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Barrick Gold Corporation (NYSE:ABX)

Q3 2009 Earnings Call

October 29, 2009 9:00 am ET

Executives

Deni Nicoski - Vice President, Investor Relations

Aaron W. Regent - President, Chief Executive Officer, Director

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

Rob Krcmarov - Senior Vice President - Global Exploration

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

Analysts

Heather Douglas - Thomas Weisel Partners

David Haughton - BMO Capital Markets

Steve Butler - Canaccord Adams

Barry Cooper - CIBC World Markets

Greg Barnes - TD Newcrest

John Tumazos - John Tumazos Very Independent Research

Terrence Ortslan - TSO & Associates

Steven Kibsey - CDP Capital

David Kristy - Scotia Capital

Etom Hodaly (ph) - Solomon Partners

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Barrick Gold Q3 2009 results conference call. (Operator's Instructions) As a reminder, this conference is being recorded Thursday, October 29th, 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 good morning, everyone. Before we begin I will bring to your attention that we will be making forward looking statements during the course of this presentation. For a complete discussion of the risks, uncertainties, and facts 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 reports or our most recent AIF filing. With that I'll hand it over to Aaron Regent, President and CEO of Barrick.

Aaron W. Regent

Thanks, Deni. Good morning and thank you for joining us today. Like in previous calls, Jamie Sokalsky our CFO and I will make some brief formal remarks. I have also asked Rob Krcmarov, Senior VP of Global Exploration, to provide some comments on our exploration activities as well. In addition we have other members of senior management here including Peter Kinver our COO.

Turning to our results, in summary we had a good quarter on a number of fronts. Both gold and copper production were on plan as were our total cash costs. For gold we produced 1.9 million ounces at a total cash cost of $456 per ounce or on a net cash cost basis $371 per ounce. Our copper production was 104 million pounds at a cost of $1.05 per pound. Cash flow of $911 million was a record for the company and an increase of 67% over last year, however, we did record a significant loss in the quarter of $5.4 billion which reflects the impact of our decision to close out our hedge contracts.

This decision requires that change in accounting for a hedge book and resulting charge to our income statement of $5.7 billion. But on an adjusted basis, net income was $473 million of $0.54 which was 17% higher than last year and also above consensus estimates.

Before discussing our third quarter results in more detail I'd like to take this opportunity to review the company's progress against some of our key priorities. First, we remain on track to meet our production and cost targets for the year. Second, our products remain under control and on time and in line with our budgets. Third, we have taken a major step forward in addressing our legacy hedge book. In early September we announced our plan to eliminate the gold hedges within 12 months and we're making significant progress. We issued new equity for net proceeds of $3.9 billion and issued new 10 and 30 year corporate bonds for proceeds of $1.25 billion. A combined proceed of $5.1 billion will all be applied to reduce our hedge positions. Substantial reductions are made subsequent to the quarter end and Jamie will provide more specifics in a moment.

Fourth, we have made good progress in growing our reserves and resources while we reduced our silver reserves with the sale of 25% of the silver at Pascua-Lama, we freed up additional financial capacity to acquire 70% of El Morro. As a result our net metal exposure is up significantly. At today's prices the institute value of the silver at Pascua-Lama was around $3 billion which compares to the institute value of the gold and copper at El Morro of $18 billion.

On the exploration front, Rob will discuss our efforts and success to date a little later in the call.

Fifth, we recently announced results of an internal organization review, the purpose of this review was to ensure that we have clear alignment within the company on key priorities, appropriate resources are in place to support those priorities, and clarities around roles and responsibilities. As a result of these changes I believe that our analytical and decision-making processes will be much improved and we will also reduce our admin cost by around $50 million plus per year and I will discuss this more in detail later in the call as well.

And then finally, Barrick has maintained a strong financial position with the industry's highest credit rating. We have good access to capital, flexibility in our balance sheet, and we have generated over $2 billion in cash flow from operations in the first nine months of this year.

So, overall we have made good progress on a number of fronts.

Now turning to our third quarter results, operationally we had a solid quarter and met or exceeded most of our targets. The North American region continued to perform well and was on plan was 712,000 ounces at a total cash cost of $518 per ounce. Goldstrike had another good quarter, producing about 341,000 ounces at a cost of $495 per ounce. Fourth quarter production will be lower, however, as mining from the open pit transitions back into a waste stripping phase.

The South American business unit met plan with production of 509,000 ounces at a cost of $247 dollars per ounce. Lagunas Norte had a strong quarter with production up 303,000 ounces at a cost of $128 per ounce. Veladero's production of 132,000 ounces at a cost of $502 per ounce benefited from access to high grade areas in the latter part of the quarter which is expected to continue into the fourth quarter. A second crusher has now been commissioned which has increased our crushing capacities around 85,000 tons per day, above 50,000 tons.

The Australia-Pacific region produced 462,000 ounces at a cost of $585 per ounce. (Inaudible), the regions' largest operation, produced 118,000 ounces at a cost of $583 per ounce. (Inaudible) was impacted in the quarter by slippage in the southwest pit wall which prevented access to higher grade material. This has been rectified, and as such, we expect higher production and lower total cash costs in the fourth quarter.

Production from the Africa region was 213,000 ounces at a cost of $447 per ounce and benefited from the new Buzwagi mine in the quarter. In the quarter, Buzwagi produced 87,000 ounces at a cost of $315 per ounce and for the year, Buzwagi remains on track to produce about 200,000 ounces at a cost of $335 per ounce in 2009.

Our copper production of 104 million pounds was on plan and total cash costs of $1.05 per pound were better than planned. And so looking forward, we anticipate our gold and copper production and cost to remain within guidance. Our total gold production is 7.2-7.6 million ounces at a total cash cost of $450-$475 per ounce or on a net cash cost basis, $360-$385 per ounce and copper production of 375-400 million pounds with cash costs of around $1.25-$1.35 per pound.

Turning to our projects in the construction, the Cortez property in Nevada is expected to deliver about one million ounces per year at a cash cost of around $350-$400 per ounce. First gold is expected in the first quarter of next year. Construction of the (inaudible) plant which is associated with heap leaps process is about 50% complete. The truck shop is just over 80% complete and a cross value compare system just over 90% complete. So overall construction is approximately 85% and is progression and in line with a $500 million capital budget.

