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Jamie Sokalsky - President and CEO

Analysts

Alec Kodatsky - CIBC World Markets

Barrick Gold Corporation (ABX) CIBC Whistler Institutional Investor Conference Call January 23, 2014 2:10 PM ET

Alec Kodatsky - CIBC World Markets

Well hello everyone I think we are ready to begin the last presentation of the morning session. I just remind everybody that lunch does begin immediately after, it’s in the front (inaudible) ballroom with the (inaudible) speakers [Simon Whitfield] and so. Just bear that in mind. And the last presentation of the morning will be Barrick Gold. It’s my pleasure to introduce Jamie Sokalsky, President and CEO. We will turn it over to Jamie.

Jamie Sokalsky

Well thanks Alec and thank you to CIBC and to you for inviting us to be here and good morning everyone. Before I begin I will point to the forward-looking statement. I would like to start my presentation today with an overview of some of the year of 2013 and look back as a checklist of some of the things that we said at this conference last year. And an overview of some of the important changes that we've made in the company in the last year and which are going to really put the company into a much better position to take advantage of opportunities as we go forward.

And so, this is how we've really performed against some key priorities. And as everyone knows it has been a very challenging time in the gold market and I think we have really stepped up to that challenge and have as I mentioned positioned the company well in this environment. Almost two years ago before the gold price declined, I think we're one of the first to really make a significant shift in how we're running the business and focusing on risk adjusted returns, focusing on free cash flow instead of production. I think that is a sea change and how we as a company are looking at things and also as the industry.

And so we adopted a framework of disciplined capital allocation. And it's been the basis for every decision that we've made and will be as we move forward and it will impact how our production looks, how the company looks as we move forward. We're still bullish on gold long-term. But the reality is that we are in a cyclical business. And so we’ve made some changes to recognize that, we showed some significant large capital projects, we cut sustaining capital and we cut costs pretty much right across the board, across the company.

And so while we've been able to do that, we obviously can't control the gold price. But the net result as I think the company has been transformed into a much stronger and leaner company and one that is prepared to deal with the current situation and also to provide better returns to shareholders as we move forward even if we are a smaller company in terms of production. So last year we outlined the key priorities.

And these first two slides that I am going to talk about I guess illustrate how we’ve done against those priorities and how we actually performed against other initiatives that we’ve carried out. I think we have certainly focused on operational excellence. And we’re pleased to say that we have met our guidance for the year in which we’re able to improve on last year due to some of the cost reductions that we made. We’ve significantly delevered the balance sheet. We enhanced our financial flexibility from where we were before and we’ve also worked hard on turning our Lumwana copper mine in Zambia around and our copper team has been very successful in these efforts and I’ll talk a little bit more about that later.

And while our goal this time last year was to advance Pascua-Lama it’s no exception to how we’re going to run the company the disciplined capital allocation approach. And so we’ve made a decision, a difficult one to shale that project to suspend it until conditions improve and I’ll talk a little bit more about that later.

And as I mentioned cost reduction has been a key focus and we’ve made extensive cuts in 2013 and you can see that on the slide here. We targeted another $500 million in annual savings and I think we’re well on our way to achieving that target as we move forward and we’re going to look for additional ways to get cost down. We outlined the strategy to optimize our portfolio and you see last night we announced the further divestment of another mine, the Kanowna mine in Australia. We have sold five mines in Australia. We sold short-life, high-cost non-core assets and then recognized proceeds of about $850 million of gross proceeds from the divestiture of those assets. This isn’t just about raising cash, it’s about optimizing the portfolio, focusing on our large assets and also reducing some of the other efforted costs that are inherent in managing those assets which really are not core to Barrick.

We are also running our life-of-mine plants at $1,100 gold to focus only on profitable production. And that is involved some decisions that in essence have exchange ounces for better cash flow and returns. And I will also talk a bit more about that later. And while we have had a slower ramp up than expected on Pueblo Viejo, we are expecting that mine to do much better and be fully ramped by mid 2014.

We have got a very high quality portfolio of assets to big five, what I call them. I think they really are the best in the business, Cortez, Goldstrike, Lagunas Norte, Veladero, and Pueblo Viejo last year contributed about 55% of our production, nearly 4 million ounces that all on sustaining cost of under $700 per ounce and we met that guidance.

