold price environment. However, as a result of this work, the potential for higher prices, we will be positioned to realize higher returns and increased cash flow.

We’re prepared to make the tough decisions including suspending or closing and/or selling assets as a result of this process, while the outcome of the process could have an impact on our 2013 year-end reserves as well as expected future production levels, where possible, we will maintain the option to access the metal in the future. We’re evaluating and will align our longer-term production targets with our portfolio optimization process with the mantra that returns will drive production, production will drive returns.

A key thing to highlight and some message that we’ve been conveying, is that high-quality aspect of our portfolio; five core low-cost, long-life mines delivered another quarter of strong results. These operations are among the best in the world generating nearly 60% of our production this quarter at all-in sustaining costs equal to just about half of the industry average. These superior assets positioned Barrick extremely well amongst our peers even if gold prices remain at these levels or decline further. We have seven other mines smaller, but also highly profitable and with all-in sustaining costs of less than $1,000 per ounce, well-positioned in this lower price environment.

However, I’d like to say that just because a mine is profitable it doesn’t mean it can be optimized. As I said, we’re looking at every mine and have been for months now and for each of the 12 mines we have with expected 2013 all-in sustaining costs above $1,000 per ounce, which represents about 25% of our current expected 2013 production will either optimize or change those mine plans, suspend, close or divest these operations to improve cash flow and the overall quality of our portfolio. Our goal is to significantly reduce the percentage of mines in our portfolio that are above a $1,000 per ounce and we’re working on the plans to do that.

Our four mines; Goldstrike, Cortez, Lagunas Norte and Veladero have consistently exceeded expectations and in terms of ounces added to reserves and resources, production levels and in the quality of the ounces and they continue to show potential for additional improvements.

At Goldstrike, the thiosulphate project is on track for first production in the third quarter of 2014, and will enable about 3.5 million ounces to be brought forward in the mine plan through modifications to the autoclave facility. That will contribute average annual production of about 350,000 ounces to 400,000 ounces over its first five full years of production.

The Cortez mine continues to perform above expectations. There is significant exploration potential in and around this world class mine with a lower zone and of course the Goldrush deposit, next door Nevada, which continues to be drilled out.

At Lagunas Norte, the new carbon-in-column plant, which is designed to de-bottleneck ore feed from the expanded leach pad to the Merrill Crowe plant, is on track to start up in the fourth quarter.

At Veladero, cost continued to be lower than forecasted. We achieved higher than forecast silver recoveries in the first half of 2013 and there is upside potential here for the year and beyond.

At Pueblo Viejo, we continue to anticipate being able to achieve and sustain full production levels during the second half of the year. I’ll talk more about Pueblo Viejo next, but we don’t expect it to be any different in terms of the historical out-performance that we have seen at most of our new mines.

At Pueblo Viejo, Barrick share of 2013 gold production is anticipated to be between 500,000 ounces and 600,000 ounces at all-in sustaining cost of between $525 and $575 per ounce this year. During the quarter the JV reached an agreement in principle with the government of the Dominican Republic on amendments to the Special Lease Agreement, and discussions to finalize the definitive agreement are continuing, but have not yet been concluded.

The SLA will remain in effect according to its present terms unless and until a definitive agreement is executed and approved. There aren’t many mines of this caliber in existence or on the horizon especially in light of the current lower gold price environment, so we feel fortunate to have it in our portfolio.

Here is a list of what we’re look at to maximize cash flows at a number of other our mines. Specifically for the operations with forecast 2013 all-in sustaining costs above a $1,000 per ounce, we have definitive plans to deal with them and will either change mine plans, suspend, close or divest these operations to improve cash flow.

Our key regional finance and operations personnel have ranked each mine according to its cash flow generating ability, run mine plan sensitivities both at current and lower metal prices over a number of future years, and we are evaluating a range of options.

I should stress that this is an ongoing dynamic process and not just a one-time review as well. I won’t go through each mine here. We summarize the actions being considered in the press release and again here on this slide. But I think it gives you a sense of what we are doing and we are well underway with our plans.

Turning to Lumwana. Lumwana delivered a substantially improved performance this quarter producing 65 million pounds at C1 cash costs of $1.96 per pound. Under the direction of the senior leadership team appointed last year, a turnaround team of functional experts and site management have been working to reduce costs and I’m pleased to say we’d excellent results.

We made changes to the mine plan to increase cash flow to improve the reduction to waste stripping as a result of mine resequencing and there have been significant labor reductions including the termination of a major mining contractor.

A number of further business improvement initiatives continue to be implemented to enhance the productivity of the core mining fleet and build upon the cost reductions achieved so far. We continue to see positive results from these actions and the improvements at Lumwana, are largely responsible for the significant improvement in overall copper costs guidance this year, while they’re still a lot of work to do, we feel that our initiatives are taking effect and this mine is back moving in the right direction.