Our 60% owned Pueblo Viejo project in the Dominican Republic is another key asset for us. PV is expected to be a +1 million ounce produce in its first 4-5 years of operation contributing around 600-650,000 ounces to Barrack at a cost of around $275-$300 per ounce. Good progress was made during the quarter and the project is also on track with its $2.7 billion free production capital budget in which our share is approximately $1.6 billion. First gold continues to be expected in the fourth quarter of 2011. We now have over 4,000 people on site, demolition is now complete, and earth works are about 80% complete. Autoclave construction and steel erection on the autoclave building is well advanced and the first of the mills have arrived in the Dominican Republic.

We expect to receive congressional approval of the amendments to the special lease agreements shortly and the project financing is on track to close in the fourth quarter. Our Pascua-Lama average annual production in the first 4-5 years is expected to be 750-800,000 ounces of gold and 35 million ounces of silver at a cost of around $20-$50 per ounce. That will make it one of the lowest cost gold mines in the world.

The Pascua Lama project formally entered construction in October with the project team mobilized into site and beginning work on installation of construction infrastructure. Orders have been placed for long lead time items including mills and mining and earth works equipment, all necessary premises for construction are in hand and other sectoral permits are in process and commission is expected to occur late in 2012 with first production anticipated for the first quarter of 2013.

So in total our projects under construction combined with Buzwagi are expected to collectively contribute about 2.6 million ounces of lower cost production once at full capacity. In addition to these projects we continue to advance the feasibility studies on our next generation of projects.

I would like to provide a specific update on Cerro Casale. A draft feasibility study on the Cerro Casale project was complete during the quarter and is now being reviewed by Barrick and our partner Kinross. We intend to spend the next few months reviewing various options to further optimize the project and expect to report results of this work with our fourth quarter disclosure.

So with that I'd now like to turn it over to Jamie to discuss our quarterly financial results. Jamie?

Jamie C. Sokalsky

Thanks, Aaron. Turning to our financial results for the quarter, our realized gold price was $971 per ounce which was $11 higher than the average spot price of $960 per ounce and we also benefited from our copper hedge position, realizing a price of $2.90 per pound which was 9% higher than the average market price of $2.65 per pound.

We reported a net loss of $5.4 billion or $6.70 per share which was primarily related to the change in accounting treatment following our decision to eliminate the gold hedges. On an adjusted basis, net income rose 17% to $473 million or $0.54 per share from $404 million or $0.46 per share a year ago, as a result of the higher gold revenues and lower cost of sales partly offset by lower realized copper prices and higher income tax expense.

Third quarter cash flow rose 67% from the third of 2008 to a record $911 million reflecting higher adjusted net income and lower income taxes paid as a result of the production mix and lower cash taxes as a result of tax-loss carry forwards. As Aaron mentioned, Barrick has earned about $2 billion in operating cash flow in the first nine months of this year which is a clear demonstration of the cash flow generation potential that we have.

This quarter continues the trend of margin expansion over the last several years and into 2009. On a total cash cost basis, cash margins have risk to about 53% of sales and with our continued bullish outlook on gold and our lower cost projects coming in line first with Buzwagi in May and Cortez Hills in the first quarter of 2010, we are very well positioned to deliver robust margins in the future, and as we've said previously, we're expecting growth in our production of 2010 to 7.7 to 8.1 million ounces at lower total cash costs than this year.

And on a net cash cost basis which credits our copper revenues against cash costs, our cash margins have risen to $600 per ounce or about 62% of sales in the third quarter driving the record cash flow that I mentioned previously.

Turning to the plan to eliminate gold hedges, in early September Barrick announced the plan to eliminate all of its gold hedges within 12 months and a substantial portion of the liability related to its fully participating floating contracts.

We made this decision to gain full leverage to the gold price on all future production based on an increasingly positive outlook for gold. In addition the gold hedge book has been a particular concern among our shareholders and we believe the hedge has obscured the many positive developments within the company and adversely impacted the investment community's ability to analyze and evaluate the company which reduced our overall appeal to the broader market.

To the fund the elimination of the gold hedges and a substantial portion of the floating contracts liability we issued equity for net proceeds of $3.9 billion in the third quarter and more recently, long-term debt 10 and 30 year terms at attractive rates for net proceeds of $1.2 billion. That allows us to raise $5.1 billion. By eliminating the gold hedge book the company will fully participate in future gold price movements, our overall leverage is reduced, and the capital structure is simplified and strengthened and we know that investors prefer fully unheeded products and with this plan we're now better aligned with those interests.

As you may recall, the gold hedges are fixed contracts under which we've sold forward gold ounces and receive a fixed price upon delivering into these contracts. That amount was 3 million ounces as of September 8th. As such ,on those ounces, Barrick doesn't benefit from any increase in the price of gold and the mark to market increases or decreases with a change in the gold price. We can purchase gold in the open market and/or deliver gold from our own production to terminate these contracts. The floating contracts which totalled 6.5 million ounces at September 8th were previously fixed contracts that have been neutralized by entering into an offsetting contract where the gold has been repurchased. The impact was to fix the loss the on these contracts at that point such that it didn't change with substantial movement in the gold price.

On those ounces we fully benefit from any significant increase in the price of gold and the settlement of these contracts doesn't require any activity in the gold market. We don't have to buy gold to settle the floating contracts and the floating contracts are economically similar to a fixed US dollar obligation. During the third quarter, subsequent to the announcement of the equity deal, we eliminated 100,000 ounces of gold hedges. In the month of October we eliminated a further 1 million ounces of gold hedges so as a result as of October 28th we've eliminated 1.1 million ounces of the gold hedges or over 1/3 of the 3 million ounce position outstanding on the day we announced the plan. We've also settled $2.2 billion of the $3.7 billion liability related to the floating contracts. So in total so far we have utilized $3 billion of the total $5.1 billion of net proceeds from the equity and long-term debt offerings.

Current gold hedges therefore are 1.9 million ounces with an associated liability of about $1.3 billion and the liability related to the floating contracts is about $1.5 billion so the total of that is $2.8 billion. Once the balance of the $5.1 billion proceeds are used, the floating contracts liability is expected to be reduced to only about $0.7 billion excluding any further impact any gold price movements have on the cost to eliminate the remaining gold hedges and this liability continues to be governed under our primarily 10 year lines with the banks and is the equivalent to long-term debt and is not subject to any gold price mark to market changes.

