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Barrick Gold Corporation (NYSE:ABX)

Q3 2013 Earnings Conference Call

October 31, 2013 09:30 ET

Executives

Amy Schwalm - Vice President, Investor Relations

Jamie 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

Brian Yu - Citigroup

Stephen Walker - RBC Capital Markets

Anita Soni - Credit Suisse

Jorge Beristain - Deutsche Bank

David Haughton - BMO Capital Market

Greg Barnes - TD Securities

Alec Kodatsky - CIBC

Patrick Chidley - HSBC

Andrew Quail - Goldman Sachs

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Barrick Gold Q3 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, October 31, 2013.

I will now 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 being different in 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 will hand the call over to Jamie.

Jamie Sokalsky

Thanks Amy. Good morning and thanks everyone for joining us today. I am here today also with our Senior Executive Vice President, Kelvin Dushnisky; our CFO, Ammar Al-Joundi; and our Senior VP of Capital Projects, Ivan Mullany as well as other members of Senior Management all of whom will be available to answer questions after the presentation.

Over a year ago now we introduced a more disciplined approach to capital allocation, one of the key elements of this framework was and still is a sharp focus on cost reduction companywide. Today we reported another strong operating quarter and it is rewarding to see that our efforts were once again reflected in our results and has enabled us to further improve cost guidance this year. We’re on track with our 2013 gold guidance including our all-in sustaining cost range of $900 to $975 per ounce which we lowered for the second time this year last quarter. This quarter we also narrowed our operating cost guidance by lowering the high end of the range and based on the continuing turnaround Kwilimuna we have substantially improved our 2013 copper guidance this quarter. In line with our commitment to cost reduction we have targeted $500 million in annual cost savings through the implementation of a flatter operating model and other companywide initiatives.

We have also decided to temporary suspend construction activities at the Pascua-Lama project, expect those required for environmental protection and regulatory compliance. As a result we expect to further reduce our previously lowered 2014 CapEx guidance by upto $1 billion while still addressing our social, environmental and other regulatory obligations. This is the right course of action for the company and we decided on this path for a number of key reasons. Metal prices have continued to remain at lower levels for a longer period of time and other risks and uncertainties related to regulatory and legal matters and the timing of that persist.

Accordingly capital cost estimates for the project has continued to come under pressure particularly with an extended time horizon under our current slowdown scenario. However when conditions do warrant and/or improve we will resume construction under a phased approach which will result in the most efficient capital deployment and improved cost control. And as a result of our previous decision to slow this project down and a resequencing of construction which we announced in late July including a demobilization of employees we’re in a much better position to move quickly now with many ramp down activities already underway.

I will cover this important decision in more details in a moment. Turning to our results, our portfolio continued to perform very well this quarter. Adjusted net earnings were $577 million or $0.58 per share and net earnings were a $172 million or $0.17 per share. Operating cash flow was $1.2 billion and adjusted operating cash flow of $1.3 billion was almost as high as the $1.4 billion in the prior year quarter despite a drop of over $300 per ounce in gold prices quarter-to-quarter. Gold production was 1.85 million ounces and copper production was a 139 million pounds. On the cost side you can see from these graphs that our efforts to drive cost down are having a measureable impact. Our all-in sustaining cost of $916 per ounce this quarter are nearly 10% or about a $100 an ounce lower than the third quarter of last year. C1 cost for copper are down over a 15% from last year’s level. That’s driven by the turnaround at Kwilimuna.

Certainly a decline in cost from the prior year is bucking the industry trend and we continue to position ourselves to generate peer leading operating cash flow in any gold price environment. And as I mentioned we’ve been able to improve guidance for 2013, a couple of times in few cases. During the first half of the year we reduced our all-in sustaining cost guidance twice from original guidance by a total of about a $100 per ounce or more than 10%. In the second quarter we had cut our adjusted operating cost guidance by $35 to $45 per ounce. And this quarter, we have narrowed the range lowering the top end by another $15 per ounce. In addition, we have reduced our 2013 CapEx budget by over $1 billion or more than 20% from the original range. That reflects the lower spending at Pascua-Lama, but also includes some significant reductions to sustaining CapEx and mine site expansion CapEx.

Barrick remains the lowest cost of the senior gold producers on an all-in sustaining cost basis. Our expected all-in sustaining cost of $900 to $975 per ounce for 2013, are well below the industry average of $1,200 to $1,300 per ounce and the senior peer average of $1,150 to $1,250 per ounce. This reflects the quality of our portfolio and our successful reduction and portfolio optimization efforts.

