Newcrest Mining Ltd. (OTCPK:NCMGY) F4Q10 (Qtr End 06/30/2010) Results Earnings Call August 16, 2010 8:00 AM ET
Ian Smith - CEO and Managing Director
Greg Robinson - Finance Director
Cathy Moises - Evans and Partners
Anna Kassianos - Austock Securities
Stephen Gorenstein - Merrill Lynch
Michael Slifirski - Credit Suisse
Cameron Judd - Morgan Stanley
Warren Edney - RBS
Welcome everyone to our full year results for Newcrest. I think everyone would agree that it is a fairly solid result for the end of the financial year. I'll be going through the introduction. Greg will guide us through the financials and the sensitivities, plus site guidance. Then I'll be going back over resources and reserves, exploration and then some Group guidance and a bit of a note and an update on the timetable for the Lihir transaction.
So the summary and introduction of financials; our underlying profit is up 58% to A$764 million. Our statutory profit increased a 124% to A$557 million. Our cash flow from operations is up 27% to A$1.3 billion.
We have a strong balance sheet, so we have negative gearing. And also, we have increased the final dividend to A$0.20; so a A$0.25 dividend for the full year. And in line with the guidance we gave last year, we're well on track to achieve the 2.3 million ounces in 2014.
As you'd appreciate, that is pre-anything to do with Lihir. So I'm just telling you that we're still on track to that original guidance point, but over the next few months we'll be giving you an update on the basis of the full integration, if and when it does come to pass. And cash costs to remain well within that first quartile going forward over the next five years.
Reserves and resources: The gold reserves increased to 47.3 million ounces, which was an increase of 11%. Our copper reserves had an appreciable uplift of 7.88 million ton, so up 69%. Resources increased to 83.6 million ounces and 17.25 million tons of copper - so appreciable uplifts. And when I go through the particulars of it, I think it's an affirmation of what we've been doing strategically in exploration, and that's diversification through developing a whole cohort of assets going forward.
On the growth pipeline, Ridgeway Deeps and Hidden Valley are both commissioned. Gosowong expansion is near completion, so that will be finished in the next month or so. Cadia East has commenced and on track and schedule. Gosowong's second mining front is progressing well, and I'll come back to that later when I'm talking to reserves and resource.
And Wafi-Golpu and O'Callaghan studies are well underway. In fact with O'Callaghans we're already up, we are talking to potential partners. So we're progressing our future growth pipeline as well as affirming our results.
I'd now like to hand over to Greg Robinson, our Finance Director, who'll be taking you through the financials.
Thanks, Ian and good morning everyone. In the financials, obviously Ian's gone through the highlights, very solid results. And with sales revenue increasing by about 11% during the year, EBIT/EBITDA margins very strong, nice increases there, 51% on EBITDA and EBIT margins of 40%. The results, net profit up 58% to A$764 million, the statutory profit up 124%, and the cash flow is up 27% to A$1.3 billion.
Looking at the revenue line, our gold production during the year was 8% higher. Our copper production was about 3% lower. Looking at gold, if you look at that revenue line, gold makes up about 75% of our revenue, pretty similar to last year. Gold sales increased 7%. Copper sales were down 7%.
And if we look at prices, the copper price more than compensated for the lower gold sales. So average gold price for the year was up 7% and the average copper price was up 18% to A$3.40. Gold and copper revenue therefore increased about 10% each, and obviously the strong copper prices compensating for that lower copper production and sales.
The average exchange rate for the year, we had A$0.88 this year, A$0.75 the year before; so obviously, much stronger currency, but stronger commodity prices with it.
Looking at total cost of sales, they reduced. So we had a good reduction with increased productivity, and that led to lower cost per ounce. In fact our cost per ounce this year was US$306 an ounce. I'll cover that a bit later.
So obviously the big drivers for us in lower cost per ounce for productivity, and then cost containment. And that's what I'll talk about in these next few slides.
So total cost of sales was down 4.2%, and that was driven by a series of cost containment measures, and also, the stronger A Dollar helped us.
So looking at mine production costs, very good containment here. We included within this cost, remember, two months of Hidden Valley and we came out with a number that was $1 million less than last year. So with all those productivity increases, we managed to keep mine production costs static to last year including a couple of months of Hidden Valley.
The big activities that benefited the group, there was lots of good cost initiatives within the group, but Gosowong we turned into an owner-miner underground, which was very beneficial including looking after our maintenance.