I'll just take a minute to discuss the financial statement impact of the plan. Until the plan was approved, gold and silver sales contracts were accounted for as normal sales under US GAAP. Under this accounting treatment, the impact is recorded in the financial statements as revenue at the contracted price when gold or silver production is delivered into these contracts. No assets or liabilities were recorded prior to deliver and the mark to market position has been disclosed on a quarterly basis in the MD&A.

As a result of our decision to eliminate these contracts, the mark to market position of a -$5.6 billion on the gold hedges is recorded as a liability with a corresponding charge to our third quarter earnings. And until elimination, any changes in the mark to market from quarter to quarter will be charged to the income statement. To give you an idea of that impact, as of October 28th, a $10/ounce increase or decrease in the gold price currently results in a $19 million impact to the mark to market flowing through our income statement. This mark to market is reduced as the contracts are settled and all settlements flow through operating cash flow.

With that I'd like to hand it back over to Aaron.

Aaron W. Regent

Thank you, Jamie. Since our last call there were two significant transactions that I'd like to comment on, specifically the monetization of 25% of the silver reserves at Pascua Lama and the agreement to purchase 70% of El Morro from Xstrata. In addition we thought it was timely to provide an update on our exploration activities and the progress that we've made.

First in September we reached an agreement with Silver Wheaton to sell an amount equivalent to 25% of the silver production for Pascua Lama, and in order to bridge the start of production from Pascua Lama, 100% of the silver production from three of our South American producing mines. The silver sold from our existing mines will stop once Pascua Lama reaches targeted production level. The sale price was $625 million. An initial payment of $212.5 million was received with the balance paid equally over the next three years. In addition, we'll receive initial cash payment of $3.90 per ounce for ounce of silver delivered under the agreement.

For us, the rationale for this transaction was that it helps share the risk of the project with a partner, it enhances our rates of return, and provides an additional source of financing. In addition, it also creates liquidity for and highlights the value of the silver associated with Pascua Lama. And while we have given up some of our silver exposure, we still maintain upside of 75% of the silver and 100% of the gold production.

A second transaction was our agreement to acquire Xstrata's 70% interest in the El Morro gold copper interest or $465 million in cash. El Morro is a high quality deposit located in Chile which is an attractive country to operate in and one where we already have a significant presence. It is also located between Pascua Lama and Cerro Casale, in the Atacama region of Chile so we know this area particularly well.

As reported by Xstrata, total gold resources are approximately 8.3 million ounces and total copper resources are 6.3 billion pounds on a 100% basis. The other 30% interest in El Morro is owned by New Gold Inc. which hold the right of first refusal to purchase Xstrata's interest and has until January 11th to exercise this right.

The transaction is expected to close prior to January 30th, 2010, after which we will focus on optimizing the current feasibility study and exploring the associated 800 square kilometer land position. In addition we'll look for opportunities to cap the synergies between our other projects.

At this point I'd like to turn the call over to Rob Krcmarov who's our Senior Vice President of Global Exploration to discuss Barrick's exploration approach and some of our most recent positive results. Rob has led the global exploration function for the last three years and has two decades of international experienced and joined Barrick with the (inaudible) acquisition in 2001. Rob?

Rob Krcmarov

Thanks, Aaron. Many market commentators have, in the past, expressed concern that Barrick is a large company and will have difficulty replenishing its resource base. I'd like to demonstrate just how success Barrick's been in that endeavor.

So here is a reserve replacement summary for Barrick since 1990, and you can see just how well we've done. Since 1990 we've mined 91 million ounce, acquired 104 million ounces, and found 125 million ounces. So over this period we spent about $2 billion and discovered 125 million ounces for a discovery cost of about $16 per ounce. The 125 million ounces equates to about $51 billion of institute value at the average gold price at $410 per ounce for the period 1990-2008.

At the end of 2008 we had about 139 million ounces in gold reserves, the largest in the industry, and these are economic ounces, not just ounces in the ground. Our success can largely be attributed to the fact that we've maintained our commitment to exploration and sustained substantial budgets through the years. It's also critical to have an integrated and aligned exploration and corporate development team to identify early stage opportunities, to acquire them, and then to find the answers.

Barrick's exploration growth strategy is a threefold balanced approach which focuses on finding new discoveries, adding reserves and resources at our existing mines, and identifying and delivering exploration upside following acquisitions. We've had GRENFIELDS discovery at Lagunas Norte and Veladero, both joint deposits and in production and South Arturo, currently in the feasibility stage in where we had a recent new discovery of the West Button Hill target.

In particular, Barrick exploration has an excellent track record of identifying upside and turning those ounces into reserves and resources, as can be seen on the chart. Goldstrike and Pascua Lama are major examples, but as can be seen we have consistently delivered and will continue to add value on the Placer Dome assets such as Pueblo Viejo, Cortez, Porgera, and Turquoise Ridge. We've done the same at Reko Diq. This deposit has more than doubled in size since acquisition and it continues to grow.

Our 2009 exploration budget is $150-$160 million and focuses on districts where we see the best opportunities. In '09 and continuing in 2010 our major focus is in Nevada, Chile, and Papa New Guinea where we believe there's still excellent potential to make discoveries and to expand reserves and resources at our existing mines. Our key mines continue to demonstrate significant exploration potential and we have made new discoveries at the majority of Nevada mines. In fact, compared to some of our peers, Barrick has discovered an enormous amount of resource ounces through exploration alone.

Let's now take a look at one of our key areas as an example. We'll look to the success that Ed Cope (ph) and his team have enjoyed in Nevada.

On the Goldstrike property several years ago we discovered South Arturo. Late last year we discovered another new deposit called West Button Hill which is significantly higher grade than South Arturo. It could form the basis of a new large pit as it improves the economics of the area. Also on the Goldstrike property, the Deep North Post ore body is in reserve development stage and we've already tabled a 500,000 ounce resource and continued drilling is expanding the zone mineralization.

At Balt Mountain our RBM discovery has been successful converted into a significant resource. We're planning on expanding a strong zone of very high grade mineralization down of the top deposit where we're currently mining, and this zone is open in several directions and has the potential to develop into a major new underground ore body.