I started this presentation talking about our disappointment with the significant impairment charges and $5.1 billion of that charge is related to Pascua-Lama. Some shareholders and analysts have expressed frustration with the project and have asked us about the rationale and proceeding with construction in light of the current environment. While it is true at today’s gold and silver prices, the economics are not as robust as we would need to green light a new project for development.

There are several things we need to consider at this juncture for Pascua-Lama. For about halfway through its development, and the decision to stop or suspend is much different from the decision to start construction. We have to consider more factors than the last three or four months of price weakness and the volatility in the market, when we’re evaluating 25 plus year mine life. By resequencing the construction schedule as we have, we’re improving near-term cash flow and adding flexibility.

Pascua-Lama will be a world-class mine, a significant cash generator and another core mine for Barrick. There aren’t many mines of this quality in the world. As many of you know it is one of the world’s largest gold and silver resources with nearly 18 million ounces of proven and probable gold reserves and almost 700 million ounces of silver contained in those gold reserves.

At 25 years, it’s mine life far surpasses the average life of precious metal mines. This mine is expected to produce an average of between 800,000 and 850,000 ounces per year at all-in sustaining cost in the lowest quartile of the industry cost curve over the first five full years.

And I would like to highlight that like all of our proceeding projects like Lagunas Norte, Veladero, Goldstrike, and PV are notable examples, we expect to find more ounces ultimately, make operating improvements, realize more economic benefits than what’s the initial feasibility tells us.

Our decision to proceed is based on what we feel the ultimate value that this world class mine will generate for Barrick. So I am confident that this will be a very high value mine for Barrick and over our longer term horizon, with the additional flexibility we have in managing the go-forward construction, should there be further substantial declines in gold and silver prices. We continue to have the ability to reassess our options with respect to the projects development.

We’ve made concrete progress on our plan to complete the water management system and have a word with the contractor Fluor, who has already mobilized a team of industry experts to the site. We are working actively with the regulators in Chile to move this forward.

In the second quarter, we received a resolution from the SMA, Chile’s regulatory agency that required completion of the projects water management system in accordance with previously granted environmental permits before other construction activities in Chile could resume. We’ve submitted a compliance plan for approval by Chilean regulatory authorities to complete the water management system by the end of 2014, subject to regulatory approval of specific permit applications.

So following completion of the water management system to the satisfaction of the SMA, we expect to be in a position to resume construction in Chile including pre-stripping.

Under that scenario, ore from Chile is expected to be available for processing by mid-2016. And in line with this timeframe and in light of materially lower metal prices, we’ve decided to re-sequence construction in Argentina to target production by this date. The decision to re-sequence the project, which entails a major reduction in project staffing levels over the extended schedule, will result in a significant deferral of planned capital spending in 2013 and 2014 totaling between $1.5 billion and $1.8 billion.

For 2013, CapEx is expected to be reduced by about $700 million to $800 million to $1.8 billion to $2 billion for the project and capital expenditures in 2014 are expected to be reduced by between $800 million and $1 billion to a total of $1 billion to $1.2 billion. We expect to provide an updated capital cost estimate for the project with our third quarter results, of which the timing of this update is still subject to obtaining greater clarity on the timing of regulatory approvals and finalizing the re-sequenced construction schedule.

I want to reiterate that Barrick is committed to operating at the highest environmental standards at all of its operations around the world, including at Pascua-Lama, and is working to meet all regulatory requirements at the project.

I’ll now turn over the presentation to Ammar.

Ammar Al-Joundi

Thanks, Jamie. We recognized the liquidity has been a focus in this lower metal price environment, especially given our debt levels are higher than our peers. So I’d like to address this head on. But I am going to start this discussion on the company’s financial strength with a brief discussion about the strength of our operations. The reason is because the basis of any company’s long-term financial prospect is the strength of its underlying business and at Barrick our underlying business is very strong.

We generated about $2 billion of cash flow in the first half of the year, including over $800 million in this past quarter even as the price of gold declined by about $400 an ounce.

The operational results were excellent with reaffirmation of 2013 production targets and reductions in cost guidance for both gold and copper. We produced gold at an all-in sustaining cost of $919 per ounce this quarter. This is not only about $300 below the industry average. It is over $140 per ounce below what we did last year, an excellent accomplishment in an industry where the opposite is often the case.

We do have the most debt of our peers, but we also have the most production, the lowest average costs, the highest operating cash flow, which means we also have the best ability to service this debt. Consider the following example to put this into perspective. Our total debt service costs, the interest on our debt equates to about $100 per ounce pre-tax. This year’s reduction in all-in sustaining guidance has been about $100 an ounce, roughly the same as well a total debt service costs.