The Telfer maintenance scheduling really reduced costs and headcount containment there really improved things. We had much lower fuel costs and you see that in the breakdown there, but cost per liter of fuel declined from about A$0.98 a liter to A$0.78. So that was very good, lot of it also driven obviously by the strong A Dollar.
And we saw all of that activity going into other consumables; all the reagents etcetera, all with the strong Australian Dollar and still quite a low cost profile in those areas. Steady employee costs; marginal increase there, some of that was due to increasing our own headcount on our sites for the owner-mining etcetera, but again good containment on the employee cost side of things.
There are a couple of costs that increased utilities, power, liners and grinding material. The liners and grinding material came off a low cost contract, and has gone more to market rates and that's what you're seeing there. And the second one was, Cadia came off its long-term power contract, and we had a couple of months of the new Cadia price for power. So they are the reasons those power increases sort of flow through.
And as I mentioned, the strength of the A dollar was good for the growth on the cost side.
Looking at royalties and realization costs, again a good performance here. We had a lower TC/RC market for the year, and we had lower shipping costs. And that again was a mixture of A Dollar and just being able to negotiate lower shipping costs in the market; about 20% down here for the year.
The royalties were high as you would expect. With higher prices and higher revenues, the royalty prices came up about the same amount. So it was a good strong performance again from our folk in the marketing division.
Looking at cash costs after by-product credits, I mentioned earlier we've done this year at US$306/ounce. That's a significant improvement on last year, and still puts us well and truly into the lowest cost quartile for the market. Very strong cash margins, which you see in the EBITDA margins in the business.
The industry average has continued to climb. The latest numbers we have, US$521/ounce for the industry. So Newcrest is still very much very competitively positioned there.
EBITDA by operation; we'd just like to sort of show this to make sure that all of our operations are pulling their weight on a return on capital and cash flow point of view. And the really pleasing result here is looking at Telfer; had a really steady improvement on Telfer than last year. The EBITDA was $517 million. So that asset is now starting to really perform very well. So good performance across the business.
Just some of the other, sort of financial items; some of these are sort of the accounting items. Deferred mining expense was higher at A$79. I've mentioned in the years gone by that it's mainly related to the Cadia open pit, the swings and roundabouts there.
Cadia open pit is reaching completion in the next two years, and we have a significant amount of deferred mining sitting on the balance sheet that will be amortized over that period, and you'll see that within our one year forecast.
Inventories increased during the year; we had, obviously, production greater than sales. So we added to the stockpiles, both at Telfer and Cadia. We're adding some of those into non-current inventories. They are lower grade stockpiles that we'll be using more than a year out on the production side.
With the gold price increasing, obviously, there were some modest cost increases on that inventory.
Into the other items area, the fair value on QPs, we got rid of most of the QPs in the business around copper, because we actually hedge the copper shipment as we actually sell it. But we still have one month QPs around gold, and so most of that QP is around the gold price continuing to increase during the year, and that's benefiting from that QP.
We had the normal swings and roundabouts on concentrate debtors. The foreign exchange movements this year was a loss of A$15 million, substantially obviously less than last year.
R&D tax allowance, there's been a true-up for what we are claiming on R&D tax allowance for the year. And that's the reason I think some of the analysts will be slightly higher on our effective tax rate. And our rate is slightly lower than that because of these R&D claims.
Looking at transactional costs, we have booked A$12.2 million through the accounts for the transaction costs so far, and anything else we do on the restructure, assuming the transaction moves ahead, anything else that we do on restructuring, or rather, other costs will come through in the next half year. Mentioned that the difference, obviously between the statutory profit and the underlying profit is the continuation of the hedge losses rolling through the accounts and that's well illustrated in the detailed accounts, two years to go. This year will be the last of the significant numbers and the following year is just a small number. At that point you'd see underlying profit moving much more towards the same number as the statutory profit.
Depreciation and tax, just a quick mention on depreciation again; we've shown this within our guidance. But depreciation increases, it reflects the completion of some of the mines, Ridgeway Deeps Hidden Valley, the Gosowong Extension coming towards completion. These are higher CapEx mines and so the depreciation moves up with it. And the depreciation per ounce is now around A$175 an ounce. And again for the next 12 months, we'll show you that in the guidance area.
The tax rate, as I mentioned was lower due to R&D adjustments. From a cash perspective with tax, we continue to pay full tax in Indonesia. And we still have substantial tax losses in Australia that are available to shelter out our tax payments in Australia, still A$276 million that's a net tax shelter. And it should shelter our tax payments here for the next two years. And accordingly there will be now franking credits with the dividends over that period.