At Ruby Hill we've discovered mineralization in a new stratographic interval which importantly unlocks the prospectivity of a very large part of the property. An aggressive exploration program is planned for 2010.

At Cortez we've discovered a new lobe of mineralization coming off the Cortez Hills (inaudible) pipe. This zone is open to the south. Underground development which is in progress will provide the drill platforms necessary to convert this deposit into a reserve.

Elsewhere at Cortez we've been testing some promising prospects and because of the relatively flat strata in the Cortez district we've been suing seismic geophysics to help define targets. As you know, this technique has been very successful in the oil industry. We are using the best technique available for hard rock seismic exploration and are looking for extensions to the massive pipeline deposit as it goes undercover to the south.

So the point is that we're using a high tech approach in the district to extent known mineralized structures and trends undercover and define new targets.

At Turquoise Ridge we've previously reported a new high-grade discovery at Turquoise Ridge North. We've extended the limits of the mineralization further north and an extension drift has been approved to define the north limit of this new discovery. In summary, I'm extremely excited about the potential we've identified for Barrick and we look forward to continuing our successful track record of finding gold through the (inaudible). I will now turn it back to Aaron.

Aaron W. Regent

Thanks, Rob. Before concluding our presentation I wanted to make a few comments about the changes we are making to our organizational structure. I believe it is important in any organization to take a step back periodically and look objectively at how we are doing things to ensure that there is an alignment around key priorities, that resources are properly channeled that there's clarity around responsibilities in addition to reducing and containing costs.

So in Barrick's case to do this we put together an internal team of senior executives who understand the company and are leaders in organization. The team conducted an extensive review of the company and consulted with all parts of Barrick including our function heads and regional operations to determine the appropriate recommendations.

To summarize the changes we're making, we intend to increase the focus on strategic planing and risk management to define a clear set of priorities and ensure that there is agreement and alignment on these priorities. Roles and responsibilities will be more clearly set out and simplified, corporate office to be primarily responsible for strategic direction, governance, standards, and oversight, and reasons to assume greater responsibilities, become more engaged in business planning, and be held more accountable for results.

Areas of overlap have been identified and will be eliminated. Many of the recommendations will result in changes in work practice with a greater focus on value creation activities versus the nice to haves, as well as improving the level of communication and coordination throughout the company. The objective is to eliminate the barriers to getting work done.

As a result, there will be a net reduction of about 80 positions phased out primarily over the next six months, primarily in Toronto at the corporate office. We will incur a nonrecurring charge of approximately $30 million which will be recorded in the third quarter and the fourth quarter of this year.

Corporate and regional pretax savings of at least $50 million are expected to be realized on an annualized basis once these recommendations are fully implemented. And while these savings are meaningful, more importantly I believe that our analytical and decision-making processes will be greatly improved. So now looking forward, we believe that the outlook for our industry and for Barrick is very positive. We believe that the price of goal should continue to do well. Today's macroeconomic environment is very price supportive for gold, low interest rates, the increase in the money supply, and current and future government deficits is continuing to put pressure on global currencies and is increasing the risk of significant inflammation in the future.

This has resulted in an increased demand for gold by investors around the world. The gold ETF has reached new highs and central bank selling has been significantly reduced.

The portfolio of diversification benefits of gold have been apparent as gold has outperformed most major indexes in both the past 12 months and over the past 10 years. However, opportunities to invest in gold are fairly limited given the size of our industry, so a small allocation of portfolios to gold would have a significant impact on demand in prices. And while gold prices appear high in nominal terms, in real terms they are still 50% below the peak levels realized in 1980 and from an industry perspective, my supply continues to decline and we expect this trend to continue for the foreseeable future.

So against this positive backdrop we think that Barrick is positioned to be a major beneficiary. Our production will be higher next year and at lower costs. We he a world class pipeline of projects on construction and a number of additional projects in various phase of feasibility studies. Our company's structure has been simplified with the elimination of the hedge book. We have a strong financial position to support our operations and projects and finally we have a number of competitive advantages which we believe will continue to pay dividends in the future.

So that concludes the formal part of our call today and we'd now be happy to open up the call to questions. Operator?

Question-and-Answer Session

Operator

(Operator's Instructions) Our first question comes from the line of Heather Douglas of Thomas Weisel Partners.

Heather Douglas - Thomas Weisel Partners

Hi, good morning. I have not had a chance to go through the whole release, but I was wondering if you could review — have you made any changes to your currency and fuel hedges and then remind us how much, in particular, your Aussie dollar and maybe some Chilean peso is protected?

Jamie C. Sokalsky

Sure, Heather. We really haven't made significant changes to the fuel hedges. We've added a small amount in the third quarter, but that position is still about just over 4 million barrels equivalent which is just over a year of hedge protection of diesel and the average price on that is about $90 per barrel. With regards to the Aussie dollar we have added some coverage as of September 30th. We've got $4.5 billion of Australian dollars hedged at an effective rate of $0.76. We've added a little bit to our Canadian dollar position, but that's not as significant. We've got $358 million there hedged and on the Chilean peso that is also a relatively small amount, but we've continued to actually add some to that position as well.

Heather Douglas - Thomas Weisel Partners

As you advance Pascua Lama do you see adding more peso and what is the Argentina currency p protection?

Jamie C. Sokalsky

Yes. We should, but we'll assess that as we go and we'll be opportunistic. Certainly the market for the Chilean pes forward market is deeper than the Argentinian peso market, but in line with how we've always managed the cost inputs for our operating cost and for our capital, those exposures will be monitored and at the appropriate time we'll look to add some coverage there to make sure that we protect those costs and also provide greater certainty as to the level and greater transparency on those costs going forward.

Heather Douglas - Thomas Weisel Partners

Okay, good. Thank you.

Operator

Our next question comes from the line of David Haughton with BMO Capital Markets.

David Haughton - BMO Capital Markets

Good morning, Aaron, Jamie, and Rob. I have got a question for you perhaps, Jamie. One of the options to kill the remaining portion of the hedge is to deliver into it from production. How would the accounting treatment work for that? We would see presumably delivered into all the contracts, I am not quite sure how it would be reflected into cash flow balance sheet?

