Barrick Gold (ABX) Q4 2015 Results - Earnings Call Transcript

| About: Barrick Gold (ABX)

Barrick Gold Corp. (NYSE:ABX)

Q4 2015 Earnings Call

February 18, 2016 11:00 am ET

Executives

Angela Parr - Vice President - Investor Relations, Barrick Gold Corp.

Kelvin Paul Michael Dushnisky - President

Shaun Usmar - Senior Executive Vice President and Chief Financial Officer

Richard J. Williams - Chief Operating Officer

Basie Maree - Chief Technical Officer

Matthew D. Gili - General Manager-Cortez

Andy Cole - General Manager-Goldstrike Mine

Rick Baker - Executive General Manager, Veladero

Analysts

Andrew C. Quail - Goldman Sachs & Co.

John D. Bridges - JPMorgan Securities LLC

Stephen D. Walker - RBC Dominion Securities, Inc.

Greg Barnes - TD Securities, Inc.

David Haughton - CIBC World Markets, Inc.

Jorge M. Beristain - Deutsche Bank Securities, Inc.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Barrick's Year-End and Fourth Quarter 2015 Results Conference Call. During the presentation, all participants are in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference call is being recorded on February 18, 2016.

I'll now turn the conference over to Angela Parr, Vice President of Investor Relations. Please go ahead.

Angela Parr - Vice President - Investor Relations, Barrick Gold Corp.

Thank you, operator, and good morning, everyone. Before we begin, I would like to point out that we'll be making forward-looking statements during the course of the presentation. This slide includes a summary of the significant risks and factors that could affect future outcomes of Barrick. For a complete discussion of these risks and factors, please refer to our most recent AIF filing.

With that, I would like to turn it over to our President, Kelvin Dushnisky.

Kelvin Paul Michael Dushnisky - President

Thank you, Angela, and good morning to everyone on the call. Thank you for joining us. I'm here today with our Chief Financial Officer, Shaun Usmar; our Chief Operating Officer, Richard Williams; and our Chief Technical Officer, Basie Maree.

You may recall that two of our mine general managers joined us on our last quarterly update call. That's something you can expect us to continue in the future. However, because they'll be present at our Investor Day next week, we have them on the line today rather than here in person.

Joining us are Matt Gili from Cortez; Andy Cole from Goldstrike; Ettiene Smuts from Pueblo Viejo; Jim Whittaker from Lagunas Norte; and Rick Baker from Veladero. They'll be available to answer any questions you may have at the end of the call, and you'll get a chance to hear more from them and others at our upcoming Investor Day.

2015 was a foundational year for Barrick. We began by refocusing the company around one overriding objective: to maximize free cash flow per share through disciplined capital allocation, operational excellence and a deep focus on talent.

We identified four key strategic priorities for the year and we made a commitment to stay focused on them and to do exactly what we said we would do. Our priorities were, number one, to streamline the business by embedding a lean, decentralized operating model; number two, to strengthen the balance sheet by reducing our debt by at least $3 billion; number three, to refocus the company on maximizing free cash flow; and number four, to optimize the portfolio to focus on our best assets in our core regions.

To recap on our progress on these priorities, first, we completed the implementation of our decentralized operating model, removing management layers between the head office and our mines. This has improved information flow and the speed of decision-making across the company, and it has helped us to reduce costs.

Second, we exceeded our $3 billion debt reduction target and substantially improved our balance sheet and liquidity position. Third, through greater capital discipline, operational efficiencies and cost management, we were able to generate $471 million in positive free cash flow in 2015 after several years of negative free cash flow. And we did so despite a gold price that dropped about 10% or $125 per ounce over the course of the year.

At the same time, we achieved a $33 per ounce reduction in our all-in sustaining costs for the year, from $864 per ounce in 2014 to $831 per ounce in 2015, well below our original cost guidance for the year. These savings were driven by lower capital spending, combined with reductions in corporate overhead and operating cost reductions.

At 6.12 million ounces, we met our updated gold production guidance of 6 million ounces to 6.15 million ounces adjusted for net asset sales. We also met annual production and cost guidance for our copper portfolio. And finally, we divested, all or part of seven non-core assets last year, further focusing our portfolio on our most profitable mines in the Americas.

The company is in a much stronger position today than it was a year ago, so it's not surprising that many of you would ask, what's next? I'd like to give you some insight on that now.

As I mentioned, our primary objective continues to be to generate and ideally grow free cash flow in any foreseeable gold price environment. To accomplish this, we are focused on maximizing margins at each of our operations and delivering free cash flow through efficient portfolio management. This will support a stronger balance sheet while allowing us to invest in our business and provide our shareholders with a sustainable dividend.

Our production will be measured by quality, not quantity. While we are producing fewer ounces today than we have in recent years, we are generating significantly more cash from these ounces, and we intend for this trend to continue.

Based on our current asset mix and before potential divestment, we expect to maintain annual production of at least 4.5 million ounces of gold through 2020. We have significant options within our portfolio to maintain and grow free cash flow beyond this point, and we will continue to assess alternative investments and opportunities which meet our return on invested capital hurdle rate of 15% and align with our strategic focus.

Our goals are to lower our all-in sustaining costs to less than $700 per ounce by 2019 and to reduce total debt to less than $5 billion in the medium term.

We are also working hard to create increased optionality within our portfolio that will give us more flexibility with respect to future operating and development choices, for example, through new technologies like TCM and a staged approach to developing our projects. Achieving these goals will take some time, but ultimately, we are positioning there to deliver industry-leading returns through the metal price cycle.

As we did last year, we set out four priorities for 2016. The first priority is to ensure we can generate free cash flow at a gold price of $1,000 per ounce. To support this objective, across the business, we have implemented a more consistent methodology for determining the pricing assumptions we use for budgeting and mine planning, the calculation of reserves, impairment testing, and assessing project economics.