Moving into underlying profit; it would have really covered most of these movements. The last one there that's a material match is exploration. It's about A$25 million lower as an expense item this year. On a cash basis, we spent A$100 million again, roughly on exploration. The reason the expense is lower, is the exploration has been very focused on our development areas and our Brownfield Expansions. So basically, you've seen a higher capitalization, you'll see that in the balance sheet. There's about A$280 million worth of exploration capitalized on the balance sheet. That is really associated with our major areas Wafi-Golpu, Gosowong some areas of Cadia and Namosi.
Looking at investment capital expenditure decline from A$1.3 billion down to A$786 million. CapEx was very focused on our major projects Cadia East, Ridgeway Deeps, Hidden Valley and Gosowong. Hidden Valley and Ridgeway became operational during the year. The Gosowong expansion is nearing completion also and so that will go operational. And then when we look at future CapEx, and Ian will talk about that later, it will really be focused on Cadia East. And that was approved earlier in the year with a A$1.9 billion CapEx program.
Expiration expenditure was A$100 million and again, very focused on Brownfield and Province development. And the next slide really just has a quick illustration of where we spend that money. And you can see the predominance is again that southeast Asian focus, Australia, Indonesia, PNG, Fiji all associated with our major projects, Cadia East, Callahan's Telfer, Indonesia was Gosowong, PNG obviously moving towards Wafi-Golpu, and Fiji is the Namosi Project. So again very focused on those core projects.
Ian will talk more about the resource and reserve conversion. But pleasing to note that resource additions on a gold equivalent ounce added at A$4.80. So again, a very competitive rate of adding them to the inventory.
Looking at sources and uses, really the big story here for us is again cash flow at A$1.3 billion. We increased cash, obviously paid our dividends, exploration their capital, and we added cash to the balance sheet of about A$217 million in a net position at the end of the year. And that's illustrated on the following slide, which really shows us with now gearing during these last couple of months, we did go out and increase the liquidity facilities for the company.
So we've increased the bilateral loans from A$600 million to A$1.1 billion. And that's obviously linked to the Lihir Transaction. We've done it with our existing aid banks, each bank has an equal stake in that bilateral facility of A$137.5 million and it remains fully undrawn at this stage. Our cash flow going forward should cover all their major capital expenditure. And as a last point here, we have increased our dividends, gone from our final, from A$0.15 to A$0.20.
The record date will be October 1, we have made an undertaking to Lihir Gold, but that record date for the dividend will be after the implementation date for the Lihir Scheme. So it means that the Lihir shareholders will also benefit from that dividend. So the dividend payout for the year will be in the order, assuming the transaction moves ahead, will be about A$150 million for the company. And again, well within our cash flow forecasts and a low gearing outcome.
So the final slide on the financial side, just talks a very high level again about what it can potential look like going forward between Newcrest and Lihir as a merged entity. The book value of the company will be around A$15 billion. We will, in the scheme be paying out somewhere between A$500 million and A$1 billion, that's what we've set as the payout within the scheme. And within that range, our gearing will start somewhere around the 1% to 5% level. So still, a very strong financial base, very strong liquidity within the company and good cash flow forecast versus capital.
Now, just on guidance, Ian's going to talk more about the combined group outcomes later. But starting with Cadia Valley, production increases from about 500,000 ounces to 580,000 ounces to 600,000 ounces of gold. Copper is expected to decrease marginally; cash costs expected to reduce, stripping to increase and that stripping is associated with the open cut. And again, you'll see the specific numbers there on the table. I won't read them out. And depreciation will increase, again associated with a full year of production from Ridgeway Deeps as we start to amortize that fund.
Moving to Telfer; Telfer maintains a very similar range as last year for gold with slightly lower copper. Site cash costs increase marginally and that's associated a little bit with the higher energy and lighter costs forecast in that market, and the depreciation costs are expected to stay about the same range; so expecting another very strong year from Telfer.
Looking at Gosowong; Gosowong expects to have, again, a similar year to last year for gold production. Costs are expected to be just marginally higher and we expect royalty cost will also be slightly higher for next year. Depreciation costs increased again as we finish the full commissioning for the Kencana two mine, but again in line with the guidance we've given in the past.
Hidden Valley, there's nothing to really compare to for Hidden Valley. Hidden Valley continues to ramp up in the first six months, and it should be followed by a solid second six months of more stable production. The objective is to drive the production higher for both gold and silver, contain the costs and add to the reserve base. The management team, obviously have a very detailed action plan to deliver over that next 12 months.
