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Executives

Jamie Sokalsky - President and CEO

Analysts

Tanya Jakusconek - Scotiabank

Barrick Gold Corporation (ABX) Scotiabank Mining Conference 2013 December 3, 2013 12:45 PM ET

Tanya Jakusconek - Scotiabank

Okay everybody we all going to start the afternoon session. So the afternoon session is turning to the precious metals. So this afternoon we have presenters from some of the largest precious metals companies and worldwide and we’re going to start off with the Barrick Gold.

So, Jamie Sokalsky, President and CEO of Barrick; and Jamie was appointed President and CEO in June of 2012. Jamie has been with Barrick since 1993 in the various roles within the company, including prior to CEO, CFO of the company. Welcome Jamie.

Jamie Sokalsky

Well, thanks Tanya and good afternoon everyone and thank you for being here and attending our presentation today. Before I begin I’d like to point out I’ll be making forward looking statements during the course of this presentation. I’d like to start out with an overview of Barrick at a glance. And as we all know it’s been a very challenging year and there has been a lot going on in the industry, but also a lot going on at Barrick.

And I’d like to start with a snapshot of why I believe that we put ourselves in a very solid position in this environment as a result of a number of actions that we've taken over the last year. And I think we got a head start on this lower gold price and we've taken the actions that have I think strengthen the company and given us more flexibility.

As we have said a number of times last year, we instituted a framework of disciplined capital allocation and it’s been the basis for every decision that we've made. As part of this focus we embarked on a portfolio optimization review, we sold some noncore assets for about $700 million and got a number of other sales processes underway that I'll talk about, we have lose a mine. And as we move forward this is a dynamic process and the work is ongoing as we work to shrink the higher cost portion of our portfolio.

We've also recently suspended our construction activities at Pascua-Lama, except those that are required for environmental protection and also regulatory compliance. And we feel that this is the right course of action for the company. And I'll give you some of the more detail on that later. And as a result of that suspension we've been able to reduce our CapEx for next year by up to another $1 billion over and above what we had already reduced through the slowdown of Pascua-Lama.

If you look at our all-in sustaining cost guidance. It's the lowest all-in sustaining cost of the senior producers and almost about 55% of our production this year has come from just five of our large mines. And that said an all-in sustaining cost that we're expecting to be about $700 per ounce. So, those five mines almost 60% of our production are generating significant cash flow even at this lower gold price.

And so we also embarked on a cost cutting exercise well before the gold price had fallen. We reduced our 2013 capital and cost by about $2 billion and we’ve been able to lower our 2013 gold and copper cost guidance a couple of times this year and are targeting another $500 million of additional savings which I will talk about. And so we’ve made some meaningful progress this year at positioning Barrick to be stronger in this environment.

So here is a slide that details a little bit more of our five largest mines Cortez, Goldstrike, Veladero, Lagunas Norte and Pueblo Viejo. We are currently working through our new mine plans and while we will be giving guidance in early 2014 just a couple of things that I can highlight about the portfolio which we think is really the best in the business.

As we noted with our third quarter results while we have had another really great year for Cortez this year over 1.3 million ounces much better than what we are anticipating a number of years ago. We will see we will transition to some lower grades next year and expected to produce between 900,000 and 1 million ounces. And with that lower production there will be a slightly there will be an increase in our corresponding increase in the costs. But still to have a mine that’s producing between 900,000 and a million ounces is still a very good accomplishment.

At Goldstrike what we are working through that modifying to autoclaves with a thiosulphate project to treat about 4 million stockpiled ounces that otherwise could have only been processed through the roster at the end of the mine life. So that’s going to allow us to accelerate the cash flow from those ounces and keep the autoclaves working and maintaining the production levels, that will allow us to get more and longer term use out of them. And the first production from this actual patented process that we have is expected in the fourth quarter of next year and we expected the thiosulphate process to add between 350 and 400,000 ounces a year and the first five full years beginning in 2015.