Jamie C. Sokalsky

David, we do have the option to deliver production or buy those ounces back, the million ounces that we reduced the position by in October was effectively just buying them back in the open market. They are very similar. If we deliver against production it'll show up as a reduction of our operating cash flow. If we buy them back it shows up as a reduction in our operating cash flow, so they're very similar. I think one of the only differences is what you'd see in the realized price on the revenue line whether you deliver it against production you'd show lower revenue and then a lower realized price versus buying it back is just a financial settlement.

So, subtle differences really in the income statement presentation. The both go through operating cash flow and we do have the ability to do one or the other.

David Haughton - BMO Capital Markets

From a P&L perspective you'd be better off buying it in market, wouldn't you?

Jamie C. Sokalsky

The P&L will not be impacted one way or the other because whether you buy it back or deliver it against production there's either an opportunity cost against delivering production which you will get a lower price against spot, or you will have a loss in the income statement of buying those ounces against spot. So the net impact should be very similar.

David Haughton - BMO Capital Markets

Okay. Operational question now, Goldstrike seems to hang in there and exceed expectations. What's the outlook there?

Aaron W. Regent

I am going to make a brief comment and maybe Peter can add. The forecast for Goldstrike's production this year is around 1.2 million ounces and that's a level that we think is, plus or minus, is sustainable for the next little while and so when we, I guess, have our next conference call which will be in February we will be able to provide you with a bit more specifics on the 2010 production forecast for Goldstrike.

David Haughton - BMO Capital Markets

Okay. Because you've effectively got just with the nine months of performance your annual target.

Aaron W. Regent

Correct, but as I mentioned in my remarks, the fourth quarter, we are transitioning into more of a stripping phase and so the production in the fourth quarter will be down.

David Haughton - BMO Capital Markets

Okay. I have another operational question, Porgera's west wall has been problematic. It looks like another slip has impacted the previous quarter. What' the action now? Is the remedial action working or is it just going to continue to slip with the shale in that wall just getting all boggy and falling in?

Aaron W. Regent

You're right we did have an impact in the third quarter where our production was down. That situation has been rectified and so we will be in higher-grade material in the fourth quarter. And going forward it is a situation that we are managing. Peter, maybe you want to —

Peter J. Kinver

Yeah. I don't know if maybe I can add to that, but it's an ongoing — I suppose it's a struggle with the mudstones in the upper — when they exposed to rain they basically turn from mudstone into a very soft unconsolidated material. So what we're currently doing is trying to unload a lot of that material and lay it back at a very flat angle of repose, but some of this material did go into the bottom of the pit and prevented us getting access to high-grade ore, but as Aaron said we've now overcome that.

David Haughton - BMO Capital Markets

Okay. And my last question probably is for Rob, West Button Hill, could we see that as an extension of the Goldstrike pit or would it be a separate operation? How would you envisage that?

Rob Krcmarov

It's quite a distance from Goldstrike. It's closer to the old D operation and it could be part of an extended D South Arturo Pit.

David Haughton - BMO Capital Markets

And what sort of timing to move it forward from here possibly into production?

Rob Krcmarov

I'm not really sure. We're still drilling this out and scoping it out. We still haven't found the edges of it so there's still a bit of definition work to do before we hand it over to the production group.

David Haughton - BMO Capital Markets

All right, thank you very much, guys.

Operator

Our next question comes from the line of Steve Butler of Canaccord Adams.

Steve Butler - Canaccord Adams

Good morning, Aaron, et al. Aaron, you still give a pretty broad range of guidance given nine months you're done, 7.2 to 7.6. So we obviously imply either 1.675 to 2.1 million ounces in Q4. Goldstrike will be lower, but there's a number of operations where you'll be higher and maybe you'll leave it to our educated guess, but should we expect reasonably consistent or a better number than 1.9 million ounces for Q4? That's a question.

Aaron W. Regent

(Laughs) I understand. I think that what I'd say is clearly we're confident we can meet the guidance that we set out for the year, but I don't know if I want to be really much more specific than that, Steven.

Steve Butler - Canaccord Adams

Okay. So I mean unless Goldstrike wants to crater, okay. The other question I guess was on the copper cash costs, anything that particularly explains the nice improvement, i.e. lower cash cost on copper of $1.05 a pound in the quarter versus previous couple of quarters? Maybe this is a question for Peter? Thanks.

Aaron W. Regent

I think the main reason is the performance we had at Osborne where we were able to get at better grades than what we had in the first two quarters of the year. Peter?

Peter J. Kinver

Certainly a big driver and also we're seeing a pleasing reduction in commodity prices. Notably acid has come down from last year we were paying $300-$400 a ton and we're now paying less than $100 a ton and that's certainly helping Zaldivar well.

Steve Butler - Canaccord Adams

Any impact on the range of reduction on acid cost on Zaldivar's cost per pound, Peter?

Peter J. Kinver

Well, that was one of the reasons why we were seeing the costs coming down, but as Aaron said, Osborne is really having a good run with good grades at the moment and that's probably the key factor at the moment.

Steve Butler - Canaccord Adams

Okay. Thanks very much, guys.

Operator

Our next question comes from the line of Barry Cooper of CIBC World Markets.

Barry Cooper - CIBC World Markets

Yes, good morning, everyone. I'm just wondering the strategy for hedge reduction. It seems to, I guess, be bias towards the floating hedges where I sort of thought that you would have been learning more towards the fixed hedges there. Just wondering why you didn't reduce the fixed hedges more so than the floating hedges and what is the strategy going forward for that mix?

Jamie C. Sokalsky

Barrie, I think they're two different animals. The floating hedges really are, as you know, just a crystalized liability. It's just money that we owe the banks and so the timing of that just represents, I guess, the best opportunity that we have to pay down the banks in the most efficient way and so that's really just a cash settlement.

So there are a number of factors that go into our decision as to which banks we're paying and at what time period. So that's a separate issue. On the fixed book that really depends on when we go into the market and buy the gold. So that is market sensitive and we want to be opportunistic in the marketplace when we buy the gold back so that really depends on when we buy the gold, the fixed book whereas the floating book is strictly just a repayment obligation that we have options on.

Barry Cooper - CIBC World Markets

And then on the fixed is there any tax implication differences between these that you would look at as well?