Although, the start has been a bit slower than we expected, Hidden Valley remains a 10 year plus mine, and it's expected to produce very strong financial returns for Newcrest shareholders going forward. We still also believe Hidden Valley remains very perspective from both resource and reserve, and would expect additions in the future.
Cracow, I won't really talk for long about Cracow other than to say expect pretty much what we had last year. This year it continues to tick along in a very consistent way.
And then profit sensitivities, profit sensitivities haven't changed. This is obviously just for the Newcrest standalone business at the moment. We'll come back assuming that the Lihir transaction does move forward, and we'll really look at the sensitivities.
And with that I will hand it back to Ian.
Thank you, Greg. I'll go through the resources and reserves exploration and summary points. Gold reserves up 11% and you'll notice that this year the gold reserves are based on 750. So it lifted from last year's mark of 650 for our gold reserves, but we're still well behind the pack of the other people within the industry, that is our conservative position.
We want to stay in contact with the lead pack, we certainly don't want to be ahead of anyone else. So we are still conservative in the way we estimate our gold reserves. Now, the point I would like to make about gold reserves is Gosowong.
This year or the year just completed was a transition year for Gosowong. What we started to do is put a lot more emphasis on the discovery and the development for the second mining front. We've also decided to go after the Gosowong CapEx, so again at the original pit, still has some ounces in it at a lower grade.
With the Gosowong expansion, it gives us a little more flexibility and the way we run the site. So what we've done is taken in some of the tailings areas, which were run through in earlier days and clearly identified higher grade than should be in the tailings dams. We will be taking some of that back over top.
We've included the Gosowong cutback, so lower grade area is going in. But most especially we've proved up a mining method with the Toguraci North area, which will be the second mining front on a very conservative basis. So we proved the mining configuration of the mining stocking taking in a lot of dilution.
So what you'll see over the upcoming 12 months is the consolidation and hopefully the initiation of the second mining front with a finalized mining method, which will reduce that dilution. And that will lift the reserve grade of Gosowong over the year. So take that reserve grade for Gosowong as a transition unit.
Copper reserves up appreciably and you can see the effect of Namosi starting to come in. And we've lifted from A$1.75 to A$2 a pound four our reserve basis there. So still conservative compared to most people in the industry but we are lifting in line with what is the general industry trend.
Namosi over the next 12 months will be a consolidation point for us. We're going to pursue the higher grade areas around Waivaka and Wainabama, and start to spread out in our exploration effort. So basically what we've done at Namosi now is consolidate and have a very clear picture of what Waisoi is about.
We're going to go after the Waivaka and Wainabama area. All of those areas can be taken through one process plant overtime. So it's the progression of the Namosi into a more consolidated point, and that reserve from Namosi comes in what we understand of Waisoi now, which is a very clear picture about how you go about mining it.
Gold resources up to 800, so again we've lifted by A$100 over the course of the 12-month period, but still lagging a minor group within in the gold industry and the pricing they put on their resources. The other point to note is the expansion of the opportunity set that we have been showing.
So you're starting to see some fruition and some delivery out of the multiple exploration points that we have. And overtime, the expectation is that the percentage of our resource will start to grow out of several of those points. And then copper resources, again Moravia is starting to push in as a copper resource point to a fair degree, Namosi again in the resource point is an appreciable area, and then Cadia Valley around Cadia East especially.
So that 17.25 million tons of copper puts us in a good position, overtime in conjunction with our gold. The general over riding point on that, Greg made the point before that during the year just completed, I think we ran at 75.9% of our revenue from gold. The year before it was 75.6%, if the transaction that we're undertaking with Lihir comes to pass away point that it will, then we'll be lifting our gold revenues even further. And the copper coming in will be a supplement to that profile over the next 10 to 15 years going forward. So we really cover both sides of the economic cycle.
The additional resource is down about 95 million ounces of silver and then there's a rundown on the resource for. As I said before, we're at a stage now where we have started going out talking to potential customers with a fair bit of interest in the development of O’Callaghans as a joint entity going forward.
Exploration Achievements & Targets: Some of these were given and shared when we gave guidance last year. Just like to go over those as an affirmation point. We targeted that we'd do 15% more meters at 15% lower cost per meter. So in other words, we'd lift our drilling amounts without expending any more on exploration.
We managed to break that. So we delivered 15% more meters at 21% lower cost per meter. And really, the configuration and basis of it was that we went back to the market with a different type of contract, and that's working very well.