And then also next year Pueblo Viejo while we have had a little slower ramp up than we anticipated in 2013, we fully expect that to be ramped up completely in the first half of next year and as a result we will see higher production and lower cost as well.

And let me talk a little bit about that. The full capacity next year which we are expecting will represent a very significant overall percentage of our total operating cash flow, it’s a 25 plus year mine life. The power plant was commissioned in the third quarter on schedule. The revised special lease agreement was ratified by the government of the Dominican Republic. And major modifications of the autoclaves have been completed and all four the autoclaves are on line after being individually tested to design capacity. And the modifications for the lime circuit which had caused us a little bit of slowdown in our ramp up are well under way and the silver recoveries are improving. And so we expect this mine to significantly better producer next year and significant generator of cash flow for us.

We have also talked about improving the cash flow at our higher cost mines and we have indicated earlier this year that we’re either going to change the mine plans and make them more efficient or suspend the mines or close or divest the operations to improve the overall quality of our portfolio. And we've made some progress on that to-date. It obviously is a more difficult environment to sell assets, and I won’t go through each mine here, but I’d like to highlight some of them.

We did sell three mines in Australia, which produced about 340,000 ounces for us in the first nine months of this year and we have a sale process underway for Plutonic and Kanowna that is advancing. And we do have quite a lot of interest in those mines. We've closed -- initiated closure procedures at Pierina, and that produced 80,000 ounces in the first nine months of this year. So that will be down next year.

And then ABG is also seeing some improved results under their operational review, which includes changes and improvements to the North Mara mine plan. And they are looking to realize up to $185 million in annual savings and are well underway in that process. And then we've also seen some significant improvement in Lumwana. This is one of things in particular this year that I’m very pleased about that we've really turned that mine around from being a high cost mine to a much lower cost mine. And I think there are even more opportunities to do something there to further improve those operations.

Let me talk a little bit about Pascua-Lama and the decision to suspend. This project has been a top priority for Barrick and at the same time it has been our biggest challenge, as I think everyone knows. It is the right thing to do, particularly in this current price environment but also as a result of some of the other regulatory and legal challenges we have. All options with respect to this project, I’ve always said remained on the table. And this suspension is going to allow us to really recalibrate the project and allow us to get the timing and the uncertainty behind with some of the permits that we have and also some of the legal matters that are out there. We won the Supreme Court case. There are few other legal challenges there.

So suspending this project allows us to reduce spending which in this very challenging environment. But we're also going to break up the future construction of this into stages and move it forward. I think we should be able to do that a lot more efficiently. And ultimately this will be one of the best lowest cost world class mines in the world.

And once -- because we've already slowed this project down, we're in a very good position to accelerate that ramp down. And then re-baseline the project, complete the Phase 2 of the water management system and then move forward where it makes sense for us to do that.

And let me talk a little bit about the phased approach. This approach does allow us to synchronize the spend with the permit approvals and provide time for a value optimization and further discussion with the contractors, renegotiation, hopefully we can lower some cost and streamlining the owner EPCM and our contractor strategy overall. It allows us more flexibility and better planning, execution and the capital deployment as well a significant objective, better cost control.

And I think we should be able to renegotiate certain contract. And so we're ramping it down. And we are going to be looking at talking to everyone one of our contractors about doing things cheaper and more efficiently. And while it's in suspension, we'll refine and update the capital cost, estimates in the mine plans and develop the right stages for the resumption of the construction, as you can see on this slide.

And we are not going to proceed with the next phase that is on each one of the development timelines that we have, until we are satisfied that we’ve been able to deal with the risk that we’ve got more complete information and clarity at defined decision points. And that way we will have a higher confidence in the risk adjusted rate of return which is a key component of our disciplined capital allocation framework. And we will also look at other means to try to improve the risk adjusted return which could include strategic partnerships and royalty or income streaming deals as well. And that could not only bring more money into the project but also reduce the risk of capital that we have and improve the returns.