We are working and continue to work to strengthen our balance sheet, but the foundation to a strong balance sheet is a strong business. We have taken action this year to strengthen the underlying business, and we have plans to take more action and strengthen the business further.

Looking at our liquidity, beyond a strong underlying business we have $2.4 billion in cash and an undrawn $4 billion facility out to January 2018. We have only about $1.8 billion of cumulative debt due through 2015, which is less than our operating cash flow in the first six months of this year. Our total cumulative debt through 2017 is only $3.5 billion.

We are also asked questions about our $3 billion minimum consolidated tangible net worth covenant on our bank facility. Let me also address that question here. Our current tangible net worth is $6.3 billion. This is a fully undrawn facility, it’s a backstop facility. What’s also worth noting is that we will be adding to our consolidated tangible net worth number with net income going forward.

Finally, and most importantly, between the $2 billion of reduced costs and CapEx spend, the $400 million of cash from the sale of Barrick Energy, the term out of $3 billion of debt in April and the $150 million per quarter reduction in dividend payouts, Barrick has taken action to improve our cash flows and our balance sheet, and we have thereby reduced the need to draw down on this backstop facility in the first place.

Turning to our impairment charges, with a substantial decline in metal prices this year, we revised our gold, copper, and silver price assumptions used from impairment testing to $1,300 per ounce, $325 per ounce, $303.25 per ounce and $23 per ounce respectively. $8.7 billion of charges are comprised of $5.1 billion for Pascua-Lama, $2.3 billion in goodwill impairments of which $1 billion relates to the Copper unit and $1.3 billion to Australia Pacific, Capital Projects and ABG segments. $1.3 billion in other impairment charges of which approximately $500 million relates to ABG assets. $400 million relates to Jabal Sayid, $100 million to Pierina which is approaching the end of its operations. $100 million to explorations and $200 million split between the rest.

The fair values in the impairment assessment were calculated as of June 30 assuming metal prices that were influenced by only recent spot declines. Yet which are then applied and held constant over mine life that in some instances are in excess of 25 years. Although Barrick does not rely on higher prices to drive its business plans, we do remain positive on the long-term fundamentals for these metals. It is worth noting that with higher prices in the future we would reassess the fair value of our high quality long life assets such as Pascua-Lama and could potentially reverse some of the impairment charges recorded.

I’ll now turn it back to Jamie to wrap up.

Jamie C. Sokalsky

Thanks Ammar. In closing, I would like to acknowledge that this has been a tough quarter for Barrick, our shareholders and for the industry as a whole. We are in a cyclical industry but we do remain bullish on the long-term prospects for metal prices. But we have to expect there will be volatility and anyone in my position have to ensure the company is prepared for that.

As this slide shows, I believe we had made significant progress on the key priorities we identified at the start of the year, but we still have more to do. We are disappointed by the significant impairment we recorded and the dividend reduction. However, our underlying business continues to be strong and positions us very well going forward and you saw that in the second quarter.

In the quarter our high quality portfolio generated strong operating results and we made significant improvements to 2013 capital and cost guidance.

We are able to do this because we were ready. Our disciplined capital allocation framework gave us a head start and the ability to react quickly to this new environment and we are not only reducing capital and cost for 2013 alone.

Recently our top leaders met in Toronto and went through a detailed process to rank each mine for its cash flow generating ability at various gold prices over each life of mine plant and the group conducted scenario planning exercise and the event prices declined further. As part of this process, as mentioned, we’re rerunning life of mine plants at $1100 per ounce.

We are making substantial changes at Barrick with the actions we have taken to reduce cost and optimize our portfolio. The natural question is, with the new mine plants and the portfolio optimization, what could the company look like in the future? The short answer is that, we will focus on quality, not quantity.

We are well advanced in improving the organization to be more consistent with a company that is focused not on production, but on higher returns and free cash flow.

I am encouraged by the process we have made in optimizing the business and we are committed to applying the same level of discipline going forward to ensure we are prepared not just today but in any metal price environment.

Thank you. I will now turn the call over to questions.

Question-and-Answer Session

Operator

Thank you. We will now take questions from the telephone lines. (Operator Instructions) First question is from Stephen Walker from RBC Capital Markets. Please go ahead.

Stephen Walker – RBC Capital Markets

Great, thank you very much operator, good morning. And just a couple of questions, Jamie and Kelvin on the legal process in Chile with respect to Pascua-Lama, how is the Copiapo Court lifted the injunction on the work to allow the remediation work to begin, and my understanding is, as you see that Fluor Daniel up there starting the initial engineering work. Has that injunction been lifted? And secondly, as part of that same question, is there still plans in the courts to have a hearing between the indigenous community and Barrick would respect to some of the initial charges or claims that they relate by the indigenous communities.