So we've now got some drilling experts that work with our contractors as they lift their productivity. That puts them in a more competitive position than the general industry, and we benefit as well.
You know, the thing about last year is that we increased our mineral resources by 21 million gold equivalent ounces at a cost of A$4.80 per gold equivalent ounce, which is very competitive in the total context for the industry. So this year, what we're targeting is 8% more meters at 10% lower cost per meter.
So we think that the productivity profile that we're seeing out of the way that we deal with contractors and the way that we apply our drilling expertise, will continue to deliver.
Production guidance overall is between 1.85 million and 1.95 million ounces for the year. And really what you're seeing here is a consolidation of what we'll be looking like going forward. Now these statements are on the basis that Lihir is a successful transaction. But in the longer term, you'll see Cadia Valley pumping out its 800-plus sales in ounces; Telfer sitting in that 650 to 700 sales in ounce mark; Lihir at 1 million ounces plus.
So basically a very conservative bottom end in the way of production. The first 2.5 million ounce plus area, we'll be sitting on the back of three very long life assets. And then you'll have a whole range, Gosowong, Hidden Valley, etcetera of other points to add and enhance production going forward.
Now I think you've seen announcements on Sumatra. There'll be some other announcements going forward, so we're still expanding our exploration base to build on that very solid amount going forward
The third tranche of the strategy is that Wafi-Golpu is now proving up to be a major district, and will lead over the next 12 months for a pre-feasibility etcetera through a point we hope where it will paint itself as a very substantial mine for a long period of time going forward, and Namosi will start on that treadmill as well.
So over time we'll have three very large assets pumping out production. Another two on the line, and then a whole host of other assets upto 0.5 million ounces each, including Bonikro that can enhance our total production profile.
Copper is in the range of 80 to 86 for the year, and silver will start to lift on the back of Hidden Valley, lifted production, to between 1.7 million and 2.1 million ounces. And the profile for the year will basically be fairly even, but the first half will be around 48% of our total production, second half 52%. And copper and silver will be a fairly consistent profile throughout the year.
Capital expenditures, Greg went over earlier and suggested, on the back of Cadia East mostly. The studies in construction will be progressing with Wafi-Golpu studies. Some studies around Telfer areas as well. And development, mainly around Cadia East again will sit between 75 million to 85 million for the year.
And our sustaining capital in that 100 to 110 range, which is where we've been for the last few years; so we've been able to contain our sustaining capital. So that gives a total of 1.275 to 1.395 in exploration in the same range as what you saw this year. So A$95 million to A$105 million spent on exploration.
So going back to that gold production graph, we gave some guidance that over the upcoming five years we'd get our production up to at least 2.3 million ounces. Well, we're on track to achieve that. And of course, this is well before any inclusion that comes out of the Lihir transaction. So that's an affirmation of that profile going forward.
What we're seeing with copper this year is actually the lowest copper you are going to see from us as a company. So we'll be down into that 80,000 to 86,000 ton range and then rapidly increasing up to around 130,000 tons of copper by financial year 2014. So that's actually in excess of what we forecast as a 30% increase in our copper production over the next five years.
And moving on to the LGL transaction, the meeting for approval of the scheme by shareholders on August 23, so next Monday. On the Friday of the same week, on the 27, the second court hearing to approve the scheme in PNG. And then the scheme becomes effective on August 30. So a fortnight from today, given a successful vote and approval by the PNG court, we'll be taking over the day-to-day management of LGL.
And the scheme consideration transferred to the LGL participants, so all the true-up on shares etcetera and the final wrapping up of the current board profile on the 13th of September. So basically two weeks from today, all going well, we take over day-to-day management, and then a short time after that, a fortnight after that the wrap-up of the total transaction.
The two points to note under the post integration results in guidance is that we'll be giving integrated guidance for the second half financial year 2011 because we will be going by the current financial years that we pursue, will be in February 2011. And then at the latest this time next year, we'll give a five year profile for the total integrated company.
So that's a good quick summary of a very successful year. Not only did we enhance our profit points and manage to contain costs, but we also put in place a very strategic plank for the growth of the company going forward. And really set the company up over the next 10 to 15 years to continue to grow the platform.
Are there any questions from within the room?
Ian Preston - Goldman Sachs
Can you just give us some idea around Namosi, what the parameters are you've used to bring it into reserve status? Then on the overall reserve, can you give us an idea of the sensitivity to changes in the gold price? So if you were to use it 12 quarter moving average gold price what would be the uplift in the overall gold reserve?