Our 2016 budget has been prepared using a $1,000 gold price assumption while our long-term planning assumes a gold price of $1,200 per ounce. This ensures a focus on maximizing free cash flow in the near term while preserving optionality for the future.

Debt reduction also remains a top priority. You'll recall that we said the $3 billion target we set last year was the first step, not the final one. This year, we intend to reduce our total debt by at least $2 billion. We plan to do this using three levers: existing cash balances; free cash from operations; and non-core asset sales, joint ventures and partnerships.

Our third priority relates to redoubling our commitment to operational excellence with the launch of our Best-in-Class initiative, which we're implementing across the portfolio this year. Our operations are already among the lowest cost in the industry, but we believe we can do even better. You'll hear more from Richard later about the Best-in-Class program, but I can tell you that we're enthusiastic about the potential for improvement across the business and we are already seeing results.

And finally, we will continue to have a sharp focus on capital discipline. We have set rigorous criteria for capital allocation, including the 15% hurdle rate for new investments, all of which are evaluated by our revamped investment committee.

As you will have seen in our release, we've provided three-year consolidated guidance on production, cost and capital. This reflects our plans as they exist today. Over the next three years, our production is expected to be in the range of 4.6 million ounces to 5.5 million ounces of gold at progressively lower all-in sustaining costs. And as I noted, our objective is to improve upon this over time, with the aim of achieving an all-in sustaining cost below $700 per ounce by 2019.

Just before I turn things over to Shaun, I want to acknowledge the exceptional efforts of the entire Barrick team in delivering our 2015 results. They reflect the tireless efforts of thousands of people across the company.

With that, I'll let Shaun to walk you through our strong fourth quarter and full year results.

Shaun Usmar - Senior Executive Vice President and Chief Financial Officer

Thank you, Kelvin. 2015 was a critical year for driving change and delivering on our promises at Barrick. We're really pleased with how the entire organization rallied around our objectives to transform the business financially over the past year, and this is evident both in our 2015 results and beyond, as you've seen in the guidance.

We pulled every lever at our disposal, including greater capital discipline, to enhance capital allocation, reduce overheads, improve productivity and lower working capital. We also have a great mineral endowment, which represents one of the most powerful levers within our control for reducing debt and fueling our future growth potential. And Bassie will cover this later in the presentation.

Our efforts resulted in 2015 all-in sustaining costs of $831 an ounce, coming in well below original guidance of $860 per ounce to $895 per ounce and at the bottom-end of our lowered guidance of $830 per ounce to $870 per ounce.

Cash costs of $596 per ounce were well below the bottom-end of both of our original and revised ranges. When you strip out our fuel and currency hedges from both 2014 and 2015, which had a year-over-year impact of around $37 an ounce, and add about $15 or $20 an ounce in support services to the sites in 2014 since G&A wasn't allocated to the sites that year, our cash costs are down about $55 per ounce sold year-over-year.

In addition to meeting our gold production guidance, we also met our copper production guidance, and C1 copper costs of $1.73 per pound were below our original range of $1.75 to $2 per pound. The team at Lumwana did a great job last year, bringing down their cash flow breakeven costs, aided by the weak kwacha, and they're continuing to find opportunities to drive down costs.

At $1.5 billion, total CapEx was significantly below both our original guidance of $1.9 billion to $2.2 billion and our revised guidance of about $1.7 billion. These robust results allowed us to generate free cash flow of $471 million last year after backing out the $610 million in proceeds from the Pueblo Viejo stream that was subsequently used for debt reduction.

If we were to put 2014 and 2015 on the same realized price and grade basis, the year-over-year increase compared with a cash outflow of $136 million in 2014 would be $1.8 billion versus the reported improvement of $607 million.

The net loss of $2.6 billion in the fourth quarter and $2.8 billion for the year reflects $2.6 billion and $3.1 billion of post tax impairments respectively. As Kelvin indicated, we've implemented a more consistent methodology for determining the pricing assumptions we use for impairment testing, mine planning, calculation of reserves, and our project economics.

We've experienced significant volatility in this economic environment as evidenced by the 10% and 30% drop in the gold price and our share price in 2015, respectively. Against this backdrop, we therefore adopted a pricing approach to underpin our valuations which is informed through the statistical price moves over the past few years and sees beyond short-term spot price moves.

Our long-term gold price assumption represents an assessment of long-term consensus pricing and will only be adjusted based on fundamental shifts in the gold market. The impairment charges we've recorded are mainly related to our low metal price assumptions of $1,000 per ounce for 2016 and a $1,200 per ounce long-term price versus our previous long-term assumption of $1,300 per ounce.

On an annual basis, the impairments include just over $2 billion of goodwill related to the low metal price assumptions. The $1 billion related to asset impairments is primarily for Pascua-Lama of about $400 million due to the reduction in market comparable values used to value this project and Pueblo Viejo, about $390 million due to the low metal price assumptions.

The impairments impact to earnings was partially offset by a $110 million gain related to the sale of Ruby Hill and Spring Valley. While we certainly don't rely on higher prices to drive our business plans, we remain positive on long-term price fundamentals for gold and copper. With higher prices in the future, we would reassess the fair values of our long-life assets such as Pascua-Lama and Pueblo Viejo and could potentially reverse some of the asset impairment charges recorded.

We were clear at the start of last year that our core focus would be on prioritizing free cash flow per share instead of chasing ounces. And I'm pleased with how the company stepped up to the shift in emphasis, generating substantive cash flow for the first time in four years at the lowest price experienced during this period.

I want to note here that we did this through two complementary objectives and without compromising our longevity. We improved our cash margins in the short term while focusing on driving sustainability and longer-term value creation for the portfolio. These objectives are underpinned by a high-quality, well-capitalized asset base with the potential for high return growth in the future.

We're enhancing operating cash flow both through business planning and ongoing actions like Best-in-Class while continuing to drive down the consumers of that cash flow, including by reducing our holding cost at Pascua-Lama, lowering our interest expense and cutting overhead.