Jamie C. Sokalsky

Okay, I’ll ask Kelvin to respond to that.

Kelvin Dushnisky

Sure, Stephen. Your first question regarding the injunction in fact the ruling indicated that the court requires as to in fact proceed with what the government regulators has required, which is to start the work on the Phase 1 water program as Jamie indicated during the presentation. So that work is actually underway and we’re making good progress on it.

The second question, I think relates to the challenge to the SMA ruling, it was brought by agrarian groups and indigenous groups and farmers. That is a challenge that’s proceeding and in fact, we expect there will be a decision by the end of August or September. And our expectation is that court will take full consideration of the fact that the SMA is qualified and has capacity to assess and impose a sanction to that.

Stephen Walker – RBC Capital Markets

Okay. And then, maybe just as a follow-up, Jamie. I think the original capital cost estimates for the remediation, the recommended work by the SMA is around $30 million. Is that still the budget that you’d be looking at for the planned work or is that to be confirmed with the Fluor Daniel work?

Jamie C. Sokalsky

We’re still working on that, Steven. The number should be higher than the $30 million. I’d anticipate that it’s probably going to be more in the neighborhood of approaching $100 million in total or all of the water management work.

Stephen Walker – RBC Capital Markets

Okay. And just as a follow-up to the one of the comments that you made earlier about your ongoing mining plan, planning process for the mines using $1,100 gold, where are your thoughts vis-à-vis, where you’re going to book reserves at year-end? Have you – could suggest that now you’re going to be using a lower gold price to book reserves. Is $1,100 just sort of a short-term plan and then the process using a three-year term average again or some sort of gold price between to book reserves and resources at year-end?

Jamie C. Sokalsky

Steven, the $1,100 is what we’re using really to run the mine plans to access the ability to generate more free cash flow over a shorter period of time as well. So that doesn’t necessarily apply to what we would be using to calculate our reserves. We’re still going through that process and as you know we announced our reserves at the end of the year, but I can clearly say that we’ll be using a lower price, quite a lower price than the price we used last year and we’ll not be using the three-year trailing average, but a lower price.

Stephen Walker – RBC Capital Markets

Okay. And again, if that’s the question of $1,100 gold, is there a risk that you could be preferentially high grading some of that, some of the grades, some of the operations and do you in fact have the flexibility to adjust the mine grades or mine plant to mine significantly higher grades or other grades on an average clearly homogeneous at most of the operation and also a general question, but in principle do you have that flexibility?

Jamie C. Sokalsky

Yeah, first I should say that every mine is different. We have the open pit and the underground mines, but they do provide us with the flexibility to adjust the grades and ultimately to have higher grade operations, but that will be dependent on individual mine plants, but the short answer is, yes, it will give us the ability to not only – a number of the mines to generate higher return ounces, but also generate higher return ounces as the gold price increases. Any type of change in that mine plan at the lower gold price isn't going to impair our flagship mines.

So we're going to be able to continue to manage those ounces, those low-cost ounces very well as we move into future. So we're not going to be - our view is that it's not going to be a significant decline in the number of ounces as a result of this process in the short-term.

Stephen Walker – RBC Capital Markets

Okay. Thank you, Jamie and thank you, Kelvin.

Jamie C. Sokalsky

You're welcome.

Operator

Thank you. The next question is from Anita Soni from Credit Suisse. Please go ahead.

Anita Soni – Credit Suisse

Hi, good morning. Congratulations on good operational results and reversing the operating cost upward trend that we've seen across the industry.

Jamie C. Sokalsky

Thank you.

Anita Soni – Credit Suisse

On the resequencing at Pascua, can you just talk specifically about what you are doing to resequence the plant there?

Jamie C. Sokalsky

Well, we primarily need essentially slowing down the process of construction in terms of putting the plant together. Ultimately, we are going to continue doing some of the major items completing the tunnel, we will be looking at advancing the tailings down et cetera, finishing things like deflating on buildings et cetera, but primarily what we are doing is scaling back the number of employees, the number of construction labor on the Argentinian side quite significantly over time. So that ultimately will allow us to resequence the construction of various items over a longer period of time, but the critical items and the ones that make the most sense for us to complete earlier, we are going to continue and hopefully we will be able to renegotiate with some of the contractors and ultimately build this project more efficiently.

Anita Soni – Credit Suisse

Would that also imply that maybe the initial production from Pascua may also be staged as well as versus coming out of sort of 800 to 850 right from the (inaudible)?

Jamie C. Sokalsky

No, the plan is really to continue with the same plan of operation in mid 2016 and ultimately have that ore from Chile to feed into the plants, so our view is that the actual mine plant does not change, it just comes a bit later in the process.

Anita Soni – Credit Suisse

And lastly, how should we think about 2015 CapEx at ?