Jamie C. Sokalsky

Not really. Both of the positions are largely in an offshore jurisdiction so the floating book has been a realized loss that has been done at prices below where we are now. The fixed book is also a realization of a loss. Both those losses are essentially in the same jurisdiction. The fixed book, the buying of that currently has been done at prices crystalizing those losses at higher prices than the floating book, but in essence those losses all end up in once place and there isn't much of a difference at all. You can't get a tax deduction on those losses unfortunately. That's why you see in the financial statements effectively almost the full amount. There is a minor part that we can get a tax loss on, but effectively unfortunately, the full amount is not tax deductible.

Barry Cooper - CIBC World Markets

Okay. And then maybe a question for Peter. You've taken a write down, is that the full amount that you had on the books and what is your view of this project going forward?

Jamie C. Sokalsky

Maybe I can just make the comment in terms of the write down and then we can make some further comments on the outlook on the project. We wrote down $158 million which is effectively almost all of the value of the project plus some exit costs that are there. Fortunately we don't get really any tax deduction on that either. It's $155 million charge going through the income statement. The remaining balance on that for our 10% interest is $6 million so very nominal interest left on the books.

Aaron W. Regent

And, Barry, maybe I could comment on the decision that we made. We spent a lot of time looking at how we could optimize the project to improve the rates of return, but ultimately we concluded that it did not really meet our return thresholds in a second. It is not really a core asset for us and we would have to make a — to secure a 65% ownership position we would have to make a further $106 million investment plus then commit another $400 million plus for the first phase of construction so it's a half a billion dollar commitment for 65% of a platinum project in South Africa. So we concluded that that's somewhat off strategy for us and that we have better uses of that capital. And so it wasn't an easy decision, but we think it's the right one to basically withdraw.

Barry Cooper - CIBC World Markets

Right. And then a final question while you're on the line there, Aaron. Obviously you've made some changes there at the corporate head office, but one of the things that's going to impact you in the not too distant future is when Hemlow runs out of ore and whatnot and you'll be left with no committee and source income for which you can offset the head office costs there. Are you incentivized to look at Canadian acquisitions to perhaps make that a tax effective corporate head office?

Aaron W. Regent

Well, I think we are interested in Canada and yes, if we could find an opportunity that made sense for us we would be aggressively pursuing it. And we do have an advantage as you point out in that we are generating a lot of shelter here so on an after tax basis I think it would give us an opportunity to perhaps earn higher rates of return.

So I wouldn't say just because we have shelter here in Canada that's driving a specific strategy to look in Canada. I think a Rob pointed out from an exploration perspective we have areas that we've targeted which we think have the highest prospectivity, but from a corporate development perspective we are looking at opportunities on a global basis and that would include opportunities in Canada.

Barry Cooper - CIBC World Markets

Sure, okay. Thanks a lot for the question.

Operator

Our next question comes from the lines of Greg Barnes of TD Newcrest, please go ahead.

Greg Barnes - TD Newcrest

Aaron, I wonder if you could just discuss a little further you strategy in Chile without El Morro, Cerro Casale, how those purchases stacking up in your mind and what the strategy is there in terms of copper production, gold production, how everything comes together?

Aaron W. Regent

Sure. Well, first we think they’re both very good projects. But we have further work to do to firm up the economics and project profiles. And as I mentioned, Cerro Casale, we have a draft (inaudible) done which we’re going to further look at. Some opportunities we see to improve on what we’re seeing right now. And with El Morro, we haven’t yet acquired it and so once that transaction is completed we will be focused again looking at how to optimize the feasibility study and some other things that we think where we can create and uniquely create some value. So in terms of potentially how we might advance these projects, I think it’s probably premature for us to conclude anything at this point. I think why we like El Morro is it’s an again, unique opportunity in an area in an attractive country and it’s got a lot of gold and clearly has a lot of copper too. But it is an interesting and unique situation that we think kind of fits and really enhances the quality of the overall portfolio of projects that we have. So that’s kind of where we stand.

Greg Barnes - TD Newcrest

I think it’s pretty clear on both of them. You have to make an assumption on long term metal prices to really push ahead. What long term metal price scenarios are you running on both of them, copper and gold?

Aaron W. Regent

I think that we would have a few different scenarios that we would look at. One scenario is we do look at the forward curves as a data point. And then we would have our internal estimates of what we think long term prices are. And we tend not to disclose those, Greg. We think that there’s a lot of work that we do to determine those numbers and we somewhat think that they’re a bit proprietary. But we kind of have two scenarios that we look at and that we stress test them for upside downside cases to test the robustness of the projects.

Greg Barnes - TD Newcrest

What are our odds, Aaron, do you think are acceptable in your mind to push those projects into the go discussion category?

Aaron W. Regent

We would have a base IRI for – in most of the investments we make of around 10%. And then we’ll add to that for specific risk factors. But I think that’s kind of the base number we’re working towards. And that’d be after tax, unlevered. And so once you put some leverage in you can get into the mid teens start raise the return on equity. So that’s kind of the, I’d say, the general answer. But it would also then be situation specific.

Greg Barnes - TD Newcrest

Okay. Thank you, Aaron.

Operator

Our next question comes from the line of John Tumazos of John Tumazos Very Independent Research, please go ahead.

John Tumazos - John Tumazos Very Independent Research

In terms of size of projects and future capital spending, what do you think your largest single year outlay may be for the company the next two or three years? And how does from a, I guess, 30,000 feet level does the company view getting bigger in terms of ounces of gold and pounds of copper output, versus capital employed and the inherent risks, as there’s only so much water, electricity and other resources in a given mining region for a project like Cerro Casale that’s got a lot of neighbors with higher grades?

Jamie C. Sokalsky

Maybe I could take that first question. This year we’ve got sustaining capital expenditures of about $800 million and on projects about $1.5 billion. So if we look forward, we’ve got a couple of projects that are essentially, Buzwagi and Cortez, will be build. And so we won’t be contributing or spending a lot of money there.

However, Pascua we’re going to be ramping up and also with Pueblo Viejo we’ll be spending a considerable amount of money next year. So, I’d say that certainly next year our project expenditures will be going up. But it’s difficult to give you a number for a year in the next couple of years because some of that is going to be dependent on whether we have a go-ahead with some of the other projects that we have in our pipeline. So I’d say that in the next year or so we still will have considerable project expenditures again, because of Pascua-Lama and PV.