The major impacts around Cadia East, Telfer with a big porphyry type system of such as Waisoi. If you start to use a much higher copper price, then that grows appreciably as well. But the main affects are out of Cadia East and Telfer, not so much out of the epithermal as you'd understand. So we could pick up an appreciable amount by unburdening the copper price and constraints we put around Cadia valley. So it's not just sensitivity to the price. We also need to be fully cognizant of the footprint we're putting in place for the cave which is the constraint. So major growth in Telfer, Cadia East could be on constraint with price, but that's determined by the footprint for the cave. And that cave footprint is just about determined.
So even if we went up in price in the Cadia Valley, we wouldn't be expanding too much on the reserve bus. So now we're getting into a situation where Telfer, Waisoi are really the growth points if we lift the prices used on reserves. With reserves at Namosi, it really comes down to Waisoi, so we basically drilled out to an indicated status for the Waisoi pit area and put pit shapes around Namosi, Waisoi pit as well. So that's the basis of that reserve basis.
Overtime as I've flagged before, we want to start to get Waivaka Wainabama to that stage as well and that could provide configuration for a much more robust start up in configuration between the three points.
Ian Preston - Goldman Sachs
How much of the increase this year in the reserves was due the A$100 increase in the reserve price?
Sorry, this is Colin Moorhead who is our EGM of Resources.
The growth at Cadia East, all about 2 million ounces was driven with price. The rest was basically off the drill bit.
The Cadia East growth is now capped, because we got the final footprint. Unless we can extend the length not the depth of the Cadia East or body over time, but that would be a stepwise increase.
Sophie Spartalis - Macquarie
Just on the Lihir transaction, what do you see as sort of the quick wins over the next six to 12 months that you'll be focusing on?
We've given some outlines as to what the synergy savings should be. From we have seen so far, we're confident that we should at least make that number. I suppose one of the initial points is the amalgamation of the support offices. So the configuration of Brisbane going forward and there points around combined insurance, combined supply; some of the contractual arrangements that are in place, some of the maintenance profiles and how we go about major maintenance and sharing of those resources between sites.
So all of those points from the investigations we've been undertaking over the last couple of weeks have been confirmed. So we're very confident we're going to hit that number at least as a synergy positive.
Sophie Spartalis - Macquarie
And from an operational standpoint?
We have a range of operational points that we'll be looking at for Lihir Island, for Bonikro and Lihir O Pit going forward, a combination of the way that we're running Cracow, Mt Rawdon. But until we actually get full control of the company and actually sit down and go through those various operational points, we won't be giving any guidance on that. So you'll have to bear with us for a few months while we consolidate our view of the various options that we have going forward.
Hayden Bairstow - CLSA
Just a couple of questions from me, firstly Gosowong, just on the decision to go on with the pit expansion and cutback, does that impact gold production or is there enough of a throughput expansion to cover the lower grade going through the middle, and secondly, are we closer to a decision on Marsden and when that might come into the production pipeline?
Marsden is really which assets we want to bring to bear first. But the understanding of the Marsden deposit is now at a stage where we've got confidence around how we go about the mining method et cetera. So it's really over the next 12 to 18 months, a configuration of where it sits in the profile of the whole company, and whether we put resource into the development of Marsden compared to the development of other things.
Sorry, what was the first part of the question, again?
Hayden Bairstow - CLSA
Just on gold production at Gosowong and whether the pit cutback will actually see lower gold production going forward or it'll be sustained at the current rate?
I think at the end of the last quarter I gave some guidance and some points about we now have enough flexibility and throughput and capacity. So the expansion that we've undertaken at Gosowong is suggesting that we do have upside in the amount of tons we can put through the place. And even with variable grade we're seeing that 95% recovery point being maintained.
So what that means is that we are confident of that 450ish drum beat footprint for Gosowong going forward. As I said earlier, over the next 12 months, we will lift the reserve grade by the finalization of the top north area. But that 450-470 mark for production profile for Gosowong, we are very confident of going forward over the next five plus years.
Vincent Pisani - Shaws
Two questions; Ian, firstly, can you give us some sort of guidance as to how much having such a large bilateral loan facility actually costs you, even though it's not drawn? Secondly, we hear always from Catalpa they've got this mystery option over the other 70% of Cracow. How long is that option out there for, and has there been a price set as to a comfortable rate at which you'd be happy to part with the other 70%?