Turning to copper. I am very pleased to say that we continue to make some excellent strides in improving the operating performance at Lumwana. This substantial turnaround has been a major accomplishment for the copper leadership team, which was appointed only about a year ago as you can see on the chart. Over the next couple of quarters, the team has had various options to reduce cost and improve cash flow at the mine. And as you can see, they made a decision to adopt a new mine plan in the second quarter. This has included more focused efforts to improve the productivity of the mining fleet, which is evident in the uptick in production. With changes to the mine plan, we are able to eliminate a large mining contractor, which has resulted in significant cost reductions.

As a result of these and other changes, we have seen a substantial improvement the last two quarters and you can see that on the slide. And we are evaluating a number of other initiatives to support and build upon the cost cuts achieved so far. In the third quarter, Lumwana produced 71 million pounds at C1 cash costs of just $1.75 per pound and C3 fully allocated costs of $2.36 per pound respectively. So we have made further improvements in our overall 2013 copper guidance this quarter, again due to Lumwana’s strong performance. We have increased our guidance for production by about 5% to 520 million to 550 million pounds from our original guidance of 480 million to 540 million pounds. And we have also reduced C1 cash costs guidance by over 10% to $1.90 to $2 per pound and C3 fully allocated cost guidance by 8% to $2.40 to $2.60 per pound.

Turning to our decision on Pascua-Lama, the project has been and continues to be a top priority for the company and also our biggest challenge. I am convinced that the decision to suspend construction is the right thing to do for our company. This is part of our disciplined capital allocation framework and it applies to all capital deployment decisions. Pascua-Lama is no exception. So spending construction now and breaking up future development decisions into distinct stages will provide us with more flexibility and is the most efficient and effective way to build the project going forward. A decision to proceed to the next stage will depend on reduced risks and improved economics. As you know, we previously announced significant reductions in our 2013 and 2014 CapEx guidance as a result of a plan to demobilize construction in Argentina and re-sequence construction to coincide with first ore expected in Chile in mid-2016.

As I have said in the past and during that time, all options with respect to Pascua-Lama including suspension has to remain on the table for consideration. We have made this decision in light of prolonged lower gold and silver prices and uncertainty related to timing required to obtain permits as well as other uncertainties and risks associated with other legal and regulatory matters. As a result of the above and the scheduled delays and slowing down the project construction over a long period of time, capital cost estimates for the project have continued to come under pressure. It's much more efficient to go full speed on a project than half speed. While the recent ruling from the Chilean Supreme Court upheld the project’s environmental permit [ph] and is now behind us other legal and regulatory challenges remain outstanding today. Suspending the project will allow us to postpone and reduce spending in a very challenging environment for the gold industry and for this project in particular.

As a result of our decision we anticipate reducing 2014 capital spending by up to $1 billion from the already reduced 2014 CapEx guidance we announced with the July slowdown.

We plan to break the remaining development of Pascua-Lama into Phases, each with it's own budget objectives and work program. This approach allows the synchronization of our spending with permit approvals and provides time for value optimization and streamlining of the owner EPCM and our contractor strategy. Importantly we will not proceed with the next phase until we’re satisfied that we have more complete information and clarity at defined stage gates and in turn hire confidence in the risk adjusted returns. This approach will allow for more flexibility, better planning, execution in capital deployment, as well as improved cost control.

And it may also afford us the opportunity to renegotiate certain contracts. While in suspension at the right time we will update and refine capital cost estimates and inline plans and develop the right stages for the resumption of construction. Finally during this time we will also explore other options to improve risk adjusted returns such as potential strategic partnerships or royalties or income streaming deals.

In the coming weeks we will be commencing an acceleration of the ramp down of the project, water treatment will continue to be prioritized though along the other important environmental protections and regulatory compliance requirements. In the end as I mentioned we are in a much better position to move quickly now with many ramp down activities already underway.

The ramp down will be carried out in such a way as to allow an efficient and effective restart when it makes sense to do so. At this point in the year we do not expect to spend significantly different amounts in 2013 as compared to our previously reduced guidance of $1.8 billion to $2 billion but in 2014 we estimate cost in the $250 million to $300 million range of which about 50% will be capitalized to complete the ramp down and address our social and environmental obligations.

Of course actual cost will be dependent on a number of factors including regulatory requirements as they evolve. It's important that we preserve the option to resume construction at Pascua-Lama and that’s what we’re doing here. It's the superior operating cash flows that ultimately can be generated from this long life asset that distinguishes in a class of it's own and by meeting clear defined project milestones and regulatory obligations we will at some point attain the required risk adjusted returns and turn this into a substantial cash generating long life gold and silver mine. But for now it's an opportunity to pause and focus on capital efficiency.