We are currently looking to finalize new mine plants, but a couple of things I would like to highlight as the preview to this year which I had mentioned before. Cortez had a fantastic year last year, over 1.3 million ounces and much better than we are anticipating a number of years ago. As we noted in our third quarter results, it’s going to transition to lower grades and production in 2014. So we expected to produce between 900,000 and a million ounces, still a fantastic performance but that’s down about 400,000 ounces from this year. And so that also because of the decline in the production while still one of the largest mines, gold mines in the world that will have a corresponding increase in our costs in 2014.

At Goldstrike, we’re looking at modifying the autoclaves with a thiosulphate project that's going to create about 4 million ounces of stockpiled material that otherwise could have been only processed through the roaster layer on in the mine life. So that's going to allow us to accelerate the cash flow from those ounces and keep the autoclaves working for a longer period of time and get longer term use out of them.

So that first production from this process which is patented is going to come in near the end of 2014 and we expect to add about between 350,000 and 400,000 ounces from this new process in the first five full years on an annual basis beginning in 2015. And as I mentioned Pueblo Viejo is going to have a much better year this year, as we fully wrap it up.

And so let’s talk about Pueblo Viejo. We will get to full capacity by the first half of this year. It has got a 25 year mine life and it’s going to be a major contributor for many years to come. We expect about 600,000 to 700,000 ounces to Barrick’s account in 2014. We commissioned the power plant in the third quarter on schedule and the revised special lease agreement with the government of the Dominican Republic was ratified late last year.

As mentioned with our third quarter results, our effective tax rate in the fourth quarter is going to go up because of the agreement that we negotiated with the Dominican Republic government, it’s going to be about 38%, and that will have a carry forward effect into 2014 resulting in our overall corporate tax rate to go up to about 45% and that’s largely due to the impact of the taxes at Pueblo Viejo. We made major modification to the autoclaves last year, another modifications that are well underway and silver recoveries are improving. So this mine is really starting to hum along a lot better.

Pascua-Lama. So we did make the decision to suspend this in light of the prolonged lower metal prices and the continued uncertainly and risk. This has been a top priority for the company at the same time it really has been our biggest challenge. So what we feel the decision suspend was a right thing to do; all options including the suspension remained under the table with regards to our disciplined capital allocation framework, it’s going to allow us to recalibrate the project and gain more certainty on the timing for some of the permits we need as well as more clarity on some of the legal matters that we are facing.

And it also allows us to reduce spending about $1 billion less than spending in 2014 because of the suspension. We are coming in online with the spending for 2013 of between $1.8 billion and $2 billion and we’re prioritizing the water treatment which is a critical issue for this project and we won’t cut any corners on that.

And so as a result of the suspension we are going to stop capitalizing interest costs for the project in fourth quarter and this is also going to increase our finance costs in 2014. We’re going to spend about $300 million on Pascua-Lama in 2014, about a quarter of that is going to be capitalized and the rest will expensed. And most of that $300 million really relates to completing the ramp down, a big part of it will be more weighted to the first half and then also funding our environmental and social obligations and for care and maintenance costs as we fully suspend the project.

And some of these costs will depend on a number of factors including any additional regulatory requirements from Chile and Argentina. We expect the ramp up to be fully completed by mid-year with a large portion done by the end of the first quarter. And so, we're in a much better position to re-baseline the project, look at and look at potential cost decrease as whether contractors and a lot of the other activities that we're doing there. And we're going to complete the Phase 2 of the water management system and then move forward when conditions want.

And so, we're taking a phased approach to managing the project. We'll break it into a future development of distinct stages, their own budgets, objectives and the work program. This is the most efficient way to build this project going forward. We can synchronize the permit approvals that allows us time from value optimization of the project. And the goal is really to lower the some of the costs and streamline the owner EPCM and our overall contractor strategy. So, we're basically being able to take a fresh look at this and build this hopefully in a much more efficient way once we get back to it. And allows us better flexibility on planning, execution and capital development. While this is in suspension, we'll refine the overall capital cost and determine how we best approach it from a contractor standpoint. And then we'll have more complete information and clarity at distinct points to allow us to move forward. And that's a part of how we're managing the business under this disciplined capital allocation framework.

And it's important to resume the option; we'll look at potential partnerships here. And we expect to ultimately maximize the return on this project through -- and create a substantial cash flow generating mine, one of the top gold and silver mines in the world. It is a 25 year mine life but now it’s an opportunity to pause and focus on the cost and the efficiency.

