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Barrick Gold Corporation (NYSE:ABX)

Bank of America Merrill Lynch Canada Mining Conference Call

September 12, 2013 11:30 ET

Executives

Jamie Sokalsky - President and Chief Executive Officer

Jamie Sokalsky - President and Chief Executive Officer

…attending my presentation this morning. Before I begin, I would like to make the forward-looking – draw your attention to the forward-looking statements. I’d like to start off my presentation with I think a little bit different snapshot of Barrick. It’s a snapshot of what you get when you invest in Barrick. And I think we have made some significant changes in the past year. There has been a strategic shift in how we are managing the business. I think we had a head start on what we are seeing in terms of the gold price fall and some of the volatility. And we have been able to implement some major cost reductions fairly quickly and I think ahead of the curve. Some fundamental things remain unchanged and I think we are positioned very well in this lower gold price environment.

I keep reminding people that we have what I think is the one of the highest quality portfolio, it’s not the highest quality portfolio in the industry and it’s a portfolio that provides us flexibility in any gold price environment. We’ve got five core long-life mine in the Americas and those mines this year will generate about 60% of our production at all-in sustaining costs, cost including sustaining capital of only about $700 per ounce almost 50% lower than the gold price. We are the lowest cost senior producer. I think that sometimes gets missed. And we already this year have reduced our guidance by $100 per ounce. And while we have the five long-life core mines that we tend to talk about, we also have 75% of our 2013 production at all-in sustaining cost below $800 per ounce. And then that 25% that’s well above that is what we are working on to either change, reduce, or divest.

We adopted a disciplined capital allocation framework, which we call it internally (indiscernible) in mid 2012 as I mentioned well before we saw the metal price declines. And we have also reduced – been able to reduce budgeted CapEx and other costs by $2 billion this year alone in the first half of the year. And I think that stands out as a significant reduction particularly relative to perhaps what other companies have been able to do in a short period of time. And we have made some progress in an ongoing portfolio optimization. We have sold Barrick Energy. That was non-core to us our oil producing hedge company that we had in Alberta and we have also entered in an agreement to sell three mines in Australia, Yilgarn South two gold fields. So, we are prepared to make tough decisions and we are making them and we are going to make some more.

So our high-quality portfolio, while we are producing 7 million to 7.4 million ounces this year. And even though we sold Yilgarn South we reiterated that guidance. The cash cost or the all-in sustaining cost are 900 to 975 and three quarters as I have mentioned of that production is below $800 per ounce. And you see that grey area on the pie chart, the 25% smaller high cost mines, we will work to change that and increase that 75%. And that positions us very well in this gold price environment and even if gold prices go down further. We are the lowest cost senior producer as I have mentioned our 2013 all-in sustaining cost, but if you compare them against the industry average of about $1200 to $1300, I think we stand out, but also if we compare ourselves to the senior peer weighted average, I think we also spent about $1150 to $1250. So we are under $1000. And I think we are certainly on track to making that. We adopted all-in sustaining cost this year, which is the World Gold Council all-in cost measure and we will continue to report that for each of our mines and really drive the business, it’s not just a metric to report, it’s how we are managing the business and how we are managing our mines. And with this all-in sustaining cost being so low we have been able to generate very healthy operating cash flows $2 billion in the first half alone.

We have also got very high quality reserves. Here is our average reserve grade compared to the senior peer average. Our average 2012 reserve grade is 1.3 grams versus the senior peer average of 0.86 grams per ton. So we stand out in terms of our high quality reserves as well and I think sometimes that average grade is missed on a relative basis and that’s going to allow us to really manage our cost profile to a greater extent than some others might.

Let’s go back to the five core mines that we have. So here is a graphic that demonstrates by size and where they are in terms of production and the cost framework and so again 60% of our production those five mines Cortez, Goldstrike, Lagunas, Pueblo Viejo and Veladero are added all-in sustaining cost of only $700, which is well below the company average and once Pascua-Lama comes into production that’s going to help to drive this even further down.