Turning to our further cost reduction initiatives, as I mentioned at the start of the call we’re targeting total annual savings of a $0.5 billion from a number of cost reduction programs which are well underway. We’re already realizing some of these savings and we will begin to realize more of them as we move through 2014. We continue to look at every area of the company to reduce costs but we have targeted specific savings to be derived from three major areas including a $150 million of annual savings from the benefit that are simplified operating model that will be in place by early 2014 and through lower overhead and other expenses from significant job reductions the majority of which have already been carried out. Another $250 million through a recently launched global program to rapidly reduce procurement costs. And we think there are huge opportunities to do that across the company. We expect another $100 million of additional savings from further opportunities related to the new operating model.

Let’s go through some more detail on these targets. The $150 million I mentioned is expected to be realized through the lower overhead and other expense through a simplified operating model, which will allow our mine managers to focus their full attention on achieving the best possible operating results and also improving the focus on strengthening our license to operate. With the elimination of overlapping roles and clear reporting lines between the mine site and corporate, it also strengthens accountability and integrates and better leverages our operating and other support functions. And as I said, we expect the new operating model to be fully in place by early 2014. In addition to the companywide review, we announced in the first quarter, we were able to capture more efficiencies through the implementation of this new operating model and in total about 1,850 positions are being eliminated across the organization.

I’d like to go into some more detail on this new operating model, because I think it’s important about how we are going to run the company and how it compares to our previous RBU structure that was created over a decade ago as we became a global organization and why we decided to change it. Each region previously had a mandate to manage geographically grouped assets and grow gold production. Over time, this created too many layers and resulted in some complex decision-making structures. As you know, the landscape of our industry has changed dramatically. Gold investors aren’t rewarding production growth in and of itself as they did in the past given the lack of capital discipline and rising cost that accompany that.

As part of focusing on returns over production to focus on cost and disciplined capital allocation and streamlining the business to drive efficiencies, we realized the old model was no longer the right one in today’s environment that are focusing on maximizing returns and profitability rather than maximizing production required a new structure with reduced complexity and one that allows us to respond more nimbly. The new operating model provides a flatter, simpler and more efficient decision-making structure and brings senior management closer to the mines. The elimination of overlapping roles and clear reporting lines between the mine sites and corporate also strengthens accountability.

With the streamlining of roles, this helps free up our mine managers to focus exclusively on our core business of mining, where the money is made with an emphasis on free cash flow, production cost, safety performance and of course, meeting our environmental obligations. One of the key changes with the new operating model is that the mines that drive most of the value in Barrick will report directly to the COO. Mine managers at Cortez, Goldstrike, Pueblo Viejo, Lagunas Norte and Veladero will report directly to Mark Fisher, the President of our Global Copper Business Unit, who has recently been appointed as chief – Acting Chief Operating Officer replacing Gary Halverson in that role, who is leaving for another opportunity while we continue our global COO search. And at this point, I would like to thank Gary for his significant contributions to Barrick over the past decade and increasing roles of responsibility and wish him continued success in his new role.

The other mines that you see here are bundled up under various operating heads as you can see on this slide. We are also targeting $250 million of annual savings through our recently launched program to reduce procurement costs at all operations and across all corporate functions. And our goal is simply to rapidly reset these costs and we are prepared to make significant changes to our supply base to achieve this. We expect to see cost reductions through competitive sourcing and scale back demand and from the other areas that you see here on the chart.

With that, I would like to turn the call over now to Ammar.

Ammar Al-Joundi

Thanks, Jamie and good morning everyone. As Jamie has mentioned, Barrick has some of the best long-life low cost mines in the world. This portfolio of mines positions us very well in any gold price environments, including a lower gold price environment. We have five mines, Cortez, Goldstrike, Veladero, Lagunas Norte and Pueblo Viejo which will generate more than 55% of our production this year of all-in sustaining costs of about $700 per ounce well below the industry average. We have another six mines which although smaller for Barrick are still sizeable by industry standards which are solid performers and are still highly profitable. Our other 10 mines which represent about 25% of our portfolio are higher cost and as we have discussed on previous calls our goal is to reduce this percentage. We are committed to improving cash flow throughout all areas of the company. Last year we discussed our plans to improve cash flows at higher cost mines and said we would take whatever action is needed changing mine plans, suspending production, closing or divesting these operations to improve the overall quality of our portfolio.

We have been working on this quite aggressively and we can report substantial progress this quarter. I won't go through each mine here but I would like to highlight some in addition to the divesture of one of our non-core assets, Barrick Energy. As part of our portfolio optimization process we sold Yilgarn South and we now have a sale process underway for Plutonic and Kanowna.

We have also decided to initiate closure of Pierina. This is an example of reducing production to make improved returns. African Barrick Gold is also seeing positive results from it's operational review which included changes to the North Mara mine plant. As a result it has improved it's operating outlook for the year and we believe the company is also well underway to achieve it's targeted annual savings goal of a $185 million. And as Jamie talked about earlier we have seen significant improvement in Lumwana’s performance.