So let’s -- I’ll give you a high level view of some of the 2013 guidance and how we’ve come in on that. We were able to improve our guidance in 2013, really bucking the trend as what we’ve seen in the industry for the last number of years and we improved the guidance a couple of times in a few cases and we’ve successfully met all of these targets.

During the first half of the year, we reduced our all-in sustaining cost guidance twice and we reduced total CapEx by more than 20% or over $1 billion. And so, we’ll release our final 2013 results and 2014 guidance next month but on -- first, the high level view, as I mentioned, we did meet our original guidance of between 7 million and 7.4 million ounces despite selling some assets and we also met our reduced all-in sustaining cost guidance for 2013 and we’ve also met our improved copper and CapEx guidance as well. So a highly successful year in terms of meeting guidance even as we reduced it a number of times in terms of cost.

I’ll spend a little bit of time talking about our 2013 gold reserves. They will be lower based on several factors. As we’ve said many times, we are only going to produce ounces that earn a high return that generate cash flow that meet return hurdles. And so, we’ve taken a conservative approach this year and we’re going to value our reserves at $1,100 per ounce as well as running the mine plans at $1,100 per ounce.

We’d previously indicated with 2012 reserves that a drop of $300 from the $1,500 to $1,200 would result in a drop of less than 10% at that point in time. So, we further dropped it to a $1,100 per ounce and ultimately that move to the $1,100 per ounce is more conservative. And it’s important to note that it’s not necessary linear as we move that price down.

So the 10% last year was based on reserves at that time, the mine plans at that time, inflation assumptions, the cut-off grades, the capital we are spending, the expansion, the sustaining capital, other costs etcetera. So now we are redoing those reserves at that $1,100 price. And so that as we highlighted in the third quarter, will result in reserve dropping, not surprisingly.

If we are going to be true to our discussion about being disciplined on capital and returns and we use a lower gold price, it does mean that we are exchanging ounces for higher returns, and that will impact our reserves. There are couple of other things that impact our reserves this year because of the focus on returns and capital discipline. And under the new mine plans which are being run at the $1,100 per ounce; ounces that don’t make money and some ounces that do make money but don’t meet hurdles that we need, they don’t achieve the acceptable risk adjusted returns; they have been removed from the mine plans. That means that many of those ounces will come out of reserves and go into resources. They are still there, we haven’t loss them. It doesn’t mean they won’t come back into reserves at hire gold prices because we are preserving the option to mine them in the future everywhere we can.

And then thirdly, we have sold some assets. We sold a number of mines which represented about 3 million ounces in our 2012 reserves and we also made the decision to close Pierina. And lastly, depletion in 2013, we produced between 7 million and 7.4 million ounces. So and such reserves from that depletion will decline as well, and aren’t fully offset necessarily by addition.

So with respect to the copper reserves, we’re using a $3 pound for price which is unchanged from last year and actually we expect to get a slight increase in our reserves at Lumwana. And so, as a result of these mine plan changes and the lower reserve price assumption, we also not surprisingly which we highlighted in the third quarter and I think there is an expectation that we will look at recurring some potential impairments at some of our operating sites.

In the third quarter, we identified the operating assets and the assets that were potentially most at risk from an impairment. And so we’ll be looking, working through those impairment calculations at year-end. And as a result of the temporary suspension at Pascua-Lama, we expect to record an additional impairment charge there at the end of the year. And you know that as we’re all too familiar that the multiples that we are seeing in the market as well have declined over the last year. So, we’re still working on those impairment tests and we’ll reflect the final amounts in our year-end financials which are due on February 13th.

So last year, we outlined this roadmap to improve and maximize cash flow at our highest cost mines and you see this slide here as to what we've done. We’ve taken further steps. This slide shows a considerable progress that we've made at all of these assets. And these changes are reflected in our new life of mine plans.

And a good example of this is Bald Mountain, where we focused on exploring the two highest value pits that we have instead of stripping more than a dozen that we had previously to increase production, again a focus on returns. And if it means less production, less ounces, then so be it. This will have a substantial positive impact on our net cash flow over the next few years while also maintaining the flexibility to go back to those pits to access gold in the ground sooner if the gold price increases and the return of capital targets are met.