I’ll spend a little bit of time looking at the five core mines. Of those five core mines we’ve built these mines and Cortez was something we got from Placer, but also essentially did an expansion there. So we’ve effectively been the ones to build these mines and of those fine mines, four of them have outperformed the feasibility production expectations by a long shot. Veladero was never going to produce more than 500,000 ounces or 600,000 ounces a year and that feasibility study we had a number of years of well over 1 million ounces. So there aren’t many mines of this caliber in this industry. And we fully expect that with Pueblo Viejo ultimately ramping up that it is going to be one of the mines that outperforms the feasibility studies at some point in the future.

And I’ll just give you a bit of an update on the PV ramp up. And I think you heard a little bit from Chuck on that as our partner. I will give you a little bit more detail. We have been proceeding with some autoclave modifications. We’ve had some bottlenecks in the circuit, but the autoclave modifications had been successful and nearly complete the fourth autoclave that’s come online, but it will come online by the end of the third quarter. And all the autoclaves that were individually tested and have achieved design capacity.

The copper circuit is now online and expects to produce salable concentrate by the end of October which is also another good step. The power plant and the power line has been connected to the mine and being commissioned and it’s going to be fully operational by year end. Down the silver circuit, we are modifying the pre-heaters to reach the necessary temperature in the lime boil circuit. And with the temperature in limestone that design that sliver recovery has been proven. So now it’s trending in the right direction again, but we still have some work to do in the lime circuit to ensure an adequate supply for this process step.

So with the autoclaves running as expected, there are some headaches with the lime circuit. These were difficult to pinpoint until the lime and limestone demand increased, but now that’s happening with the increased autoclave throughput that’s increased that demand and the necessary modifications are minor compared to the autoclaves. And certain pieces of equipment do need to be replaced or reconfigured hence the bottlenecks that we have. So the ramp up to full capacity is now slightly delayed about 3 months to 6 months into the first half of 2014. And at the moment we expect to be at the low end of the 500,000 ounces to 600,000 ounces guidance range we gave for the mine in 2013. That will slightly increase the costs of the project, but we are working through that and it won’t impact our all-in sustaining cost guidance of $900 to $975 for this year.

And lastly the proposed SLA special lease agreements with the government of Dominican Republic have been agreed to and the congressional review and ratification is pending but the economics are essentially the same as the MOU that we announced earlier this year. Pascua-Lama, this is going to be a fantastic world-class mine once it’s in operation. The first year production of 800 to 850 ounces still at the bottom of the first quarter all-in sustaining cost profile, it’s really one of the world’s great gold and silver resources and it’s also high grade, it’s not many of this size have caliber in the world. There are 11 projects, right now of 5 million ounces or more with average grades above 1.7 grams per ton and only four of those are in construction and the largest and highest grade is Pascua-Lama. It’s got a 25 year a mine life which parts sees the average mine life as you know.

The current economics with this – with the cost of the project and at this gold price aren’t as robust as a project that would have been green lighted in this environment but there are several things to consider as we proceed with this mine. We are half way through the development. So with a different decision and if we are starting construction start right down, we are looking at I guess about 5 months or 6 months of price weakness and we can’t just look at this price weakness in the context of a 25 plus year mine life. And so looking at this and say let’s use 1300 or whatever in the context of something that ultimately is going to be a very long life low cost mine it doesn’t make sense to us.

And we’ve also had a very good track record as a company of finding and producing more ounces, putting in operating improvements and realizing more economic benefits in the feasibility which is what I described with the five core mines that I had on a slide earlier. And so the decision to proceed albeit at a slower rate we’ve slowed down the project is based on the ultimate value that we feel will generate for Barrick in the future. And the re-sequencing and the slowdown of this mine provides us with additional flexibility to reassess the development option. And while the slowdown ultimately having this stretched out over another 18 months, it does inherently create additional costs, indirect costs, the holding costs everything else of the project. We are certainly working on the number of things to try to mitigate that, but inherently a longer time horizon does result in somewhat higher cost as well, but we are working to look at that and hopefully be able to mitigate some of that.