We're also optimizing our gross spend on higher-return, lower-risk options near our existing asset base while maintaining our other options for the future at the lowest cost possible. As a result, despite the $250 drop in our realized gold price from two years ago, we generated three consecutive quarters of free cash flow in 2015.

To put that in context, in order to generate free cash flow in 2013 we would have required a gold price of more than $1,600 per ounce. At the beginning of 2015, we would have needed a breakeven price of $1,350 per ounce before implementing our cash flow improvement actions. By the end of the year, we were free cash flow positive, below $1,100 per ounce.

This represents a 35% reduction in our breakeven price over the last two years. And this year, we intend to reduce further to $1,000 per ounce to ensure we can generate positive free cash flow at that price. We've achieved these results by aggressively managing our controllable costs as you'll see on the next slide.

Clearly, we can't control gold and copper prices, but there are many factors within our control that contribute to our cost of sales and uses of cash. As you can see, we did a lot last year to mitigate the more than $100 an ounce drop in our realized gold price and the 20% drop in our realized copper price. We did this through a combination of productivity gains delivered by the sites which were reflected in the cash cost per tonne processed and management actions to reduce overhead and exploration, closure and project-related expenses which are grouped in the other category.

The per tonne costs reflect operating costs, which are under the direct control of our site leaders, and improvements they made last year with respect to productivity and cost reduction, offset about half of the price decline. Operating costs are where we still see the most opportunity to reduce our cost structure and Richard will speak to this in more detail in a moment.

We've also done quite a bit to optimize capital in the last two years. While the majority of the 70% reduction since 2013, related to Pascua-Lama after the project was suspended that year, there were also significant cuts and deferrals made to sustaining and expansionary capital in 2013 and 2014 that were necessary in the lower gold price environment.

This has created somewhat of a bow wave of deferred capital in future years which was something we needed to deal with as a management team last year. And we were successful in doing so. We addressed this in a couple of ways. Firstly, by revamping our business planning and budgeting approach. The key change here is that our operating technical and financial teams are now fully and concurrently integrated in the process from the beginning, compared to the detailed but more sequential approach of the past.

The benefit of this is that we harness the best talent in each of these areas from the start, in conjunction with the business plans generated by the mine general managers, who ultimately are accountable under our decentralized model for maximizing value and managing the risks for their businesses.

This approach, along with site-specific cash margins bolt into the plans from their inception, ensure that the general managers developed their plans through the lens of ensuring enhanced cash margins at lower prices that would cover our corporate uses of cash; namely, taxes, overheads, funding our growth, paying dividends and the like, while preserving optionality at higher prices.

Some examples of the decisions made through this process included eliminating capital associated with the open pit at Golden Sunlight, focusing more on underground at Cortez and Goldstrike and removing capital for subsequent leach phases at South Arturo that aren't currently economic. By leaving marginal ounces in the ground, the requirement for associated items like tailings, lifts and maintenance disappear.

I want to be clear that what I've described is not high-grading or going after pockets of high-grade material. What we have done by leaving these marginal ounces in the ground is to raise the average mining grade in order to generate cash flow, and we've been careful to do this without sterilizing future optionality.

Secondly, we looked at our projects dynamically and assessed how we could accelerate funding in the event that prices would have been materially higher in the near term. We concluded that our project sequencing, which is now supported by more robust business plans, is appropriate for the current business outlook and is not capital-constrained.

In terms of our spending outlook, this year, we expect total CapEx to be in the range of $1.35 billion to $1.65 billion, lower than 2015 on reduced development capital at Veladero and KCGM and also reflecting the asset sales. Project spending for 2016 has been lowered to $50 million to $100 million from $100 million to $150 million last year. And we expect it to be at the low end of this range for the next two years.

Project capital this year largely reflects ongoing pre-stripping of the South Arturo deposit near Goldstrike and capitalized costs for permitting, engineering and construction activities related to the temporary solution for water management at Pascua-Lama as we transition the project into deep suspension.

The expansion capital for 2016 is primarily for feasibility and development work at Cortez related to the underground expansion project, and also for pre-stripping of the Crossroads open pit deposit, which is expected to reach production in 2020.

In 2017 and 2018, we expect expansion capital to increase as this work accelerates, and it also reflects some costs to improve throughput with additional ventilation at Turquoise Ridge.

For 2017 and 2018, we expect sustaining CapEx to be slightly lower than the $1.2 billion to $1.4 billion this year at about $1.1 billion to $1.3 billion. But in 2018, it will include about $175 million in development capital for stripping at Lumwana related to mining Chimi West stages 4 and 5, where the ore is deeper and has a higher strip ratio.

Turning to the balance sheet, we exceeded our debt reduction target of $3 billion in 2015 by repaying $3.1 billion through a combination of asset sales, free cash flow and new joint ventures. This reduced our total debt by 24% and our net debt by 28% in just one year.

Including the $610 million in proceeds from the sale of Bald Mountain and Round Mountain received last month, our net debt has now been reduced by 33% from the start of last year. As a result, our annual pre-tax interest expense will be cut by about $135 million per year, and some of this is reflected in our lower finance cost guidance of $690 million to $730 million this year.

In addition, we extended the majority of undrawn $4 billion credit facility up one year to 2021 and negotiated a financial covenant that better reflects our ongoing deleveraging measures. The net debt to total capitalization covenant requires us to maintain a ratio of less than 0.6. At the end of 2015, this ratio was at 0.44, and we expect it to improve as we make progress on our new 2016 total debt reduction target of at least $2 billion and our medium-term target to bring total debt below $5 billion.

Our deleveraging efforts have significantly improved our liquidity, particularly in the near to medium term as we targeted shorter-dated debt to clear the runway for the next several years. We now have less than $350 million in maturities due before 2018 and less than $100 million maturing between 2024 and 2032. About $5 billion or around half of our total debt is very long-dated maturing only after 2032.