Jamie C. Sokalsky

Well, if we look at ultimately where the capital is going forward, and we haven’t updated that capital cost yet, but you’ve got the 2013 spend, the 2014 spend and then you can take the differential between what you might estimate to be the capital cost of the project and two-thirds of that would be in about 2015 and then the other third would likely be in 2016. So I can’t really give you a more definitive number than that, but that’s broadly how the spend will go assuming a straight line type of expenditure once we start past 2014.

Anita Soni – Credit Suisse

And do you expect to see any capital, I guess, savings improvements or I guess [citing the tied] on the capital increase on path growth as a result of renegotiating with virtually any contractor?

Jamie C. Sokalsky

We’re certainly hopeful of, on both sides that we’ll be able to, in this environment where we’re seeing slowdowns in the resource business globally. We’re hopeful that we’ll be able to get some efficiencies through re-negotiation. That’s certainly our intention. That’s our plan to have those discussions. But we also have to face the fact that this is an extended schedule and ultimately that will create some additional costs, but the short answer is, yes. It’s a definite target for us to talk to quite a number of the contractors who are ultimately going to be doing this project over a longer period of time, and hopefully get some efficiencies and cost reductions. But it is still early in the process for that.

Anita Soni – Credit Suisse

Okay, thank you very much.

Jamie C. Sokalsky

Thank you, Anita.

Operator

Thank you. The next question is from Greg Barnes from TD Securities. Please go ahead.

Greg Barnes – TD Securities

Thank you. Ammar, in your comments, you described $4 billion lines of backstop facility, in the current gold price and assume we have a flat $1,300 gold price going forward. Do you see itself drawing on that line significantly?

Ammar Al-Joundi

Naturally it depends on the gold price going forward and it depends on our CapEx spend, but we don't see ourselves drawing on at this year, and what I would also say is, and I want to re-emphasize this, because to me this is important. It is more about the operations, the differences we made the year have effectively reduced the need to go out and borrow money. And as Jamie said we are re-running mine plan at $1,100, that’s $600 below where we ran them last time, and that is going to have an impact.

Greg Barnes – TD Securities

Okay. I guess the second question for, I think it is Jamie, but [Pascua-Lama] you have done impressive job of bringing the cost down there this quarter. I think previously we thought cash cost there would be in the mid $2 range, but do you think you’ve been able to get that down below $2 a pound going forward?

Jamie C. Sokalsky

Greg, I think that's something that will be difficult to keep it below $2 a pound on a go forward basis. I want to be straight about that, but I think we can absolutely have this mine performance at much lower cost than what we saw last year.

Greg Barnes – TD Securities

And deferring some of the stripping, are you shortening the mine life here and targeting higher grade or is that still to be work done?

Jamie C. Sokalsky

No, we are not shortening the mine life at this point, so that still has to be worked out. We are still proceeding with the existing mine plan that we have, but just in a better and a more efficient way, and through cost reductions, something we will look at in the future, but we haven’t shortened the mine life at this point.

Greg Barnes – TD Securities

Okay, thank you.

Jamie C. Sokalsky

You are welcome.

Operator

The next question is from Patrick Chidley from HSBC. Please go ahead.

Patrick T. J. Chidley – HSBC Securities USA, Inc.

Hi, just a couple of questions, just first a follow-up on Lumwana there on the cost side. We just heard from another of your peers that, they have basically replaced the contractor and would own the mining at one of their mines in Africa, and seems to have been able to achieve a 50% reduction in mining costs. So I am wondering if there might be sort of similar possibilities at Lumwana to reduce cost that much in that operations?

Ivan Mullany

Absolutely Patrick. We have actually done that. We terminated a contract with a contractor and going to own mining and that’s been a part of the reason why we have been able to improve our cost so much, and we are looking at other things like that going forward. There are other things that I think we can do, but what we made a decision to terminate a contractor, and that has paid huge benefits for us already.

Patrick T. J. Chidley – HSBC Securities USA, Inc.

All right, thanks Ivan. And just on a separate track, I wonder if Rob is there, I wonder if he can sort of talk a bit more about the exploration success for the quarter, and also about historical exploration that’s been done at Pascua in the last 10 years, I mean my understanding is that result have been very much done in the last 10 years and I am wondering if there is any additional potential that in time could unravel which is another reason for you sort of pursuing the project despite the critics.

Jamie C. Sokalsky

Yes, Patrick to be honest with you since I went to Toronto about years ago I haven’t had any focus on (inaudible), really the main game was to basically get in the construction and get it producing, but again as Jamie pointed out, it points to our historic record, we’re fairly good at adding value once deposits coming in operation.