Just a status update on Pascua-Lama, the SMA resolution, which is essentially environmental authority in Chile that was issued in the second quarter, it requires a completion of the water management system before other construction activities is in Chile could resume, which is why we have this delay. But we are fully committed to complying and achieving and operating at the highest environmental standards. And the current plan is subject to the approval of the permits that are necessary to build the complete water management system, we – if we can get that on the timely basis, which we certainly are targeting, we expect to produce ore from Chile around mid 2016. And so re-sequencing the construction of the project has resulted in cash spending savings of between $1.5 billion and $1.8 billion in 2013 and 2014. And we are targeting updating the market on the capital cost with our quarter three results and the timing on this update really depends on achieving greater clarity on the timing of the regulatory approvals for permits and finalizing the re-sequenced construction schedule.

Let’s go back to the disciplined capital allocation framework, which is really a core of how we are managing the business differently. It’s focusing on maximizing risk adjusted rates of return and free cash flow and it really does also sharpen the focus on cost control for the company. Its one of the first actions that I undertook when I became CEO of the company and has provided the discipline really to allow us to react quickly in a slower gold price environment before the metal price decline and has given us the ability to act decisively and reduce costs in a major way and its inherent and how the entire organization is embracing how we are going to manage the company going forward.

What I would like to do is just go over a review of what we have done, what we are doing now, and what we plan to do. And I think we are very well positioned as I mentioned. And what we have done so far independent metal price declines, we have initiated the portfolio evaluation. We have launched the companywide review of overheads. We reduced corporate staff by 30%. We made significant job reductions in the regions with certainly more that I think we can do in terms of overhead. And as I mentioned we have been able to make progress on the portfolio optimization even in a tough market. This is not a sellers market, this is a buyers market, but we need to do the right things. We need to make decisive actions and really make sure that we are focusing on our core assets. So we sold Barrick Energy for about $450 million in consideration and Yilgarn South in Australia for $300 million.

And so what are we doing now? So while we are still bullish on the long-term fundamentals, for gold, this is clearly a cyclical industry with volatility and we are seeing it today. We are seeing it over the last few weeks. And my job really as CEO is to ensure the company is prepared. And so by focusing on maximizing the returns and the profitability, we are also putting in a new structure throughout the company which is reducing complexity and getting the assets closer to Toronto to the head office to the COO. So we are implementing a new operating model, which we are calling operating units versus our regional business unit structure which was somewhat more of a corporate office related regional business unit in the regions. We are going to be able to bring these assets closer to Toronto under the COO.

And so those operating units are going to be accountable for managing the operations with a focus on free cash flow production cost safety environment, and really bring it more of an operational focus rather than a somewhat of a second or third administrative office focused in the regions. And that will result in greater direct drive of the assets to our COO. And we have just appointed Gary Halverson who is our Regional President of North America and also is a Regional President of Australia to act as an Interim COO while we continue the search for a CEO, a global search. So Gary has come up to Toronto and he is going to help to drive this organizational change and also further cost and capital reductions. And we started work on optimizing all the mines months ago and we are rerunning our mine plans $1100 per ounce.

And here is a chart that shows a little more granularity to that $2 million that we reduced so far this year. You can see we reduced cost by $500 million project sustaining development in the first quarter. And then in the second quarter alone, another $1.5 billion, project capital $600 million, primarily Pascua-Lama $600 million of further operating expenditure declines, $200 million in sustained development and expansion CapEx and further $50 million in exploration and evaluation. So we have been able to take some serious action. And I think we have the ability to do more as well. And as a result, it’s really improved our 2013 guidance. You can see here that costs are down from our original guidance. We are originally $1100, so $1000 to $1100 on all-in sustaining cost now under $1000, so over $100 decrease. Capital now $4.5 billion to $5 billion rather than $5.7 billion to $6.3 billion.

Copper cash cost, a significant reduction already in the first half alone. And if you look at all of these improvements to guidance, I think they are significant. And as we have also reiterated our gold production guidance and raised the lower end of our copper production guidance. So I think we are making very good headway and also accomplishing some very good operating results. In fact, our all-in sustaining costs are lower by $140 this year than they were last year bucking the trend. And so what are we going to do to maximize cash flow going forward. We have made those tough decisions already have begun. We have sold Yilgarn. We have also decided in the third quarter to commence closure of Pierina. We are closing Pierina and in line with what I have said if we cannot either improve the operations, divest them, we will close them we are closing Pierina.