The answer to the second one is no. We haven't had those discussions at all with Catalpa. So I'm sure they're suggesting to persons at the moment that that might be a way for them to go over the future. But at this stage we haven't had those detailed discussions at all.
On the first point Greg?
Too much we can say. I think the liquidity facilities we think are appropriate to the company size and the size of projects we contemplate going forward. The line fees, I mean its all libel based funding, and it's in line with the market, but it's under confidentiality with the commercial banks.
Needless to say, they are very competitive rates, and we did go through a sort of extensive negotiation when we settled at those rates. They're higher than they were three years ago, is what I can say.
Your next question comes from the line of Cathy Moises of Evans and Partners.
Cathy Moises - Evans and Partners
I'm just wondering if you can give any clarity on the breakdown on the site-to-site for the CapEx for next year.
We tend to give the overall number, and that's the guidance that we have been giving over the last couple of years. Suffice it to say, the vast majority of the capital in the upcoming 12 months will be spent on Cadia East project. We came out and gave a good total amount on Cadia East, and most of that will be spent in this 12 month period and the upcoming 12 month period after this. So you can see that the vast majority of that capital will be spent at Cadia East.
Gosowong expansion running down in the next month; also Ridgeway Deeps finished, Hidden Valley commissioned, really suggests that most of our capital will be just around Cadia East. This is before the combination with Lihir.
Your next question comes from the line of Anna Kassianos of Austock Securities.
Anna Kassianos - Austock Securities
Just two quick questions; the first one is regarding the power costs of Cadia. You said you've just come off long-term contracts and that'll be increasing. What sort of proportion is the cost base and what sort of rates are you getting there, now that you're going to market? And the second question, just in terms of what would be the timing on review of, I guess of all assets in your portfolio, assuming you combine with Lihir? Would that be some time mid next year or earlier than that?
Second one first; at the latest as I said before, it would be this time next year. If we can come back to you with a detailed profile of what we'll look like over the next five years, we'll do that earlier. But I'm saying, at the latest, this time next year.
On Cadia, we've already locked in, and we took the opportunity and we picked the bottom of the power market last November to lock in for this 12 month period. And in the last two weeks we've locked in for a further two years. So we've actually locked to pay our costs away for this year and the next two years.
We think we've picked the low points in the market. There is an uptick from the price that we had before. Greg, do you know the percentage?
Certainly. First point is, it is embedded within our forecast next year. So you can sort of see where the costs are for Cadia, but it'd be about 20% to 25% higher than we had in our old contract price. But it is the pool price on the eastern seaboard. So that's where we're locking in with the market participants there.
So if you look at the lowest point that got to last November, it will give you a good indication.
Your next question comes from the line of Stephen Gorenstein of Merrill Lynch.
Stephen Gorenstein - Merrill Lynch
Ian, just a quick one on Wafi-Golpu, which seems to be shaping into a pretty impressive deposit. You mentioned before that over the next 12 months you might be looking at releasing some pre-feas. Will you be in a position to release any concept studies between now and then?
We are in the process of finishing the concept study at the moment. We'll be kicking off the pre-feasibility in October of this year. If you want some idea of what the concepts are looking at and what the size and configuration of various mining combinations could be, we'd be more than happy to share that with a group of people if you're interested just to give you some insight into what we're looking at for block caving versus open cuts. That's what we can share with you at the moment. If you want to pursue that, get in contact with Steve Warner, and we'll share it with a group of you.
Your next question comes from the line of Michael Slifirski of Credit Suisse.
Michael Slifirski - Credit Suisse
When you give us the next five year guidance early next year, will we see any new projects creep into that other than the acquired projects?
Over that five-year period, given that if we're going to start the pre-feasibility on Wafi-Golpu, and we hope to get that finished within an 18-month period, I would suggest that right at the end of that five year period you'll start to see some indication of what we think we can be doing with Wafi-Golpu at the end of that period.
Michael Slifirski - Credit Suisse
I think well within the five-year period we should have a pretty clear profile of what's going on with O'Callaghans. As I said, we've been talking to potential partners. The people that we've spoken to so far are quite excited about opportunities and optionality going forward. So in the next 12 months or so we should be able to come out with some clear indications of what O'Callaghans will look like during that five year period.
Michael Slifirski - Credit Suisse
Specifically on O'Callaghans, from time of finding a JV partner and doing a deal, how long would it be from that point to getting it into production?
We have consolidated our opinion of how you go about processing opportunities. And one of the reasons that we're talking to partners at the moment is, various partners have their own processing capability outside of Australia, and we want to work with the partners to how far we take it down the processing path before it's actually taken to another point.