Perhaps an example of that would be Pueblo Viejo, within the first two years of acquiring it, our exploration group scattered out with some low hanging fruit, we found a multi-quarter ore body and several million ounces went into the mine plant, beyond that we know that there is further upside, but again the game is producing and we are producing in a very good drive, at some point we’ll go back to Pascua-Lama, and we go back to Pueblo Viejo, and I’m fairly confident that we’ll see some business upside.

Patrick T. J. Chidley – HSBC Securities USA, Inc.

Great. And gold rush in EM, any comments on what happen this quarter there, in terms of expanding or in-filling or maybe progressing with a scoping study.

Jamie C. Sokalsky

Okay, so I guess it’s fair to say that we’re looking at write-offs study right now, but the feasibility study is going to be about. And we basically have the option of going to a lot obviously at a lower gold price, a huge pit going to be less attractive. And more of our focus this last quarter and for the rest of the year has been on doing infill drilling.

So really look at the viability underground option. And so I don’t expect the resource is going to be increasing in the next year or two. I’m fairly confident it will in due course, but the really the main game here is to support the price feasibility study and demonstrate kind of new – high grade. So pretty much all of our drilling going forward for the next year, that would be included.

Patrick T. J. Chidley – HSBC Securities USA, Inc.

Okay. And in terms of scoping for pit, is there something that would be the ore, have you done any additional test regarding ore to say that it’s similar to what you have say it at Cortez?

Jamie C. Sokalsky

Yeah, ore characterization studies fairly continues with – we’re still pursuing that really aggressively. Again, some of the (inaudible) would slowdown a little bit, some of the hydrology work slow down a little bit, but ore characterization study is advancing probably.

Patrick T. J. Chidley – HSBC Securities USA, Inc.

And any results, you can speak up or is it too early?

Jamie C. Sokalsky

I think it’s too early.

Patrick T. J. Chidley – HSBC Securities USA, Inc.

Okay. All right, well thanks very much.

Jamie C. Sokalsky

Thanks Patrick.

Operator

Thank you. The next question is from Kerry Smith from Haywood Securities. Please go ahead.

Kerry Smith – Haywood Securities, Inc.

Thanks Operator. Jamie, one of the options that you originally talked about at Pascua-Lama was sourcing or initially from the Argentinian side, now it sounds like that, that’s not an option anymore, you just going to plan on starting up from the Chilean side, is that correct?

Jamie C. Sokalsky

Yes, Kerry. That’s correct. It really makes sense for us to with the new resequencing for us to take the order from the July side and start processing that.

Kerry Smith – Haywood Securities, Inc.

Okay, okay. And maybe Kelvin already answered this, the water management system, the remediation that you have to do, can that be done through the Chilean winter and secondly how long would it actually physically take to do all the work that’s involved in remediation program?

Kelvin Dushnisky

Kerry, you’re probably referring to the first – the Phase 1 is underway now and the work is ongoing and we’ll continue to see the winter and the target is, have it done by about October 1.

Kerry Smith – Haywood Securities, Inc.

Okay. And then the second phase, to get to the $100 million that Jamie talked about that could be done, how long would it take to do that and can it be done through the winter?

Jamie C. Sokalsky

The target is actually we're in discussions to have approval for Phase 2 to start near the end of this year, and so we'd be working that through largely through the Chilean spring and summer as we go into Q1 and Q4 and to Q1 and that will continue. So that work can also be done in the winter as well.

Kerry Smith – Haywood Securities, Inc.

Okay. So you don't have any weather constraint. Okay. And then, Jamie, you've gone through this $1,100 announced for your life of mine plans. What sort of carbon price would you be using for your copper projects in terms of their life of mine plan?

Jamie C. Sokalsky

We'll certainly be using lower than 325 to look at those plans as well, Kerry.

Kerry Smith – Haywood Securities, Inc.

Okay, okay. And then I think you have said at one point in time, your reserves were down last year at $1,500 an ounce. I think you said it $1,200 an ounce the reserves would drop by less than 10%. Is that still roughly correct?

Jamie C. Sokalsky

Yeah, we're still working through that, Kerry, but just from an individual price sensitivity standpoint that's a number that is largely in the ballpark absolutely.

Kerry Smith – Haywood Securities, Inc.

Okay. And then, would it be linear if you went to $1,100 or is it not linear or do you can even a sense…

Jamie C. Sokalsky

It's hard to say on that, Kerry, but we're certainly working through that, but the impacts different mines differently. So we can't really say.

Kerry Smith – Haywood Securities, Inc.

Okay. Fair enough. And the stockpiles at Goldstrike that you have, would they be economic at $1,100 an ounce gold generally?

Jamie C. Sokalsky

That's been looked at now, Kerry, so but it's something that they would be economic.

Kerry Smith – Haywood Securities, Inc.