And ABG, we have had an operational review African Barrick Gold and operational review going on there. We’ve changed the CEO. We just our change – we are now changing the COO there. And I think we’re going to be able to aggressively optimize mine plans and operations as well there this year. There are actions we take on these mines and as well as optimizing our mine plans will impact our year end reserve levels, we’re going to be using a lower gold price this year which makes sense in terms of looking at the reserves. That may impact future production levels as well, but we’re going to maintain the option to re-access that metal in the future where we can. So this is gold, these aren’t reserves that are lost. These are just the change in the way we are calculating them. And so for $1000 plus all-in sustaining cost mines which is 25% of our production, let’s say we are going to continue to optimize that and we do have some other processes going on and that is going to be done to improve that overall portfolio of quality and reduce that 25% number that we’ve seen before.

We’ve also made some significant changes to Lumwana’s mine plan including lower waste stripping from re-sequencing. We’ve also made significant labor reductions and the termination of mining contractor. I am very pleased with the progress that we’ve made with the new management team that we put in place there and the business improvement initiatives that we’re putting in are gaining good traction. And this mine is moving in the right direction and you can see us with the improved operating performance in the second quarter. Copper production of 65 million pound and C1 cash costs of under $2 a pound, a dramatic improvement and we think that we will be able to continue and turn this mine around.

We had realized that there has been a lot of focus on our balance sheet and particularly with the lower metal prices given our debt levels. And I think we’ve taken decisive action, but almost importantly as well we do have a great cash generating business a very robust underlying business to service this debt. They have seen it in our strong operating cash flow and operational results in the first half $2 billion of operating cash flow are very attractive all-in sustaining cost. We’ve reaffirmed our production targets. We’ve reduced CapEx and operating cost. With that $2.4 billion in cash and we’ve got $4 billion undrawn credit facility out to January 2018 which is a back stop. And earlier this year, we termed out $3 billion of debt 5, 10 to 30 years at very attractive rates that we’ve reduce the dividend to further improve liquidity. The right balance between what we feel is the appropriate dividend now and also preserving liquidity.

And if you see look at this maturity schedule, it’s not onerous, it’s $3.5 billion of repayments over the next five years, $1.8 billion only through to – end of 2015. And again benchmark that against the $2 billion of operating cash flow that we have and we have no financial covenants in our public bonds. I want to reiterate that there are none in our public bonds which is the bulk of our debt. So, while we do have the most debt of our peers, we also have the most production, we have the lowest all-in sustaining costs and highest operating cash flow which means we have the best ability to service this debt.

So, looking forward 70% of our 2013 estimated production is already in the Americas. We’ve got five core low cost mines generating the majority of our production and the cash flow. It’s been the tough year, but I think we’ve made substantial progress on key priorities and the (indiscernible) program has given us a head start. And so our focus is going to continue to be on quality not quantity, 50% of that 70% of production comes from North America mostly Nevada. So, geopolitically, we are in a very strong place and with the mine changes that we are putting in place the sale of assets, this could mean lower production, but the ounces will be of a higher quality. If we get smaller so be it we just want to be more profitable and make more money. So some things won’t change in the company, we’re going to maximize risk-adjusted return and free cash flow. And I keep saying as returns will drive production not the other way around and we got not plans to build new mine in this environment. And after implementing the overhead review and the new operating model, I think we’re going to emerge leaner, more agile and profitable and able to deliver a much greater return over the long-term, longer term value to shareholders, employees and also the host communities in which we operate. So that’s my presentation.

I’ll leave this slide up, which outlines our key priorities and the progress we have made, and I am very pleased to be able to look at the progress and tick some of the boxes that we said we are going to do at the start of the year. So with that, I’d be very happy to take any questions.

Question-and-Answer Session

Unidentified Analyst

Just we have time for questions I see we got two in the back there.