Last month, Moody's placed the long-term debt rating under review. And in light of this, we've been asked whether retaining an investment grade rating is important to us. The answer is yes, and to that end, we set ambitious but attainable debt reduction targets last year, this year and going forward.

But of equal importance, we are focused on improving our cash flow and cash margins through productivity improvements and cost reductions delivered through our Best-in-Class program as well as a continued sharp focus on capital discipline. We made considerable progress in all these fronts that I just covered. So, we expect to do even more over time as we look towards driving our all-in sustaining costs down to less than $700 per ounce by 2019.

We believe we will be successful in our efforts. But if a downgrade were to occur, we would not increase the cost of borrowing under our existing public debt or our credit facility. While a downgrade could increase our borrowing costs if we were to issue a new debt, we've been very clear that we're focused on reducing our debt.

Turning to our financial guidance for the year, I covered CapEx and the interest expense components as finance costs earlier. And I should just note that our finance costs also include accretion and that the interest expense savings this year from debt reduction are partially offset by higher accretion expense mainly related to the Pueblo Viejo streaming agreement.

The guidance numbers on this slide are based on our 2016 budget assumptions of $1,000 per ounce. However, the tax range shown here is based on a gold price of $1,100 per ounce. At a $1,100 per ounce, our tax rate is expected to be 50% to 55% reflecting the greater contribution this year from PV, which is taxed at 57%. And at $1,000 per ounce because of nondeductible expenses such as Pascua-Lama, our effective tax rate rises to 133%.

As I mentioned earlier, we reduced our overhead costs last year. This was done through head count reductions and downsizing or closing regional offices, in line with implementing the decentralized model. We realized approximately $65 million in reductions to gross functional G&A and overhead costs compared to 2014, allowing us to meet our corporate administration expense target of $145 million after adjusting for severance and other one-time costs. And we expect to reach $100 million in annualized overhead savings in 2016.

Some additional context on this to help with comparing 2015 to 2014. At the beginning of 2015, we transferred most of the functional support services to mine sites in order to hold them directly accountable for the costs of the services they require to run the business, resulting in the allocation of some of our general and administrative costs to individual mine sites. These costs now form part of mine site G&A costs, which are included within direct mining and cash costs.

We've also reduced our exploration budget, but as Basie will cover, we have a strong focus on opportunities around our existing mines, where we continue to identify excellent potential for resource conversion at many of our operations. We'll assess this dynamically throughout the year depending on the quality of our targets, the cash available through our improvement efforts and the gold price environment. But we feel the guidance is appropriate for the current environment

I'll now turn it over to Richard to take you through our Best-in-Class program and our operating results.

Richard J. Williams - Chief Operating Officer

Thanks, Shaun. Our vision over time is to become the industry leader or Best-in-Class in the way that we operate and develop our existing and any future mines.

We believe that we've got some of the best assets in the world. But to be clear, we judge that they are not yet being operated at their maximum efficiency, as defined by what is possible across the industry and using all available and the latest technology. And this provides us with a significant opportunity for improvement.

To address this, and over the last six months, we've been rolling out a business improvement system called the Best-in-Class. This is a data-driven operating system that will maximize value creation from our operations by driving improvements in efficiencies and productivity, as well as sustainable reductions in costs and improvements in safety and environmental management across our portfolio.

It brings together into a single place all of our existing and future improvement initiatives such as those already identified in what we've called our value realization studies of last year, as well as those associated with the $2 billion cash flow improvement target that you'll be familiar with.

It's not just a top-down process. It's being built in tandem with the mine leadership and provides both them and us with a constantly evolving plan to close the gap between current performance and optimal performance at each site. It does this by exploiting opportunities to close where we currently are, so that's defined by the current system's technical limits in ways that are familiar across the industry. And we do it at all of our operations, while, concurrently, seeking any opportunity to deliver step changes in performance by system changes, i.e., changing mining methods, digitization or other such measures. As well as pulling forward in a structured way any new innovations across the spectrum with a particular emphasis on information management.

All of this is done while simultaneously investing vital time and effort in areas that are often forgotten and are the bedrock of any mining company, and that is the operators, their skills, and the frontline leaders and their skills. To drive this, we've developed a scorecard with concrete targets to reduce and optimize the intensity of labor, mining, energy and capital as measured against growth in revenue, improvements in asset efficiency, increasing operating margins, and the sites' annual short-term incentive schemes.

Progress towards these targets are reviewed and driven every week at our business plan review or BPR meetings, the weekly video conference that links all sites with the head office, and in monthly optimization, innovation, and talent development reviews.

As Kelvin and Shaun have mentioned, this program has been rolled out across our portfolio and is to be managed by a stand-alone business improvement group that I've stood up and reports directly to me and is headed by Michelle Ash, formerly at Acacia. She obviously will work with Basie Maree, the Chief Technical Officer, and Peter Sinclair, the Chief Sustainability Officer, and teams from Finance. And it's this process that provides the concrete support for our target to reduce our all-in sustaining costs to less than $700 an ounce by 2019. And we'll cover this in more detail in our Investor Day next week.

Moving on to our operating guidance. 2016 gold production remains at 5 million ounces to 5.5 million ounces and reflects about 1 million ounces in asset divestitures last year as well as lowering expected production from Lagunas Norte this year.

We've reduced our cash cost guidance to $550 an ounce to $590 an ounce from $596 an ounce in 2015. And this reflects lower than expected cost of PV on increased production and higher silver credits relative to last year, lower costs from Acacia and the sale of higher cost ounces, but carry higher average costs in 2015, as well as an expected positive impact from currency and fuel hedges at this year's lower rates.

We've also reduced our all-in sustaining costs guidance to $775 to $825 per ounce, based on lower capital expenditures and lower G&A and exploration expense that Shaun has outlined already. Although all-in sustaining costs that we've driven down by the Best-in-Class effort, the first half of the year is expected to be higher than the second half all-in sustaining costs, with the second quarter expected to be the highest cost of the year.