Okay, okay. And then the last question, are you having any difficulty selling any of your concentrate that comes out of Lumwana, I know First Quantum, they're having a lot of problems trying to get rid of their concentrate in country and not pay the export tax. Are you guys having any problems that way?

Jamie C. Sokalsky

Not that we are aware of, I think we are able to sell our concentrate with no problem, Kerry.

Kerry Smith – Haywood Securities, Inc.

Okay, great. Thank you very much.

Jamie C. Sokalsky

You're welcome.

Operator

Thank you. The next question is from Dave Hove from Stifel Nicolaus. Please go ahead.

Dave Hove – Stifel, Nicolaus & Co., Inc.

Hi guys. I have a few questions. I wanted to understand the new adjusted operating cost measure. What would be the total cash cost been, if you hadn’t adopted the adjusted operating costs?

Jamie C. Sokalsky

Dave, it's Jamie. It is the same. It is just the new term that we are using, that coincides with the World Gold Council standard. So there is no difference between adjusted operating cost and total cash costs.

Dave Hove – Stifel, Nicolaus & Co., Inc.

When I looked at what you reported in 1Q 2012, for example Cortez and Lumwana. Those numbers are – the restated numbers are lower than what was reported earlier. So what exactly changed this?

Jamie C. Sokalsky

I'll ask Michael Lepore, our Vice President of Controller to respond to that.

Michael Lepore

Thanks. Hi, Dave, as Jamie mentioned the calculation is virtually the same. So as we go through the process sometimes there is prior period adjustments that affect the comparatives, but there was relatively minor changes.

Dave Hove – Stifel, Nicolaus & Co., Inc.

Okay, all right. Thank you so much.

Jamie C. Sokalsky

Thank you.

Operator

The next question is from Tanya Jakusconek from Scotiabank. Please go ahead.

Tanya Jakusconek – Scotiabank

Okay, good morning everyone.

Jamie C. Sokalsky

Good morning.

Tanya Jakusconek – Scotiabank

I just wanted to ask a question on Cerro Casale, I know that cannot get the right down last night on that asset and maybe and I couldn’t find it, maybe it’s copper price related. I know you deduce that $325. If we had run at $3 a pound, would that have triggered an impairment?

Ammar Al-Joundi

Hi, Tanya, it’s Ammar here. They have different cost basis and if you work out sort of back of the envelope what their retained value as and what is on our book side, it’s about the same number.

Tanya Jakusconek – Scotiabank

Okay. And then, maybe just a question with the sale of Barrick Energy, is it safe to assume that the sort of $10 per ounce to $15 per ounce savings you were getting from that will obviously be eliminated, would that be a fair assumption as we go forward?

Jamie C. Sokalsky

Yeah, well I think that’s a pretty fair assumption where the differential is with the Canadian oil prices versus WTI. It may not be that high, but I think it’s important to note that there is a fair bit of sustaining capital in that business and so the impact on our all-in sustaining costs going forward is minimal.

Tanya Jakusconek – Scotiabank

Okay. And then just maybe two other questions. One, just maybe an update on where we are with a new COO.

Jamie C. Sokalsky

Still working through a process of a global search on that, Tanya. So we’re certainly making progress, but we will keep you informed as that progresses.

Tanya Jakusconek – Scotiabank

Is there a target at all, Jamie, to have someone in by year-end or…?

Jamie C. Sokalsky

Certainly, we’d like to see that even sooner.

Tanya Jakusconek – Scotiabank

Okay. And then maybe just, Jamie, on some of these cost reductions that we’ve talked about, I mean some of them we have seen always talked about people, but can you talk to us a little bit about what you are seeing labor wise and maybe just some of your cyanides, your maintenance and contractors, suppliers, what sort of release are we seeing?

Jamie C. Sokalsky

I think we’re seeing a fair bit of relief on cost in a number of areas. On the labor front, we’re seeing a notable easing of wage inflation this year versus last year. For example, Australia, labor cost increases are in the neighborhood of, say, 3% versus 6% last year. Even in Argentina, we’re seeing some relief on labor. Labor inflation rates are under 20% now as opposed to the mid-20s last year. Chile as well, we’re seeing a cut in half from, say, 5% down to 2% to 3%.

On the consumable side of things, the fundamental for almost all the industrial commodities are weak with declining or flattening trends and scrap steel prices are down 25% since this time last year. Tire prices are down, say, about 15% over the last year. So machinery prices are flat, and, but I think we are seeing the ability to negotiate some of those prices to at least 15% below year-ago levels. So I think we’re certainly seeing some flattening and reductions in overall cost trends and so I don’t envision that we are going to see the big spikes in some of these costs that we’ve seen in past years.

Tanya Jakusconek – Scotiabank

And just some of your peers have also given us guidance some of the cyanide contractor maintenance have seen releases 10% to 15%. Would you be seeing something similar?