So the ramp down is underway now, it’s going to be carried out in a very controlled, efficient and processed delivery way and then restart when the conditions want. And water treatment is a priority for us. It’s being prioritized with other important environmental protections. We are not going to cut any corners on that. We don’t expect to spend a very significant amount of money next year. It’s cost about $250 million to $300 million which about 50% of that will be capitalized. And most of that is related dealing with the social environmental obligations as well as care and maintenance. And we will be bidding out the care and maintenance on this project as well. Of course some of the costs will be dependent on a number of factors including any additional regulatory requirements that we may have from the Chilean and Argentinean governments.

And so it’s important that we really strongly and efficiently preserve the option to resume construction. And by meeting the defined project milestones and regulatory environments and really focusing on building its right to go spend and also assessing the long life gold and silver prices, ultimately we will get there. But for now it’s an opportunity for us to pause and focus on capital efficiency.

So, let me just briefly talk about our third quarter results. We’ve had a quite I think good year of delivering against our expectations of meeting or exceeding consensus, showing that the operating results of the company are really excellent and strong and the underlying business that we have continues to generate the significant amount of cash flow.

So in the third quarter, our adjusted net earnings were $0.58 a share. And we generated adjusted operating cash flow in the third quarter alone of $1.3 billion compared to $1.4 billion in the previous year, despite a drop of over $300 in the gold price. So this -- the company has the ability to generate a significant amount of cash flow. And that was demonstrated in the third quarter.

And on the cost side, you can see from this chart, how well we’ve done at controlling cost and driving cost down and how a much measurable and material impact that is having on our results. And I am particularly pleased that we are doing that in an environment that I think is bucking the trend.

Our third quarter all-in sustaining costs were $916 per ounce or about a $100 an ounce lower than the equivalent quarter last year, that’s about 10% than the third quarter of last year and also our C1 corporate cost down 16% from the third quarter of last year. And that was driven by the turnaround of Lumwana. And that as a result has allowed us to improve guidance a couple of times this year. During the first half of the year, we reduced our own sustaining cost guidance twice from our -- by a total of about $100 per ounce. In the second quarter, we cut our adjusted operating cost guidance by $35 to $45 per ounce. In the third quarter, we lowered the top-end of the range. So the trend has always been to lower the cost.

And in addition we reduced our total CapEx by 21% by over $1 billion and granted a lot of that is for Pascua-Lama, but also we've made some significant reductions in sustaining CapEx and mine site expansion CapEx as well. And so in total these cuts reflected a reduction of about $2 billion that we've implemented in the first six months of the year.

So we continue to be the lowest cost senior producer, all-in sustaining cost of under a $1,000 per ounce and think really reflects the quality of our portfolio and our successful cost reduction and portfolio optimization efforts.

On the copper side, as I mentioned Lumwana, we’ve made some very good strides in improving the operating performance. We produced 193 million pounds of C1 cash cost of $2.34 per pound in the first nine months of the year. If you look at this chart, you can see how production has changed, it’s gone up, and how the C1 costs have gone down significantly since we appointed a new leadership team at the start of the year.

The teams access a lot of different things to reduce cost and improve cash flow at the mine. We’re able to eliminate a large mining contract, we eliminated the maintenance contract or cost by brining maintenance in-house. It’s resulted in improved availability and productivity of the fleets. The availability of the fleet has gone up to 80% from 55% previously. And you can see that in the uptick in production that we've had here. So we're pleased with the process, but we're evaluating a number of other initiatives including plant efficiencies to continue to build on that improvement at Lumwana.

And so as a result, we've been able to improve the copper guidance, higher production, much lower C1 cash cost and C3 fully allocated cost. So, not only have we made some very good progress in the gold business, but also in the copper business as well. And I think importantly shows that we do have the operational capabilities and the desire to make decisive action and reduce cost and make the difficult decisions in a swift manner.