Turning now to the sites. Our Cortez mine led by Matt Gili has had an excellent year, significantly beating our original operating guidance for the production of 999,000 ounces, just short of 1 million ounces, at all-in sustaining costs of $603 an ounce, and this benefited from improved underground productivity and higher open pit grades and recoveries.

The guidance this year were 900,000 ounces to 1 million ounces at an all-in sustaining cost of $640 to $710 per ounce, which includes about 250,000 ounces of refractory ore that will be processed at Goldstrike. The higher expected costs in 2016 reflect increased sustaining capital related to water management projects and timing of open pit haul truck maintenance.

Best-in-Class initiatives for reference currently underway at Cortez include optimizing shift change sequencing, revamping fleet maintenance, improving underground capital efficiency, installing advanced process controls, and strengthening geo-metallurgical modeling. We'll provide an update on plans for the expansion of underground mining at Cortez at the Investor Day, as well as the results of the pre-feasibility study for the Goldrush project located within the Cortez district.

Moving across to Goldstrike. Production at 2015 was in line with expectations at 1.1 million ounces, but all-in sustaining cost of $650 per ounce came in well below guidance on improved underground mining costs, optimized haulage routes and lower contractor costs. Throughput and recoveries from our new and innovative TCM circuit, which doesn't use cyanide as you know, continues to improve with ongoing adjustments in line with expectations for the ramp up of a new technology. Still work to go yet but we're content with the progress at this point.

We expect to achieve design throughput of 11,000 tonnes per day by the third quarter of 2016. Production at Goldstrike this year is expected to be similar to last year, but higher all-in sustaining costs of $780 to $850 per ounce, reflecting increased sustaining capital for tailings expansion, water management and timing of underground equipment replacements.

Best-in-Class initiatives in 2016 are focused on supply chain cost reductions, optimization of Arturo pit hauling, maintenance improvements and overall equipment effectiveness of shovels and trucks. And we expect initial production for about 140,000 ounces or 60% share from South Arturo in the second half of this year.

Then moving across to PV. Our share of production in 2015 was 572,000 ounces at all-in sustaining costs of $597 per ounce. Production was impacted in Q4 by the failure of two oxygen plant motors in November, which affected autoclave throughput. Perhaps you'll all be aware. (33:47).

In terms of solving this, we're quite proud of how our new decentralized model worked well to resolve it quickly with full productive capacity restored in the late January with one repaired motor back in operation supported by portable compressors. The second motor has now also been reinstalled.

Our share of production in 2016 is forecast to be 600,000 ounces to 650,000 ounces at all-in sustaining costs of $570 to $620 per ounce. The mine brought forward autoclave maintenance activities in December to mitigate the impact of the unscheduled downtime and is currently treating higher grade ore in the first quarter, which was not processed that month.

Best-in-Class initiatives this year are focused on improving efficiency and throughput through ore blending optimization, labor intensity measures, increasing autoclave availability, and optimization of maintenance activities.

Moving to Lagunas. Lagunas Norte mine produced 560,000 ounces at an all-in sustaining cost of $509 per ounce in 2015. Costs were lower than expected primarily on lower sustaining capital spending, fuel and labor cost savings and decrease in royalty expenses. Production in 2016 is expected to be 410,000 ounces to 450,000 ounces at all-in sustaining costs of $570 to $640 per ounce. Lower production and higher costs largely reflect the transition to sulfide ore and lower expected recovery rates.

Best-in-Class initiatives there are focused on strengthening front-line management, increasing labor productivity and capital efficiency, outsourcing opportunities, increased carbon-in-column plant performance, and reducing cost associated with external services and consumables.

At our Investor Day on Feb 22, we'll provide an update on plans for the addition of a refractory ore processing circuit at Lagunas Norte, which could significantly extend the life of the mine.

Now moving to Veladero. It performed in line with production expectations in 2015 with better than expected all-in sustaining costs of $946 per ounce. It's expected to contribute 630,000 ounces to 690,000 ounces in 2016 at lower all-in sustaining costs of $830 to $900 an ounce on higher than expected production and sales volumes.

The increased production in this year, good news, reflects mining of higher grades, improved mining productivity, and improved inventory drawn down relative to 2015 through better operational management of the leach pad. Plus we're expected to benefit from the government's decision to lift import restrictions and eliminate the 5% export duty, both of which were announced in late 2015.

Best-in-Class work at Veladero in 2016 is focused on cost reductions related to supply chain and inventory management, better maintenance practices, mining productivity, and energy efficiency.

Now across to Turquoise Ridge. That mine significantly outperformed our expectations in 2015, with our share of production of 217,000 ounces at an all-in sustaining cost of $742 per ounce. The mine benefited from increased productivity and throughput, driven by improved equipment availability and change in mining method to fully mechanize the top cuts. These productivity improvements and others are expected to continue in 2016, allowing for greater mining flexibility and reliability.

Production this year is expected to be in line with the 2015 levels and slightly higher all-in sustaining costs of $770 to $850 per ounce related to increased sustaining capital for the water treatment plant and timing of equipment replacements.

Best-in-Class initiatives for 2016 will focus on operational efficiencies, economic optimization of mine design and evaluation of potential alternative rock breaking methods. As with our other projects, we will provide an update on plans to expand underground mining at Turquoise Ridge at our Investor Day.

Now turning to copper. Production guidance of 370 million pounds to 410 million pounds reflects our reduced 50% ownership at Zaldívar but doesn't include production from Jabal Sayid mine, which started up ahead of schedule in December of last year, as the mine will still be in the mill commissioning phase for part of the year. Our 2016 all-in sustaining cost guidance has been reduced to $2.05 to $2.35 per pound to reflect currency benefits and improved costs at Lumwana.