To be sure for all the effort we put on our higher cost mines we focus a majority of our efforts on our core assets which will drive the company’ forward for decades to come. In this context I would like to give you an update on our newest mine Pueblo Viejo. On the operating side we have achieved some significant milestones in the ramp-up, major modifications to the Autoclaves have been completed and all four Autoclaves are online after being individually tested to design capacity.

The new 215 megawatt power plant was commissioned on schedule in the third quarter. Due to the slower than anticipated ramp-up Barrick’s share of 2013 gold production is now anticipated to be about 500,000 ounces at all in sustaining costs between $700 and $750 per ounce.

With some debottlenecking modifications to the lime circuit that are required by the increased demand from the autoclaves we now expect the ramp-up to be complete in the first half of next year. During the quarter a definitive agreement was reached with the government of the Dominican Republic on amendments to the special lease agreement and the revised agreement was ratified. The terms of the definitive agreement are essentially unchanged from the earlier agreement and principle. The single largest adjusting item to this quarter’s net earnings was $280 million in income tax expense related to the enactment of these amendments.

This adjustment primarily relates to the recognition of an increase in the deferred tax liability which will be drawn down over the life of the mine and acceleration of current tax is payable for 2012 and 2013. In this lower metal price environment financial flexibility and liquidity continue to be a concern for the gold industry but in Barrick’s case our underlying business is very strong and it is being further optimized through it's sales, improvements to mine plans and other significant cost reductions that we have discussed this morning. We delivered another strong set of operating results in the third quarter and the $2 billion of reductions to budgeted 2013 capital an costs we announced in the first half plus the turnaround at Lumwana have enabled us to maintain our goals guidance and to improve our copper guidance for this year. We produce gold at all-in sustaining cost of $916 per ounce this quarter. This is not only about $300 per ounce below the industry average it is almost a $100 per ounce below what we reported last year and is down from the second quarter. This is a great achievement in an industry where the opposite is often the case. As you’ve heard Jamie say before we have some of – we have not only some of the best mines in the world, but some of the best operators. Based on these results, our portfolio is generating very solid cash flow even at lower metal prices. In the first nine months of this year, operating cash flow was $3.2 billion, including $1.2 billion for the third quarter, that’s more than the $3 billion in debt maturities we have coming due through the end of 2017. We also have $2.3 billion in cash and an undrawn $4 billion credit facility out to January 2018. We will also be spending significantly less on Pascua-Lama next year due to our decision to suspend the project and we expect to begin to realize additional targeted annual savings in 2014. All of this provides Barrick with excellent financial flexibility.

I will now turn the call back over to Jamie to wrap up.

Jamie Sokalsky

Thanks Ammar. As everyone knows all through well, the industry has faced some multitude of challenges, but if there is one thing I would like you to take away from this call is that Barrick’s response has been proactive. It’s been swift and it’s been far reaching. There is not a single aspect of our business that we have not been evaluating and working on improving. And underpinning that approach is our disciplined capital allocation framework. We are consistent, analytical and disciplined with respect to how and where we allocate our capital and choose to invest and Pascua-Lama is no exception.

Yes, it is disappointing that we have had to make this decision, but it’s the right one for us at this point in time. Our progress on cost reduction continued this quarter and the results once again reflect the quality of our assets and our efforts companywide. We have met or exceeded our operating targets. We have sold assets that are not core to us and substantially reduced budgeted operating and capital costs. In summary, I believe we have met our challenges head on and will continue to make disciplined decisions that need to get made.

With that, operator, we would be happy to start taking questions.

Question-and-Answer Session

Operator

Thank you. We will now take questions from the telephone lines. (Operator Instructions) The first question is from Brian Yu from Citigroup. Please go ahead.

Brian Yu - Citigroup

Thanks and congrats Jamie on a solid quarter. My question is on your Pascua-Lama, I infer from your comments in prepared remarks that you had some insight into what perhaps that new CapEx level might be and what the timing is involved as you go into a more phase approach? Would you build and share with us that information the new CapEx estimate if you got it and then if you decide to restart it, what would be the remaining construction time?