Unidentified Analyst

What affect the S&P’s downgrade have on your interest cost and maybe comment on rising rates as well in fact that has gone revolver or other financing costs?

Jamie Sokalsky

Sure. Well, our credit spreads did go up in the first half of the year, but that was largely driven by I think the fall in the gold price, because if you benchmarked us against many of the other mining companies or the other gold companies, their spreads went up as well. The downgrade to us if you just exclude the economic in the environment from what’s happened to credit spreads it was really there wasn’t a hugely significant change in the spreads if you just reflected against the downgrade by S&P. In fact, one for the second quarter and after we did the bond deal earlier this year, our spreads came well in dramatically on a relative basis. In fact, I think we are one of the best performing bonds of any bond in the second quarter. So markets, the credit parameters, I think are being improved and I think we still have very good access to the credit markets. There is no impact on the cost of our revolver. It’s a fixed committed revolver to January 2018, so any difference in terms of what S&P or Moody’s they have no impact on that, that’s committed.

Unidentified Analyst

Taking to an extreme, you could close every mine except your lowest cost mine will be very profitable, so how much production do you think you need to cover the overhead of business for example could those five mines be sufficient?

Jamie Sokalsky

Sure. If you look at particularly once Pascua-Lama is in production that could be up to $5 million ounces of production, which would still be the largest gold company in the world as ounces saving cost far below. Our debt service costs are about $10 million in ounce so, we’re already more than $100 ounce below our peer group so those five mines can absolutely generate a huge amount of operating cash flow and income and more than offset any admin and other costs. So, we definitely will be profitable.

Unidentified Analyst

Question here in the front row, Martin?

Unidentified Analyst

You are reaching any agreement with the government, which basically a pretty advancing the cash to the current government and four years down the road, there was a new government and they are going to find those no cash. So what kind of guarantees you have now that these lease agreement is now going to have to be reopened again, because I guess when you started the project, you had some guarantees from that government at the time that, that was a valid agreement and it improved that way.

Jamie Sokalsky

Sure. I guess there is never anything that’s 100% guaranteed, because we did have an agreement with the Dominican Republic government. This really I think dealt with a situation, where they weren’t getting much cash flow in the front end of this project, because of the royalty structure, the NPI etcetera. So, this dealt with an issue of advancing cash flow as well as some NTB certainly a value to the government. This is going to go to Congressional approval. So the Congress will approve it, but they approved the previous one. We have got U.S. Exim, EDC and commercial banks in as lenders. They have given us assurances that this is it, but with the new government you never know what could happen, but this is what – this is a 50% sharing of the cash flow of the mine, any change further to that would be resisted significantly by us. And they have given us the assurances and we have got the U.S. government and the Canadian government participating as a $1 billion lender, but I can’t stand here and say that a new government may not come back to us, but I think with the relationship that we have which has put this behind us. I think we are in a very good position to just go forward in a very cooperative way.

Unidentified Analyst

One more question in the back row, the same gentleman, yes.

Unidentified Analyst

I just want to make sure I understand in the case of Pierina you said commencing closure activities, are you actually closing or is it being put in care and maintenance mode?

Jamie Sokalsky

For closing, maybe we are putting it into reclamation.

Unidentified Analyst

And are there any rules of thumb as to the costs to close the mine and/or within care and maintenance mode, just some general guidelines?

Jamie Sokalsky

I wouldn’t say there are rules of thumb, because there are obviously quite different types of mines where they are underground open pit. We have effectively approved primarily all of the cost of closing these mines over time. And so Pierina’s cost would have been approved. They are significant in their ongoing costs of water management etcetera, but I wouldn’t say there is a rule of thumb. Certainly, our view is that we will spend what it takes and we can’t afford to be leaving any mines without the proper care and maintenance and a proper environmental protection, but it is a significant amount of money. And we are prepared to spend it, but we have accrued for those costs, hundreds of millions of dollars for a mine like this, couple of hundred million dollars plus.

Unidentified Analyst

I think we have come to the end of time, Jamie. So if you could all join me to thank Jamie and Barrick for the excellent presentation.

Jamie Sokalsky - President and Chief Executive Officer

Thank you very much.

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