I'll now hand over to Basie to cover our exploration and reserve updates.

Basie Maree - Chief Technical Officer

Thanks, Richard. Our aim is profitable and sustainable long-term production. This we will achieve through our renewed focus in our mine drilling programs aimed at boundary (38:41) resource conversion to enhance our long-range mine plans while maintaining our momentum over the past number of years and our exciting global exploration progress.

We also have very active project study and execution programs underway to ensure we bring new projects identified through our drilling campaigns online as per our disciplined project capital guidelines.

Our efforts continue to focus on our core regions of Nevada and the Andean region of South America. Approximately 80% of the 2016 total exploration budget of between $125 million and $155 million is allocated to these regions and strikes a balance between near mine drilling and global exploration programs.

With respect to near mine exploration or Minex, and in line with our rigorous approach to capital allocation, we're applying increased focus to higher returns and lower risk brownfield opportunities. Our Minex programs will also benefit from standardizing its approach with our very effective Globalex system called BXS that has yielded discoveries like Lagunas Norte, Goldrush and Alturas.

We see strong potential to add reserves at Hemlo (40:27) at Turquoise Ridge and Porgera and at other operating sites which Rob Krcmarov will cover in more detail at our Investor Day. And that half of the Globalex budget is allocated to emerging discoveries like Alturas.

There is also excellent potential to discover new deposits in the Cortez district. For example, we are currently exploring a target known as Fourmile located one kilometer north of Goldrush. This area is geologically similar to the high grade Deep Post and Deep Star deposits in the Goldstrike area. Early drilling has intersected mineralization well above the average grade of the measured and indicated resource at Goldrush.

At the Alturas discovery in Chile, we have reported an initial inferred resource of 5.5 million ounces of gold. Our focus in 2016 will be to continue infill drilling and step out drilling to expand the resource. (41:24) to date continues to indicate that this deposit is geologically similar to the oxide mineralization at Veladero at an average rate of about 1.25 grams per tonne, and preliminary leach tests were very favorable as well.

With respect to project studies, we plan to spend about $50 million this year to advance the Fourmile project we've been studying and will now also add Alturas as a first key project. And we will continue to convert resources to reserves at this projects such as we have done at Cortez and at Lagunas Norte.

The current metal price environment also presents new opportunities to gain access to attractive exploration projects through earn-ins and partnerships. Evaluating these third-party opportunities will be a focus in 2016.

Turning to our reserves, we have estimated this for 2015 year-end and based on a two-tiered pricing approach using gold price assumptions of $1,000 per ounce until 2020 and $1,200 per ounce from 2021 onwards. This compares to 2014 when we used the flat price for gold price of $1,100 per ounce.

The two-tiered approach is part of our overall focus on announcing mineral resource management to create the best short-term and long-term value from our mines, which is a reflection of our emphasis on producing profitable ounces. This reflects our commitment that any new investment we make must be capable of generating a 15% return on invested capital.

As of year-end 2015, our proven and probable reserves modeled at nearly 92 million ounces. After depletion, we added 8.8 million ounces for drilling and cost reductions and a change in price. Of the 5.1 million ounces added from drilling and cost reductions, the largest additions were 3.5 million ounces at Veladero, mainly at the Cuatro Esquinas area, 3.5 million ounces converted to reserves in Deep South zone at Cortez, and 1.6 million ounces converted to reserves in the deep sulfide at Lagunas Norte. We also added ounces at KCGM, Porgera, Hemlo and PV.

For our resource estimation, we used a slightly more conservative price assumption of $1,300 per ounce compared to $1,400 per ounce in 2014. As of year-end 2015, our measured and indicated resource was 79.1 million ounces. Of this, 9 million ounces is attributable to the sale of non-core assets in 2015.

We replaced nearly all of the 8.8 million ounces converted to reserves for drilling and cost reductions most notably from additions at Lagunas Norte, PV and Cortez. We also added ounces at Veladero, Golden Sunlight and Porgera. The inferred resource of 27.4 million ounces includes 5.5 million ounces at Alturas, as mentioned earlier.

Our project pipeline has significant number of opportunities for the future, as you can see here. And we're progressing a number of projects through pre-feasibility and feasibility studies. We have substantially changed our approach to project development in the last year and are now focusing on what we call starter mine concepts where the project is to commence as a smaller low-risk operation requiring lower initial capital allowing for early project optimization which can then lead to self-funded expansions if justified.

We are going to take a rigorous review of the economics of each stage gate (45:07) and are prepared to redirect or even terminate the project through its very lifecycle should it not meet our technical or financial requirements.

I won't talk to each project on the slide, but some have recently been approved by the investment committee to progress to the next stage. The gold price in Lagunas Norte sulfide projects have moved into feasibility and Cortez Deep South will go before the committee very shortly. Alturas is in the exploration phase and is expected to have a scoping study completed by the end of this year. We'll provide more detail on all of our projects next week at the Investor Day.

On Pascua-Lama, our temporary suspension plan was approved by the governments of Chile and Argentina last year, and we're moving the projects into deep suspension. This has enabled us to significantly reduce cost from 2016 to between $80 million and $100 million from about $190 million the previous year.

These costs are mainly for water management, as well as the closure of the tunnel on the Argentina site. Beyond 2016, we want to decrease our holding process even further. The team at Pascua-Lama will be focused on developing an optimized plan in 2016 and will assess the spend when it's complete, but we've been clear that the project must ultimately meet our 15% return on invested capital hurdle rate before we would consider a new project program.

I'll now hand over to Kelvin for his concluding remarks.

Kelvin Paul Michael Dushnisky - President

Thanks, Basie. In closing, we've transformed Barrick over the last year into a company that is distinguished by a strong partnership culture and a decentralized structure with owner-managers who are deeply invested in the success of the company. We continue to be sharply focused on effective capital management and apply rigorous investment criteria.