We're also looking at reducing our costs further in the future. We've got a total annual savings target of $500 million, the cost reduction programs all well underway and all costs throughout the company are under review. You can see from this chart that we've got a $150 million coming from the new operating model and efficiencies, $250 million that is we're targeting from reduced procurement cost and another $100 million of an additional savings. And I'd like to take you through that in a little bit more detail.

We've implemented a new operating reporting structure. We've taken the core mines now and have removed layers in the business. And we're going to have those core mines report directly to the COO. We're bringing senior management closer to the mines and allow the mine managers to focus solely on the core business of mining and have them not focus on many of the other things administratively social et cetera that are inherent in the previous structure.

And so by bringing these mines closer to the COO and having those mine managers freed up to really focus exclusively on where the money is made, the core business of our mining operations emphasizing on free cash flow, cost, safety performance and meeting our environmental targets and obligations we are going to I think manage this company a lot better operationally and also lower more cost.

The financial position and liquidity of the company has been a focus, I know that over the last year or year and a half. But I would like to spend a little bit time on that. Our underlying business is very strong, we generated $3.2 billion of operating cash flow in the first nine months and we’ve taken these actions to improve near-term cash flow well before the gold price declined, we’ve optimized our business through the changes to the mine plans, we are doing mine plans at $1,100 per ounce, we’re spending considerably less on Pascua-Lama next year, we termed out $3 billion in debt earlier this year to extend the maturity schedule, we’ve divested non-core assets and engaged in this process to sell more assets. So we -- and then we did the $3 billion equity issue and we didn’t do that as a standalone independent item.

First it was part of an entire strategy to improve the business, to improve the cash flow, improve the portfolio. We cut our dividend by 75%, we’ve made a lot of difficult decisions. And then we decided that we wanted to do an equity deal. So we’ve improved not only our near-term cash flow, our asset portfolio, but we also felt it was prudent to issue additional equity to improve our capital structure and partially delever our balance sheet.

So it wasn’t done in isolation, it was done as an overall strategy to provide a lot more flexibility and strength to the company and that proceeds from the $3 billion have largely been utilized to pay down debt. And you can see from our debt maturity schedule it’s significantly improved our financial flexibility, reduces our net debt by about 21%, eliminates about $2.5 billion of debt repayments over the next five years, this debt repayment schedule is very strong. Now you can see in the next two years, we only have $200 million of debt to repay. In the next five years, four years, we only have $800 million of debt to repay. And so there has been a significant improvement in our credit metrics.

So just let me ramp up, I think and summarize many of the things that I have said. There is one thing I would like you to take away from my presentation, thing is that we have responded strongly to the challenges that not only we face, but the industry has faced including the lower metal prices. And I think we have been proactive and swift in far reaching throughout the entire organization and there is not a single aspect of our business that we haven’t looked to improve.

And that’s been done, underpinned by our disciplined capital allocation framework and think we have been consistent analytical and disciplined from a financial standpoint and where we allocated our capital and choose to invest in Pascua-Lama, while difficult is no exception. And as part of our optimization, we have sold out and we will sell more and if the company becomes smaller, but is more profitable and more valuable [then so be it].

We have got in my view the best assets in the gold industry. Five mines in the Americas contributing almost 60% of our production and all-in sustaining cost well below the industry in peer average. We continue to reduce cost, we have enhanced our flexibility and we have also extended our credit facility for another year. $4 billion for five years, we had the banks unanimously support that in the last week.

And so we’ve positioned in my view the company to be stronger and more flexible. And we continue to make the disciplined decisions that need to get made in this challenging environment. Thank you very much.

Tanya Jakusconek - Scotiabank

Great, thank you very much, Jaime. If we have a quick question, we’ll just take one because we are out of time. I think you got off easy, Jamie.

Jamie Sokalsky

Okay. Thank you.

Tanya Jakusconek - Scotiabank

Thank you very much.

Question-and-Answer Session

[No Q&A Session for this event].

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