And then should we proceed with some of the other projects then we’ll have some additional expenditures that will keep us at a pretty high level.

John Tumazos - John Tumazos Very Independent Research

Do you have a threshold that you think is sort of a maximum or too high or upper limit? Could we say that $5, 6 or 7 billion could be rolled out over the next five years as a single year outlay?

Jamie C. Sokalsky

As a single year outlay? I think that’s probably fair to say. That’d be pretty heavy for us to take on in a single year.

John Tumazos - John Tumazos Very Independent Research

I would just follow the hedge book which is almost that amount into your credit.

Jamie C. Sokalsky

I do think that was a unique situation. But our goal though is to grow our production and reserves and that asset value per share. And so we’d like to do that by using our balance sheet by working our asset base where we have non-core assets we could turn into cash to deploy into strategic assets. So we’d rather focus on that as opposed to looking at potentially between any equity.

Aaron W. Regent

But, John, we think that we’ve certainly, the transaction of eliminating the hedge book is credit friendly to the company. We issued the $4 billion of equity and ultimately that’s deleveraged the company with the overall leverage. And so our view is certainly that was credit friendly transaction. And as Aaron says, we’d have good capacity and good liquidity and a great capital structure. So I think we’re stronger than ever as a result of that transaction.

John Tumazos - John Tumazos Very Independent Research

Thank you.

Operator

And our next question comes from the line of Terrence Ortslan of TSO & Associates, please go ahead.

Terrence Ortslan - TSO & Associates

Thanks good morning. Just on the two projects Pascua-Lama and Pueblo Viejo, what are the critical items left to (inaudible) for the dates that you’re talking about production dates to come forward from equipment to financing to – I guess you mentioned about the senate in Dominican Republic going through the process or whatever.

Aaron W. Regent

Well, I think if you take Pueblo Viejo first, and as with all projects you have your critical path items. And with PV, I think we’re on track and I think we’re clearly watching is the transmission line to the site and our power supply. But we think that’s on hand. But that’s a critical path item. So I’d flag that. The SLA, we believe we’re almost there. We’ve had extensive meetings with the government at all levels including into the President.

I just met the President a few weeks ago and he assured us that his full support is behind insuring the approval of the amendments to the SLA. So we think that’s on hand. And the project financing, again, there’s some very few outstanding issues. So we don’t think that should be delayed much further than the fourth quarter. With respect to Pascua-Lama, all the major permits we need from a construction perspective are on hand.

We have a few sectoral permits lines still in haulage, for example, or a transmission line from Chile and Argentina. We already had the export license. We just have to put the transmission line in. So there is – a lot of these are normal course. So we don’t see at this point anything. Any more I could be more specific on. I know, Peter if you -

Peter J. Kinver

Well, just in general, just to add, I think the world has changed quite a lot in the last 12 months to 18 months. There’s less pressure on delivery schedules, etcetera. So I’m making the project guys lives a little bit easier with 18 months to go the lead times for things that’s, mills and trucks were much longer than they are now. So I think it’s taken a bit of pressure off the schedule.

Terrence Ortslan - TSO & Associates

Okay. Just on the project financing, so that you’d be able to (inaudible)control sale the product financing requirement, let’s say, or get their response for the Echo by the fourth quarter and for Pascua-Lama, when is the schedule for that? And at the Pueblo Viejo what is that too? What’s the expenditure numbers going to be for 2010 for each project? Thanks.

Jamie C. Sokalsky

Yeah. We expect to complete the project financing for Pueblo Viejo in the fourth quarter. But virtue of the fact that it’s what they – a number of different financial institutions, multi-lateral export credit type agencies, it does take a reasonable amount of time to put that in place. But our goal, certainly, remains to get this completed by the end of the year. At the same time we have started the process on Pascua-Lama to hopefully put in a very similar type of structure to Pueblo Viejo with the target of raising at least a billion dollars. That’s something that we’ve had ongoing. And we’ve had numerous discussions with many banks and those financial institutions. And are getting a significant amount of interest from those. But that takes time as well. And so I think we’re probably looking into somewhat later in 2010 to wrap up something like that as well.

Terrence Ortslan - TSO & Associates

So in the mean time Barrick is financing the projects loans, right? That’s what you’re processing it?

Jamie C. Sokalsky

That’s correct. And with Pueblo Viejo, obviously both Barrick and Gold Corp. are financing that. And once we get the financing in we’ll obviously have a cash flow injection to help pay for those shareholder loans.

Terrence Ortslan - TSO & Associates

And roughly, Jamie, the CAP Ex numbers for each for next year?

Jamie C. Sokalsky

We haven’t any guidance on that yet, Terry. I’d say that just by virtue of what I mentioned earlier with Pascua-Lama and Pueblo Viejo. I know we’ll certainly be looking at capital expenditures on the projects that are at least as much we have in 2009, which is $1.5 billion. But we’re going through our budgets right now and I can’t give you really a more specific number. But obviously it’ll be sizable.

Terrence Ortslan - TSO & Associates

Okay. Fair enough. Thank you very much.

Operator

Our next question comes from the line of Steven Kibsey of CDP Capital, please go ahead.

Steven Kibsey - CDP Capital

Good morning, gentlemen. Just related to the organization review. I’m just wondering will there be any impact or effect on your sustainability program or any of the personnel involved in your sustainability program? And maybe at the second question, are there any highlights or events that have occurred in the quarter or year-to-date with respect to corporate social responsibility that you’d like to share with us? Something in terms of an accomplishment or a challenge at any of the operation?

Aaron W. Regent

First, as part of the review we did not make any significant changes to the resources we have to support our CSR efforts. In fact, this is an area that we see as we talk about priorities for the reorganization, we see this is an area which is one of our top priorities. And is part of this review, we are putting a greater focus on it. And we’ll be adding additional resources to meet our objectives. And so in that respect I want to assure you that the area of license to operate is something that we recognize is – the bar continues to be raised and the expectations of investors as well as governing and community leaders is rising as well. And so the bar has been raised and we have to raise our game as well. So we recognize that we’re committed to achieve it.

In terms of specific highlights, there are what I’d say - across the company there is an enormous amount of activity and positive programs that we have underway around all of our operations. I could probably – there’s probably dozens I could refer to. But I don’t know, Peter if you –

Peter J. Kinver

Well, I can give maybe a good example, Aaron. We’ve identified obviously fuels cost is great and some of our projects in the warmer parts of the world we’ve identified ways of employing large cooperatives of people to produce alternative fuels from mines. And not only do we get a greener fuel. But we can also create long term employment opportunities for lots of people at or near our mines.