We'll maintain strong liquidity going forward by ensuring we have a prudent cash position and by continuing to reduce our debt. We are fortunate to have some of the best assets in the industry, and we will manage them to deliver superior returns through the cycle by continuing to drive down costs and by active portfolio management who retains the best assets and divest non-core assets at the right time.

Our portfolio has excellent optionality with about 140 million ounces in resources and undeveloped projects, much of which can be leveraged by existing infrastructure. We expect to add to this over time given our track record of discoveries which we have successfully converted into cash flow. This provides our shareholders with exciting upside exposure.

There is still a lot of heavy lifting to be done, but we have the right foundation and the right team in place to do it. We look forward to providing more detail on our plans for 2016 and beyond at our Investor Day on February 22. Before closing, I want to thank the many investors, some long-standing, some newer to the Barrick story, who provided us with valuable feedback in 2015. We're grateful for your support and we intend to earn it even more.

That concludes our presentation for today. Operator, we'd now be happy to take questions. Thank you.

Question-and-Answer Session

Operator

Your first question comes from the line of Andrew Quail from Goldman Sachs. Please go ahead.

Andrew C. Quail - Goldman Sachs & Co.

Good morning, Kelvin and team. Congratulations on a very strong quarter and a very solid 2015. A couple of questions, first one is on CapEx. You guys have obviously given guidance in 2016 of $1.35 billion to $1.65 billion. I mean, taking the mid-point, it's pretty much in line with 2015. Given your, I call, robust and solid three-year guidance of production costs, what – can we sort of model or what do we expect for, say, CapEx post 2016?

Kelvin Paul Michael Dushnisky - President

Thanks, Andrew. First of all, thanks for the nice comments regarding the year. Regarding CapEx beyond, the guidance we gave, I turn to Shaun, he can give direction in where we think it will be.

Shaun Usmar - Senior Executive Vice President and Chief Financial Officer

Andy, hi. Look, we'll be covering some of this more on Investor Day, of course, in the next week. But directionally, when you start looking at particularly our sustaining capital on a dollar per ounce basis, certainly within the range that you'd see over those few years is what we'd be expecting, but I'm going to hand over to Richard, who I think can comment also on some of the business plans (49:46).

Richard J. Williams - Chief Operating Officer

Yeah, hi, Andrew. Nice to hear from you. On the capital going forward. We've got a plan with Shaun's outline come up in the Investor Day. But the Best-in-Class process will also mean it will be describing all of these things as we go forward. Some of the plans we've got in place today, the general managers are working on it in the way we're reviewing will adjust as we go forward. It's not just the cost of what we're doing, but that's obviously being pushed down as we negotiate with new suppliers, contractors and whatnot. But it's also going to be the plans that will adjust themselves. So, expect a little bit of dynamism, and I would say, at this point, expect to go in the downside rather than the upside.

Unknown Speaker

Right. (50:25)

Shaun Usmar - Senior Executive Vice President and Chief Financial Officer

What can you say on that? (50:25)

Richard J. Williams - Chief Operating Officer

I'm okay. Cheers.

Kelvin Paul Michael Dushnisky - President

You had a second question, Andrew.

Andrew C. Quail - Goldman Sachs & Co.

Yeah, I know. I suppose the – my second one is on cash debt. I mean, you guys have done a really good job over the last 12 months. And with your $2 billion target, is there a level of cash that you guys are comfortable with on the balance sheet or is it $2 billion or is it more? Is it less? Is there something that you guys sort of want to go past and – because you talk about paying down debt, I'm trying to sort of get – is it net debt or is it debt? And again, just sort of trying to decipher between cash and net debt.

Kelvin Paul Michael Dushnisky - President

Sure. Thanks, Andrew. Look, $1.5 billion to $2 billion is probably that number that will come forward. Shaun, do you want to add a little more to that?

Shaun Usmar - Senior Executive Vice President and Chief Financial Officer

Yeah, just kind of appreciating last year and just given the volatility in pricing, I mean, we are focusing on the things that we know that we control and we can deliver, so think of that $2 billion as a minimum target of total debt reduction in the year ahead. But that has to be seen in complement with the improvements to continue to generate cash. So, yeah, we've talked about it with you before. But as you've seen, we've produced the fewest ounces by, I guess, in many years, but more cash than we have as well on that and that will continue.

Andrew C. Quail - Goldman Sachs & Co.

That's it from me. Thanks very much, guys.

Kelvin Paul Michael Dushnisky - President

Thanks, Andrew.

Operator

Your next question comes from the line of John Bridges from JPMorgan. Please go ahead.

John D. Bridges - JPMorgan Securities LLC

Hi. Good morning, everybody. Congratulations on the results from your current operations. You've got these four reports which are coming through. When are we going to see those things? Because we need to know what sort of capital you're going to be spending later in this decade to continue this performance.

Kelvin Paul Michael Dushnisky - President

John. It's Kelvin. The three pre-feasibility studies and the one piece on Turquoise, we're going to be presenting those details next week at the Investor Day.

John D. Bridges - JPMorgan Securities LLC

Okay. And the detailed studies, will they come out concurrently or afterwards or?

Kelvin Paul Michael Dushnisky - President

Following.

John D. Bridges - JPMorgan Securities LLC

Following. Okay. And then, I take your point about leaving the lower grade material in the underground mines and that's helping you with your cost structure. But then, about a third of your reserves is sitting at open-pit mines where that's not so easy. When you are pushing your – the gold price to $1,000 for your reserve calculation for 2016, that presumably is pushing up your strip ratios. How is that being shown in your accounting?

Kelvin Paul Michael Dushnisky - President

Basie?

Basie Maree - Chief Technical Officer

Opportunistically (53:09) we're not really seeing a major increase in stripping ratios on our mines. The guidance to a lower reserve price and a mining guidance, as you say correctly, is really focused on bringing the best rates forward. Barrick has been focused on this for quite a few years and it really hasn't shown up in our reserve stripping and our mining stripping. So, at this point in time, it's not an issue for us.