Jamie C. Sokalsky

We are certainly seeing that type of possibility of trend that’s emerging. So, yes, and we’re following up on that with the process. So I think we are optimistic that we’ll be able to capture some of those savings.

Tanya Jakusconek – Scotiabank

Good, and then, great of course then. Yeah.

Jamie C. Sokalsky

Yeah.

Tanya Jakusconek – Scotiabank

Okay. Thank you.

Jamie C. Sokalsky

Thank you, Tanya.

Operator

Thank you. The next question is from David Haughton from BMO. Please go ahead.

David Haughton – BMO Capital Markets

Hi, guys. Good morning, Jamie and Ammar. Thank you very much for the update. You’ve mentioned in the commentary that the definitive agreement with the Dominican Republic is still to be completed. Does that mean that there is scope for some changes to the terms or is it just due process?

Jamie C. Sokalsky

It’s just due process, David. We’re really just wrapping up the definitive agreement with the principles that we’ve agreed to in the past couple of months.

David Haughton – BMO Capital Markets

Turn that into a more broad statement. With the weaker gold price through the course of this year, have you seen any softening of the posture of the various jurisdictions that you operate in with regards to royalties or taxes, and the other issues that have been emerging from time to time?

Jamie C. Sokalsky

I’d say probably not at this point, David, but certainly, I think being noticed. But this is a relatively short period of time that we’ve seen these metal prices come down. So hopefully going forward we’ll be able to communicate, I think particularly with the things like the all-in sustaining costs as well that we aren’t making as much money as some of these governments think we are, but I think it’s still a bit early to see a radical change in that stance.

David Haughton – BMO Capital Markets

Just changing to a different topic, you’ve got some hard decisions with about a dozen or so mines. I know you probably can’t be specific, but how will you sound the appetite for the purchase of those assets? Are you finding there is a market or multiple bidders, how would you describe it?

Jamie C. Sokalsky

Well, clearly this is not as good a market to sell in as we've seen in previous years. It's more of a buyer's market than a seller's market, but having said that, we are seeing multiple bidders on some of our assets. People still are interested in a number of our assets and while prices are lower across the board, there's still a market out there and I'm optimistic that we're going to be able to affect some transactions. There are more buyers than you might think.

David Haughton – BMO Capital Markets

All right. If there is a wide gap between what is being prepared to be offered by those buyers compared to what you think is worth. Would you move down the path of putting these assets on current maintenance or even to close if you can't get the operations working to how you'd like?

Jamie C. Sokalsky

Absolutely. That is something that ultimately we think we should be able to optimize first, but if we can't get that free cash flow to be positive in a low gold price environment that is an option that is available to us and we're prepared to do that.

David Haughton – BMO Capital Markets

And I would have to think that the closure costs or the severance pays or whatever would have to come into that consideration because it could amount depending upon the mining to many tens and perhaps even hundreds of millions of dollars in it?

Jamie C. Sokalsky

Yeah, that's a very good point, David. Ultimately there are a number of things that we have to consider to make that decision and some of them are those issues of severance and closure costs et cetera. But ultimately there are ways to do care and maintenance or various other ways where we might be able to avoid those types of high costs while still improving our free cash flow, but absolutely there are quite a number of considerations that we have to take in before we make that decision.

David Haughton – BMO Capital Markets

Now I’m conscious of time, I do have a last question, if that’s okay. It’s looking at Pascua-Lama. We haven’t heard much about the refractory versus non-refractory processing in recent times. You’re still thinking about the non-refractory first and then say, refractory a year or whatever afterwards, is that still part of the plan?

Jamie C. Sokalsky

I’ll ask our Senior VP, Capital Projects, Ivan Mullany to respond to that David.

David Haughton – BMO Capital Markets

Thank you.

Ivan Mullany

As Jamie said earlier on the mine side hasn’t changed, the first two years are upside and then we move into non-refractory, which is essentially just a floatation plant, which we generated concentrate. So that’s still the plan and nothing has changed with respect to that.

David Haughton – BMO Capital Markets

Okay, thank you very much for the update, guys.

Jamie C. Sokalsky

Thanks David.

Operator

Thank you. Ladies and gentlemen this conclude the question-and-answer session. I’d like to turn the meeting back over to Mr. Sokalsky.

Jamie C. Sokalsky

Well, thank you everyone for your time on the call this morning. As you can see there is a lot going on, I feel that we position the Company very well to perform in any gold price environment. We still have work to do, and we are looking forward to updating you on the path forward, and how we are continuing to manage the Company in a disciplined manner, and generating more free cash flow, and higher returns, and look forward to speaking with you on our future call. Thank you.

Operator

Thank you. The conference call has concluded. Please disconnect your lines at this time, and thank you for your participation.

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