So I think we’ve increased the optionality of the company while we’ve taken ounces out, they are still there, we have that optionality to go back. And ABG is making good headwind under its operational review. They’ve also set a target of $185 million in annual savings and are well underway in that process.

Porgera is a higher cost mine for us; it’s still over $1,000. So, we are evaluating changes to the mine plan there with a greater emphasis again on perhaps less ounces but higher return ounces. And as I mentioned, we’ve seen a dramatic improvement in Lumwana; and that’s one of the things I am most pleased about in our results in 2013.

So looking forward, high level again, our preliminary 2014 outlook. We do expect lower production in 2014. I don’t think that surprises anyone. We’ve sold 700,000 ounces of production in 2013 from the Australian mines. We’re closing Pierina; there is a 100,000 ounces. I talked about the potential for the 400,000 ounce decline from Cortez.

So Pueblo Viejo will be up next year, so that will offset that. But if you factor all of these changes in, it’s no surprise that our gold production will be lower next year. But our all-in sustaining costs are expected to remain among the lowest in the industry, even though we have reduced one of our lowest cost mines, Cortez by 400,000 ounces which does have an impact on our overall portfolio costs.

So, we look at CapEx that will be significantly lower, we had a peak in 2013 as well, particularly as we're only spending $300 million on Pascua-Lama. Copper production is expected to be somewhat lower with less ore and lower recoveries from Zaldívar, but overall, our C1 cash costs are similar to 2013. And we expect our tax rate as I mentioned to be above 45%.

So, let me spend a couple of minutes on Lumwana. We've made really good strides here. We expect roughly similar production levels at Lumwana in 2014 but at even lower C1 cash cost than we had in 2013. This turnaround has been very dramatic. There is sustained operating improvements and that's been a major accomplishment for our copper leadership team that we put in place just over a year ago.

If you look at this chart, you see our production and costs have improved since this management team was put in place. And they really [re-jigged] the mine plan. And we've done things like eliminating a large mining contractor, eliminating a maintenance contractor, bringing maintenance in-house, some shift change improvements, learning how to operate better during the rainy season. And availability has gone up on the truck fleet to about 80% from 55% previously. And you can see that uptick in production on this chart.

So, we're pleased with the process, but we're not done there yet. We're evaluating a number of other initiatives including plants efficiencies and I think we can really make this mine significantly better than what we saw after we first acquired it. And in 2013, you can see that we did improve our guidance overall in copper and that turnaround at Lumwana has made a big difference. We lowered the C1 and C3 cost guidance during the year. And as I mentioned, we’ve met those targets for 2013.

I’d like to also spend a little bit of time talking about something that was a big focus for us and focus for investors in 2013. Our financial position and liquidity has been something that has I think been an issue that has been somewhat holding down the stock and I think we addressed a lot of that with a number of things that we’ve done and the improvements that we made to the balance sheet.

First I’d like to emphasize that our underlying business is very strong, in the first 9 months of the year we generated over $3 billion of operating cash flow. We reduced cost and CapEx by $2 billion in 2013. Now we’ve got a $500 million target of savings. We extended our $4 billion credit facility to 2019 unanimously with all of our banks in the facility. We’ve lowered the cash outlay for Pascua-Lama and our overall CapEx in 2013 and also turned out $3 billion of debt. And once we had done all of that we’ll also reduce the dividend.

Once we’ve done all of the things that we wanted to in terms of running the business then we decided that we wanted to also improve the balance sheet with the $3 billion equity deal. That wasn’t done an isolation, it wasn’t a, well let’s just do this without having to really focus on improving the overall business and the operations of the company. It was done as part of holistic larger strategy following the actions that we took and had a significant beneficial improvement on our financial flexibility.

You can see that here with regards to our debt maturity schedule, that’s eliminated about $2.5 billion of debt repayments over the next five years. So our debt repayment schedule is very strong now. In next two years we only have $200 million of debt to repay and then in the next four years we have less than $1 billion, only $800 million of debt to repay. And our net debt has been reduced by over 20% and we’ve had a significant improvement in our credit metrics.

I talked somewhat about the $500 million cost savings, I think we have streamlined the business and we still got a lot more to go, but all the costs that we have in the company are under review. And you can see from this graph the buckets where we expect to realize those cost savings. We eliminated almost 2000 positions in the company, and that’s also having a dramatic saving on our cost.