Jamie Sokalsky

Sure. Well, Brian thanks for your question. As we were – we have been looking at the project for some time during the slowdown and the capital cost was not the sole determinant in why we made this decision. We didn’t actually end up doing a definitive or new estimate, but we saw as we were progressing we saw the trend of capital costs moving up and with the uncertainty with respect to the granting of the permits and timing and the slowdown, there were cost pressures associated with that. And taking that and other factors such as the metal prices into consideration, we changed our approach quickly to what we have just announced. And so we didn’t again commission a definitive new estimate. Suffice it to say, we did see the trend of capital costs going up, but then we change gears and we couldn’t really come up with a new definitive cost estimate, because it would be impossible to do that under a completely changed scenario of suspension. So it’s a better approach now. We will be able to recalibrate and spend the time to you know look at how we do this more effectively once we start up and perhaps renegotiate contracts, look for other cost improvements et cetera. You know we still got to complete the environmental obligations ultimately we would do a rebase line and a complete recalculation of the capital cost at a specific stage when we feel we want to proceed and at that time we will have a better idea of the overall cost estimate and so the timing is going to very dependent on those stage gates and you know once we are happy, we’ve the appropriate permits once we have done the engineering et cetera, once we see where the price of metals are et cetera only then will we make a decision to then build to begin building the project again at about 100 capacity.

Brian Yu - Citigroup

And just a follow-up just in the quarter report I’m just quoting here the suspension to generate adverse reactions from the government, can you discuss what level of interaction you’ve had with them on this announcement?

Jamie Sokalsky

Sure we have an ongoing very constructive dialogue with the governments of both Chile and Argentina at both the provincial and the federal level and we have informed both governments of this temporary suspension but we’re working very closely with them in a constructive manner and we believe that the suspension and the move to this approach is the correct one from a capital allocation respective and I believe we will be moving forward in a very constructive cooperative way, we both realize that we want this project ultimately completed and those conversations which have been ongoing will continue and hopefully that very good relationship will also continue.

Operator

Thank you. The next question is from Stephen Walker from RBC Capital. Please go ahead.

Stephen Walker - RBC Capital Markets

Just a follow-up question on Pascua-Lama, you made reference in press release that it's a world class resource and I guess it begs the question now that you’re sort of not going to develop it why it's not being written down, a $2 billion in carrying value, why was it not written down?

Jamie Sokalsky

We wrote down the project significantly as you know at the second quarter to a billion $1.5 billion. We’ve in the third quarter we did spend more money that was capitalized to the project and now that’s the number that you indicated. In essence that will be something that we will look at the end of the year when we do our regular impairment calculations. We have highlighted that in the MD&A that and we will do that impairment test at the end of the year which includes quite a number of factors and ultimately that timing will be done with the impairment calculations of the entire assets of the company at the end of the year.

Ammar Al-Joundi

One thing Stephen it's Ammar here, just to reemphasize something Jamie said and tied in with the impairment calculation. The key driver of this approach on Pascua is because any way you liked it it's a better way to build the project, it gives us more flexibility, it allows us to coordinate efforts et cetera. So we will be as part of this whole exercise of valuing the assets which we do for all of our assets and Pascua-Lama we will be taking into account this different approach to building it which we will come into that calculation.

Stephen Walker - RBC Capital Markets

If it hypothetically what would have been written down, you still would not have triggered the net tangible and net worth – tangible net worth covenants on the line of credit, you would still have roughly about $4.4 billion, $4.5 billion in that tangible net worth?

Ammar Al-Joundi

Yes. I mean, our tangible – that level is at $3 billion. Our current tangible is at $6.4 billion which is double what we have got – roughly double what we have got Pascua on the books at, but again, I can’t conceive of the situation where it gets cutback to zero. That doesn’t really make a lot of sense.

Stephen Walker - RBC Capital Markets

Correct.

Jamie Sokalsky

I mean, Steven, this is a temporary suspension. We are going to stay – we are going to continue doing work on the Chilean side environmentally etcetera. This isn’t something that we are walking away from at all. So ultimately, there is still an inherent amount of significant value to this project. So in a worst, there is no situation where there is no value on a project of this nature with such huge resources and a lot of infrastructure already built.

Stephen Walker - RBC Capital Markets

Of course. And just shifting gears a little bit here, I guess from an accounting perspective, the value of the silver stream on Pascua-Lama will have to be accounted forward as debt, that is the net amount paid deducted or net of – amount you received net of what was paid out to Silver Wheaton will have to be accounted for as debt, is that my understanding is that going to be correct and we estimate that amount to be about $370 million, does that in fact what would be part of that obligation?

Ammar Al-Joundi

It’s how the rating agencies S&P has determined how they are going to look at it as that is opposed to change in accounting or anything of that nature. So but ultimately then S&P would look at that amount that’s just over $300 million more as debt, which is pretty insignificant relative to our entire debt portfolio and balance sheet.

Stephen Walker - RBC Capital Markets

Okay. And I apologize, one last question here before I hand it off, you mentioned with respect to Lumwana that the way stripping volumes are much lower. Have you changed the life of mine way stripping ratio at Lumwana and what would that number be going forward?