So those configurations on processing, we've got a good handle on initial costings, and the mining O'Callaghans is fairly simple as well.
So cost profile was, we've got a pretty good handle on the total optionality going forward, but we really do have to sit down with potential partners and work out how far down the process stream they and us are willing to take at various points.
Michael Slifirski - Credit Suisse
Okay, thank you. Then finally, in terms of the raft of attractive looking growth projects that you've now got in front of you, as you schedule them conceptually, how long can you provide production growth for? How many years of production growth can you foresee from what's in the portfolio now?
Well, Cadia East is the 30 to 50 year. We'll be putting a lot of exploration into Telfer this year, and we think we'll be able to push that really out again in this time period. On top of that you've got Lihir around with at least 20 to 25 year production profile there. Hidden Valley is starting to throw up all sorts of exploration opportunities. Wafi-Golpu could be of a size that you're talking through the years. Plus, Bonikro has got 18000 square kilometers of some of the best West African land available.
So I think we have a sufficient profile to be well endowed for a period that is far longer than any other gold company I can think of.
Michael Slifirski - Credit Suisse
My question was more in terms of with what you can see in the portfolio now, how long can you continue to provide production growth rather than sustainability of production, but the growth profile I'm interested in?
Okay. You're talking about magnitude?
Michael Slifirski - Credit Suisse
I think the point of the company has never been, and I don't think we've ever stated that we want to become the biggest gold producer in the world. We just want to be the best gold producer in the world.
So our whole thrust going forward is not to get up to some magical 8 million ounce, 7 million ounce, whatever; is to have the best portfolio with the greatest margin, and that would be at a rate of at least 3 to 3.5 million. And that's all I can say at this stage, given that you want to go for the best ounces for the longest period with the best margins.
Your next question comes from the line of Cameron Judd of Morgan Stanley.
Cameron Judd - Morgan Stanley
Yes thanks Ian, just two questions; firstly, dividend policy. Are you able to comment on that going forward? Secondly, just on the costs associated with Lihir, assuming that that deal is done officially. And you said that you expect the costs to be incurred probably in the next half. Are you able to give an estimate on that as well please?
Now, at this stage all I can say that we are quietly confident of achieving at least the synergistic savings and most of that we'll transfer under a saving of production of Lihir Island. So we have some confidence there that Lihir Island could change slightly its cost profile.
Until we get in and really look in depth at the various potential production profiles going forward, I really don't want to be preemptive on giving any guidance as to cost structure for Lihir especially as an island of production for the next 20 years or so. So you'll have to wait another six to nine months for us to consolidate what we're going to be doing with Lihir Island going forward.
Cameron Judd - Morgan Stanley
Just on the dividend policy as well, please Ian?
I thought you'd forget those. Our policy has gone from A$0.05 a year up to a stage now where it's A$0.20 final and the A$0.05 interim. We will review the situation post the deal with Lihir, and it is really on our strategic roadmap for discussion next year.
So at the moment, we have been enhancing our dividend policy. We are close, getting to a point where we have to be more definitive with persons about our ongoing forward-looking policy. At the moment, our policy really rests around, at every six months interval we'll review our capital call going forward and our cash situation and make a stance on our dividends.
Now given what's happening within the industry and what's happening with various funds and whatever and investment, we think over the next 12 months we need to get a little bit more definitive on that. And that is certainly up for discussion.
(Operator Instructions) And your next question comes from the line of Warren Edney of RBS.
Warren Edney - RBS
Ian, can you give us some guidance on what's going to happen with the tax rate next year?
We've still not be paying tax in Australia next year.
Unlikely to be the big R&D numbers that you've seen in the last couple of years. So I would expect the Australian effective tax rate will move back towards the statutory rate. It was bit more of a one-off this year on that basis.
(Operator Instructions) And there are no further questions on the phone at this time. Please continue.
Well, thank you once again for your attendance today. I think as we started off saying this is a very solid result, but most importantly the last 12 months has really put us in a position where we have a great basis to move forward over the next 15 to 20 years. We have an unusual profile, in that we will maintain good margins as a company whilst we continue to grow our production profile moving forward. We have a range of exploration points that continue to deliver, and that gives us that unique profile of being a gold company that can sustain growth points and margin points over a long term.
So thank you very much for your attendance, and hopefully in a couple of weeks we'll be announcing the LGL transaction is fully finished. Thank you very much.
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