We also changed the operating model, how we are running the operations in the business. Our goal is that highest level of operational excellence and we have the assets to do it, and we else -- then we needed to make sure we have the right structure.

We eliminated some layers, we have the mines, the large mines and then the portfolio of mines reporting directly to the COO and that’s going to also drive a lot of the cost reduction efforts. The organizational structure you see here has eliminated some of those layers, brought the assets closer to the COO, which is what we want.

Our core mines are now reporting directly to new COO that we just hired who started this week, Jim Gowans very capable experienced guy, 40 years of experience that is going to, I am sure be able to drive our strategy, our operating strategy very well. And by doing this we are eliminating other layers of administration. And we are managing the social issues and the environment et cetera separately and allowing the general managers to focus on running the mines well. And then have some of the other functions report into other people. And so the focus is getting the most out of these assets.

So just to wrap up, we've taken a considerable action I think to strengthen the company and I am very pleased about that. Our work isn’t done yet. We’re not finished; we've still got a lot more to do. But I think we've recalibrated the company, given ourselves a much stronger base. And I’d like to provide some insight on where we’re taking Barrick to improve shareholder returns.

We’re not going to bear from our course with respect to discipline capital allocation even if it means less production, even if it means less reserve. We started with some of the more of the low hanging fruit in the company to optimize our portfolio, but we need to continue to make the tough decisions with our new life of mine plans and we will make them even if it involves closing some mines or divesting of them. But we’re also going to still continue to maintain that option to access the metal in the future.

We’re going to run more and more scenario plans at various prices to identify the strategic options available to us to either downsize, upsize, accelerate, close or preserve cash depending on what environment that we’re in. So we’re going to have a more [agile] business model and more agile operating model. And we’re upgrading our business planning processes to do that. And I think our organizational structure allows that to happen.

We've set additional cost reduction targets. We’re evaluating additional options to drive cost down into the future. And we fully expect our all-in sustaining cost this year to be among the lowest in the industry.

And so from that solid base, from what we've done this year, looking forward we still have challenges in the industry. We’re going to continue to make the disciplined decisions that we have in the past and to put us in the best position to capitalize on the strength of what I feel is a tremendous asset base, some of the best assets in the business and to deliver returns in any gold price environment.

So that’s my presentation. I see that I haven’t left myself much room for questions, but Alec I don’t know….

Question-and-Answer Session

Alec Kodatsky - CIBC World Markets

We’ll turn it over to the crowed and we can make time for questions. Well, go ahead.

Unidentified Analyst

(Inaudible).

Jamie Sokalsky

We are using $1,100 this year.

Unidentified Analyst

(Inaudible).

Jamie Sokalsky

Well, that’s because -- the question is why we’re using $1,100 in our life of mine plan and I guess the reserves as well where I’d say 1,250 now. We need to make sure that we’re mining all of the ounces at the highest possible return. By leasing a lower number doesn’t mean that we ultimately can’t take advantage if the gold price is higher. We mine to the spot price and we mine for a return. We’d look to maximize the NPV of the mine. So, ultimately if we can make money at $1,100 per ounce, then we’re going to have a room if the gold price continues to drop, but we also have the leverage to enhance the returns on everyone of those ounces that we are producing. And if we can put in a more agile operating system and a business mine planning system like I was talking about, then we’re going to be able to react in any gold price environment and not lose those ounces if the gold price goes up. Yes.

Unidentified Analyst

(Inaudible).

Jamie Sokalsky

Yes. Well, in fact we are targeting to make -- have a much better free cash flow performance, it's obviously dependent on where the gold and copper prices go. But as we are in a position to do that, yes, we will be looking to pay down more debt. But also I think we do have the ability to reinvest in the business. We've got a great suite of assets, some of the best trends and properties in the world and great potential. I characterize 2013 as a bit of a defensive type year recalibrating the company and positioning ourselves. And as we look to generate more free cash flow in the future, then we'll pay down debt, we'll look to reinvest in the business. And ultimately the goal in the future is to get back to paying a higher, returning more money to shareholders. So, I think ultimately we've got a number of options available to us, but debt reduction is a priority.

Alec Kodatsky - CIBC World Markets

Alright. I think we will have to wrap up there, Jamie before this starts flashing anymore aggressively. So thank you very much.

Jamie Sokalsky

Thank you.

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