Gary Halverson

Yes, Steven, it’s Gary here. The striping ratio is somewhat down and as we went through the review, we have got ahead of ourselves in terms of developing a chimney and after review that we are actually back into a more normalized strip level and can proceed on that from production standpoint.

Stephen Walker - RBC Capital Markets

What would you provide – what would you suggest for users like the mine or is there more normalized strip ratio?

Gary Halverson

The overall strip ratio here that we have got is still running about 3.1 and that certainly will be going forward at that level.

Stephen Walker - RBC Capital Markets

Great, thank you very much Gary. Thanks Jamie. Thanks Ammar.

Jamie Sokalsky

Thanks Stephen.

Operator

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

Anita Soni - Credit Suisse

Hi. Could you just give us an idea of what the total capital spend that you are looking at, including sustaining capital, sustaining in growth capital for next year?

Ammar Al-Joundi

Hi, Anita, it’s Ammar here. We haven’t given that guidance for next year, but we had already said that 2013 was going to be a peak for us and that was before we reduced before we announced the suspension of Pascua, which will take about $1 billion off of next year’s number.

Jamie Sokalsky

But if you look at in terms of our projects that we are spending $250 million to $300 million on Pascua-Lama next year and we don’t have any other big projects that are advancing. You can assess that the overall capital spending next year is largely going to be comprised of sustaining capital and development capital.

Anita Soni - Credit Suisse

And not sustaining and development capital was running this year at around 2 billion to 2.3 billion and I guess you make your own assumptions about that net reduction or is that, is there something in the 2 billion to 2.3 billion that you had running out this year that we should think about increasing...

Ammar Al-Joundi

I wouldn't want to give you any more specifics than that. But the range that you are talking about, plus or minus, is a good one.

Operator

Thank you. The next question is from Jorge Beristain from Deutsche Bank. Please go ahead.

Jorge Beristain - Deutsche Bank

I guess I have two questions, maybe the first one for Jamie. What would be the exit costs that you would expect in the fourth quarter for slowing down Pascua-Lama? Would we expect some kind of one-time cash charge of severance as to break with the unions and the current contractors out there?

Jamie Sokalsky

There will be some cost Jorge we're still accessing that as you know we've just announced this decision. And now we have to go and have some significant conversations with the contractors, some of the suppliers et cetera. So we'll be accepting that but that we're anticipating that number is not going to be hugely material to our overall costs.

Jorge Beristain - Deutsche Bank

Okay. And if I could have a follow up question and Jamie this has more to do with the corporate governance issues that you flagged on your own press release. Could you comment conceptually what is going on with the feedback you've gotten from clients buy side and maybe talk to any points or management is sharing some of the pain. Obviously a lot of your employees and business partners are being laid off and I am just trying to understand what management and the board are doing sort of to contribute to lower cost going forward?

Jamie Sokalsky

Well, I think what I would like to say, Jorge, is pretty much what we've said in our press release. We've engaged -- the Board members have engaged with some constructive discussions with investors to hear their feedback. And the Board is addressing the issues that have been raised with the directors, including the issue that includes the discussion of the modification of the company's executive compensation arrangements and the rejuvenation of the Board. So, what I'd like to just say is we intend to issue a more detailed announcement before year-end to update the shareholders on those initiatives and leave it at that.

Jorge Beristain - Deutsche Bank

Okay. And so if I can just get a last one and quickly to Ammar, Ammar what is Barrick's policy toward maintaining investment grade status? Is that something that the company views as fundamentally a keystone rating?

Ammar Al-Joundi

Yes, absolutely.

Operator

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

David Haughton - BMO Capital Market

Thank you for the update and the details provided on those various costs. I still have some questions on Pascua if that's okay. Year-to-date expenditure you're looking at 1.3 and Jamie correct me if I am wrong. Did I hear you say that for the year you'd expect about 1.8 billion to 2 billion?

Jamie Sokalsky

Yes, that's the right range. And some of that, there will be some expensing of costs as we discussed.

David Haughton - BMO Capital Market

Okay. Quite a step up from where you are year-to-date. What sort of things are you spending in the order of 0.5 billion to 0.7 billion in that last quarter?

Jamie Sokalsky

Well, there is a ramp down that will occur over the last three months that ultimately we can't -- a suspension doesn't provide for an immediate demobilization. And so there will be as well a significant amount of activities that need to go on to prepare this site for care and maintenance. And so we will be maintaining a fairly significant level of employment through now and the end of the year to reflect the fact that there are notice periods. Again, there is work to be done and completed to prepare the site for that care and maintenance. There will be some cancellation penalties, etcetera. So the overall expenditures in the fourth quarter are not going to drop significantly from what we are anticipating from our previously reduced guidance that we gave.