Steven Kibsey - CDP Capital

That’s very good. Thank you very much.

Operator

Our next question comes from the line of David Kristy of Scotia Capital, please go ahead.

David Kristy - Scotia Capital

Good morning gentlemen. I’m sure I’ll make this quick so we can get off of here. First on the copper hedges, I see that you’ve added some more. You’re up to 80%, I think, of your product. Will you continue to add more this year and into 2011 or will that be it for now?

Jamie C. Sokalsky

Certainly what we were looking at was to take advantage of the higher copper prices and put on zero cost callers. And we’re focused on 2010. And we’ll take a look at our future production there and assess the market and make a decision then. So I think really what we were most focused on was 2010 at the moment.

David Kristy - Scotia Capital

Okay. Fair enough. And on Cerro Casale and El Morro, you’re working to optimizing the feasibility of Cerro Casale, obviously. What’s the next step at El Morro? Where are we going from here?

Peter J. Kinver

Well, we’re hoping the transaction will close in early January. And then from there where I think about what we want to do and put the plan in place, but we’ve taken a hard look at the feasibility study and there are some things we think we can get at which will improve the project. So I think that’s really the focus today was get the transaction closed, get in and start working on the feasibility study and put a plan on how we’ll sequence this with respect to some of our other projects.

David Kristy - Scotia Capital

So, would we expect to see the optimized feasibility from both of them at the same time as sort of something you’d probably be doing?

Peter J. Kinver

We’ll probably be – Cerro will probably be ahead of El Morro. Cerro we hope next time we have this call we’ll give you more a fullest update on where we are with Cerro. And El Morro will take us some time. We’ll just get into it in January. And it’ll take us some time to work it.

David Kristy - Scotia Capital

Okay. Good. And maybe one more question for Rob on the expiration site. At Cortez Hill you talked about the high grade zone. Is this the bullion zone that you described before? And I guess how much further have you extended it?

Rob Krcmarov

That’s right, David. It’s what we referred to previously as a high grade bullion zone. We’ve extended the drift once already and we’re doing a second extension. We have three drill rigs operating there. And I think we’re about one and a half thousand feet extension compared to about two years ago.

David Kristy - Scotia Capital

Okay. That’s great. And similar kind of grades we’re getting still?

Rob Krcmarov

Yeah, similar grades.

David Kristy - Scotia Capital

Okay. And at Cortez Hills you mentioned a new lob extension there from the Bratchi (ph) pipe. What kind of size are we talking there so far?

Rob Krcmarov

It’s still early days. I think we only have a couple of fences out from it. But we constrained by access at the moment. But we’ll continue to drill there and scope that out.

David Kristy - Scotia Capital

Okay. That’s great. Thanks.

Aaron W. Regent

I think we have time for maybe one more question. We don’t want to interfere with another call we know is taking place right now.

Operator

Okay. And speakers, our final question comes from the line of Etom Hodaly (ph) of Solomon Partners, please go ahead.

Etom Hodaly (ph) - Solomon Partners

Thank you, Operator. Good morning everyone. Just a quick question. Most of my questions have been answered. Maybe just a follow up question with regards to Dalmon (ph). Can you give us an update of what’s happening at Dalmon in terms of upcoming work and commitments and where it is on your prior list at this point?

Aaron W. Regent

Where we are is, I guess, there’s a few different areas of focus. The main one is on permanenting the project. And reinforcing the plans we have in place to achieve that. So that’ll be the major focal point for us for the project for the next little while. We have a budget next year of around $5 plus or minus million. So we’re still putting significant dollars towards it. I think it’s a massive deposit. But I think the key next steps is to really get the permitting moved along.

Etom Hodaly (ph) - Solomon Partners

Okay, perfect. And then just for the remaining floating contracts. I believe you mentioned this, just want some clarification. You said it’ll be reduced to about $0.7 billion. Do you have any plans at all to put in additional longer term debt to offset that?

Jamie C. Sokalsky

The $0.7 billion that we will be left with is quite attractive bank financing. As I mentioned that’s under the auspices of the trading agreements, the 10 year type trading agreements that we have. And so, it’s attractive, it’s diversifies our financing somewhat by having some additional bank credit. And what we’re going to look at is ultimately pair that down to some of the best agreements that we have. And certainly there’s no rush to go and do any type of refinancing of that because of how good that is and how it diversifies our funding. But we’ll see. We’ll look at opportunities in the marketplace with doing public debt, etcetera. And if there’s an opportunity to actually do something that reduces our costs as we did with the $1.25 billion and extend duration, improve our capital structure. We’ll take a look at it. But certainly no current plans to do that at the moment.

Etom Hodaly (ph) - Solomon Partners

Okay. That’s great. Maybe just one last question for Aaron. Is there any plans to – let’s put it a different way, is there any other assets that don’t quite fit into your current portfolio in your mind?

Aaron W. Regent

Look, I think there are assets which I’d view as being non-core to us. But they’re good assets and I think they have a lot of value, or there’s opportunities for us to create value. But I think there probably are a few assets which are, I’m going to say, is less core to us. I don’t really want to specify what they are for obvious reasons. But I sort of refer to it when I say we have balance sheet flexibility where as I see it what we should be doing is constantly looking to upgrade in the quality of the assets we have in the company.

And so that may mean we may sell some assets which are perhaps viewed as higher quality to someone else but deploy those proceeds into higher quality assets for us. So that’s part of our strategy of wanting to work our balance sheet.

Etom Hodaly (ph) - Solomon Partners

Great, I appreciate the answer. Thank you, gentlemen.

Aaron W. Regent

I think that concludes our call today. And if I could maybe make one last comment. This has been an active quarter for us. And we’ve issued a lot of equity. We’ve had the chance now to introduce a number of new shareholders to the company. And if I could just say, we really appreciate the support that our current investors have shown us and the vote of confidence that new investors are showing us as well. And so, with that Operator will terminate the call.

Operator

Thank you. 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 nice day everyone.

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Source: Barrick Gold Q3 2009 Earnings Call Transcript
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