Ammar Al-Joundi

David, its Ammar here. If I could also add, a lot of the expenditure that would happen in the fourth quarter will be expenditure that progresses the project and adds to the eventual value of it. It just logically makes sense that to the extent you have to provide let’s say for arguments sake 30 or 60 days’ notice for people, you might as well have those people working efficiently and effectively towards finishing things off that make it a lot easier to restart and a lot less expensive with regards to care and maintenance. So it’s not all cost, a lot of that is actual contribution to the long-term project.

David Haughton - BMO Capital Market

Alright. Through the presentation and in your MD&A, you have discussed several times a phased approach to Pascua, can you just give us an idea of what sort of phases you have in mind? Could that be looking at the non-refractory versus the refractory, the different phases of stripping etcetera? What sort of things are you thinking about for those phases?

Ammar Al-Joundi

Sorry David, I will start that and then I will ask Ivan if he wants to add. When we talk about phased, we don’t mean changing the mine plan itself. What we are talking about is seizing the decisions to go forward to tie in with minimizing risk and optimizing returns. So as you know, in a situation where we were going towards, getting this built as quickly as possible, because the economics of the time made sense to do that in an environment, where we now have more time to build it and there is continued uncertainty and there is a lower metal price. What we are talking about phasing is one phase is get finalize the permitting issues, finalize the relevant regulatory issues, finalize engineering, finalize different stages of construction, which really is exactly how you would build this to give you the most flexibility and ensure that you are getting a good return on your investments. You know, when your spending, as you know a lot of money on a monthly basis that doesn’t give as much flexibility as this will going forward. So by phasing we are referring to construction process.

David Haughton - BMO Capital Market

Okay. So I guess, thinking about it from a financial point of view, Ammar, then these permitting regulatory engineering relative lower costs, so it’s almost like an exponential increase in your capital outflow as you progress through those different phases if you were to commit ultimately to construction. Is that a reasonable way to think of it?

Ammar Al-Joundi

Is that’s a good way to think about it and what you basically said is you spend a little money as you can to get more certainty before you decide to spend more money. So that’s exactly right.

David Haughton - BMO Capital Market

Alright. And final one on Pascua if I may you do refer to JVs and strategic partners, have you had any of those discussions yet or at least just hypotheticals that you are putting out there?

Ammar Al-Joundi

In the past, we have always had various discussions with various parties from time-to-time on these types of things. And those are always in our toolkit in terms of increasing the risk adjusted rates of return on the project. For example, as you know, we did a silver streaming deal with Silver Wheaton at Pascua-Lama a number of years ago. So any types of transactions like that, we are continually thinking about them, have had discussions in the past and if those types of things make sense for us in the future we will definitely look at doing something’s to ultimately potentially bring in additional money and hopefully then increase the risk adjusted rate of return.

David Haughton - BMO Capital Market

So perhaps nothing concrete at this stage but the door is definitely open.

Jamie Sokalsky

The door is definitely open.

Operator

Thank you. (Operator Instructions). The next question is from Greg Barnes from TD Securities. Please go ahead.

Greg Barnes - TD Securities

Jamie, you've termed this a temporary shutdown at Pascua-Lama. Ideally how do you see this evolving in terms of the timeframe?

Jamie Sokalsky

I use the term temporary Greg because ultimately we do feel that this will be one of the great gold and silver mines at some point in the future. You know by demobilizing and suspending and talking about the stages that we go through before we make a critical decision to move on to the next stage, there are some reasonable time horizons in between those stages.

But it also doesn't mean we can't get a certain level of confidence where we can do some things in parallel, while we are going through things like achieving the permitting and dealing with the regulatory authorities. If we get a certain higher level of confidence then we can determine at that time when those next stages start. But ultimately, we've seen the gold price being low. We've got some number of risks and uncertainties ahead of us. And I can see going through 2014 before we get the high level of certainty that we require to move on to the next stages. But it's still very uncertain, because so many things can change and happen including commodity prices that it's a bit of a moving target

Greg Barnes - TD Securities

Sure. Just quickly, how do you and Ammar see the balance sheet evolving then? Where do you want it to go over the next couple of years?

Jamie Sokalsky

Well Greg, again, we've been clear on that. We think that a strong balance sheet is a strategic advantage for Barrick and so we are determined to continue the progress we have made to improving our financial strength and our balance sheet.

Operator

The next question is from Alec Kodatsky from CIBC. Please go ahead.

Alec Kodatsky - CIBC

Just have two quick, if I could, just curious if you could sort of clarify I mean you have identified high degree of uncertainty with the permitting status at Pascua. What is the process going forward just for you to essentially secure that status?

Kelvin Dushnisky

It's Kelvin here. I think it's important to point out it's not a matter of a delay within the system itself particularly in Chili the system works well it's predictable. But we are at a point where there is a number of new items that need to approved that weren't approved in the original RCA.

So, there were two phases. First phase, (indiscernible) which is a three-month program that we're almost completed now back to size that’s how we operate, the water system and then the second phase is the larger construction of the North Channel and other things we discussed in the past and that has to go through additional review. We'll be starting that process in November. There's a likelihood we could we have decisions on that in Q1, Q2 of 2014, could go a little longer. So that's one area where we can't say specifically today how long it will take, but that gives you kind of a sense of the timing.

Alec Kodatsky - CIBC

So it's really the regulatory review of work being done and then I guess their judgment on that as far as whether it’s acceptable or not?

Jamie Sokalsky

Yes. And these are features that are, have been either expanded or are new relative to the original approval. So we just have to work to the design phase and the approval of them.

Alec Kodatsky - CIBC

Okay, great. And just quickly to Lumwana, I am just sort of curious now where does in terms of ore sourcing, how much are you taking at a chimney at this point versus (indiscernible)?

Gary Halverson

Chimney, still quite, this is Gary, Alex. The current ratio is still on the order about 80% out of (indiscernible) and over next year we will be running to a higher level obviously if that’s…

Jamie Sokalsky

The other way around.

Gary Halverson

The other way around? Sorry, the chimney pit will be running to a higher level of that overall production and by the middle of next year we will be phasing out of the (indiscernible) pit.

Alec Kodatsky - CIBC

Okay, that makes sense. I just wanted to sort of gauge where that was at. Thanks for the answers.

Gary Halverson

You are welcome.

Operator

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

Patrick Chidley - HSBC

Good morning everybody. Just my question I am afraid back to Pascua, just I wanted to ask if you could outline more detail on what’s been done to-date and what’s the work is left to do? And can you face the sort of longer time horizon lower cost work can you keep doing that in a volume suspended?

Jamie Sokalsky

Well, currently we are at about 50% constructed across the project. On the Lama side, the infrastructure is in place for the buildings, etcetera. On the Pascua side, it was suspended as you previously. So we haven’t started construction, let’s say, on the crusher and truck shop. During the suspension, there will be no construction. The sense is to go into just environmental management and through the permitting process and sustainable construction across both Pascua and Lama.

Patrick Chidley - HSBC

Okay, so no anticipated work to be done while you have got time to sort of get some of that long lead time type work done?

Jamie Sokalsky

No, other than compliance to the environmental requirements and a little bit of work around the water management system all other construction that will be suspended.

Patrick Chidley - HSBC

Okay. So there is no chance that you are going to be in production anytime in 2016, so it’s going to be beyond that, is that right?

Jamie Sokalsky

Yes, that’s correct.

Patrick Chidley - HSBC

Thanks.

Jamie Sokalsky

Operator, maybe we could take one more call and then sign off.

Operator

Absolutely. The next question and last question is from Andrew Quail from Goldman Sachs. Please go ahead.

Andrew Quail - Goldman Sachs

Hi guys. Congratulations on a great quarter operationally. I am actually switching gears away from Pascua. Do you guys expect something, I don’t know you are spending sort of 40% of your exploration budget at Goldrush and Cortez, is that going to sort of move ahead now, maybe you have Pascua and you are sort of planning to come or can you elaborate on when we expect to receive the pre-fees on something like Goldrush?

Jamie Sokalsky

Well, we certainly are continuing to make further investments and do exploration at Goldrush. It’s a project that as we know has 14 million ounces of resources as of the end of 2012. We are looking to complete pre-feasibility by about mid-2015. It is advancing to pre-fees and a number of development options are being considered like open pit mining or underground or maybe even a combination of both. And the drilling that we are doing there is really focused on establishing confidence in the continuity of the high-grade portions of the deposit, right now in support of the underground development option. And once we do these straight off studies that will give us a better understanding of the potential of the deposit and the economic drivers and then that will form the basis of the pre-fees study which remains on track for mid-2015.

Andrew Quail - Goldman Sachs

Correct. And just one more, just kind of on Pascua-Lama please, so you are saying is it – if you had to do a completion test on the project now, you would say it’s 50%?

Ammar Al-Joundi

That's correct. Yeah. I mean, we measure quantity installed on a weekly basis. And across the project we're at 50% constructed.

Jamie Sokalsky

Thank you Andrew. Okay, well we've had the call going now for an hour. And I'd like to thank everyone who participated on the call and for your questions. And we look forward to speaking with you again soon and continuing to update you on our progress. Thank you very much again.

Operator

Thank you. The conference call has now ended. Please disconnect your lines at this time. We thank you for your participation.

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