Shaun Usmar - Senior Executive Vice President and Chief Financial Officer

Yeah John, you won't really see that in our accounting. That's not a feature.

John D. Bridges - JPMorgan Securities LLC

Okay. Maybe we can ask about that on Monday. Thanks a lot, guys. Good luck.

Kelvin Paul Michael Dushnisky - President

Yes. Thanks, John.

Operator

Your next question comes from the line of Stephen Walker from RBC Capital. Please go ahead.

Stephen D. Walker - RBC Dominion Securities, Inc.

Great. Thank you and good morning. Just two questions. First for Shaun, we talked in the past about freeing up working capital with the sale of non-core assets and then just tighter management of capital allocation to the mining assets. Can you give us an idea of what was squeezed in the way of cash or the working capital in 2015? And is there any more to be gained through working capital management in 2016?

Shaun Usmar - Senior Executive Vice President and Chief Financial Officer

Stephen, yes, it's always an important theme as you point out and throughout last year. And we said it was about a 40% reduction in working capital and a big reduction in source and space inventory, in particular. Then we'll continue to focus on this, but I'd like to get Richard to comment on some of the work that they've been doing particularly on the supply side.

And just one thing which I think you've – that I touched on is, as we go through this is, with our life of mine planning, we've looked explicitly at the stockpiles and, as you know, there's really only two large sources of stockpiles on our balance sheet, and that's primarily in, obviously at Goldstrike and at PV. So, those are – those will and are being included in the plans that will be worked on. But, Richard, anything you want to add?

Richard J. Williams - Chief Operating Officer

Yes. So, just to add a bit on what Shaun was saying. I mean, again, I may hand over to sort of Andy and Matt to talk a bit about Nevada both stockpiles and then supply chain management. But just to highlight what Shaun has outlined, we've got our new supply chain boss Mel Miller based out of Henderson in Nevada that's been driving down Shaun's outline. Any unnecessary supplies or obsolete inventories with very good work down in Veladero in Argentina. Obviously Rick Baker's on the call. He can talk to that.

Returning to stockpile management, there is some limitations in Nevada courtesy of the nature of the ore which means there's around about $1 billion worth of – is that right, Shaun – stockpile sitting in Nevada. And for that, actually, I'll hand over to Matt Gili and Andy Cole to talk a little bit about what they're doing for that down there. Matt, over to you.

Matthew D. Gili - General Manager-Cortez

All right. Thank you, Richard. And thank you, Stephen. So, we're talking about the stockpiles that exist in Goldstrike and remembering too that those piles at Goldstrike and Cortez are both refractory in nature. From the Cortez standpoint, 2016 will see a overall reduction in stockpiles because of the increased amount of oxide material and increasing the throughput to the oxide plant. Andy, regarding Goldstrike?

Andy Cole - General Manager-Goldstrike Mine

As far as Goldstrike stockpiles, those are – those long-term, lower grade stockpiles are really the reason why we pushed forward with the new technology of TCM. And as TCM comes up and reaches full capacity over the life of mine project, we will continue to work down those stockpiles.

Richard J. Williams - Chief Operating Officer

Thanks, Andy. Thanks, Matt. And just for one other guy on the call, Rick Baker, could you talk a little bit about your working capital management down there at Veladero? I know you're doing a lot on that as well.

Rick Baker - Executive General Manager, Veladero

Yeah. Thanks, Richard. As far as supply chain management, we made significant improvements in that in 2015, and we're targeting further reductions in 2016 both in inventory and on our supply side.

Kelvin Paul Michael Dushnisky - President

So, Stephen, hopefully that answers your question. You had another question as well, Stephen.

Stephen D. Walker - RBC Dominion Securities, Inc.

Yeah. Thank you for the comprehensive answer. Just on Pueblo Viejo, the effective tax rate this year is 57%, I believe was mentioned. And if I'm not mistaken, the deal with the government of the Dominican Republic for PV had a greater amount of cash in 2013 to 2016 period. I have two questions. What is the expected tax rate in 2017? And presumably, it'll be lower for the next couple of years. And secondly, has there been any discussions with the government of the Dominican Republic with respect to the expiry of the existing agreement and potentially changing of any of the terms?

Kelvin Paul Michael Dushnisky - President

I can – I'll take the first part and the second part of the question, Stephen. In terms of the actual agreement, it doesn't expire in 2017 or 2018. 2017 is the opportunity to revisit the MRT (58:36) calculation for the present schedule. But that agreement stays in place. We do have the ability, again, though, in terms of looking at the, after the first four years, what the MRT (58:46) payments are based on the past prior period. So, in terms of the effective rate, Shaun, do you want to...?

Shaun Usmar - Senior Executive Vice President and Chief Financial Officer

Yeah. Stephen, I think, just for, certainly, for guidance purposes, keeping a similar sort of range that we've been experiencing is the appropriate thing for this time being. So, what we've – as I said in my presentation, we do see a greater impact because of those earnings particularly at low prices. And we continue to look at opportunities for just tax rate in general in the portfolio. For the time being, that's what I would be probably using.

Stephen D. Walker - RBC Dominion Securities, Inc.

Thank you, Kelvin. Thank you, Shaun.

Kelvin Paul Michael Dushnisky - President

Thanks, Stephen.

Operator

Your next question comes from the line of Greg Barnes from TD securities. Please go ahead.

Greg Barnes - TD Securities, Inc.

Yes. Thank you. Richard, the $700 per ounce all-in sustaining target, that's a very aggressive number. Is that coming more from sustaining capital coming down or operating costs coming down? Can you kind of give us some sense of that?

Richard J. Williams - Chief Operating Officer

Yeah. Hey, Greg. Thanks for the question. And, yes, it is an aggressive target that we're very confident we're going to hit. Michelle Ash who's come on in to review what we've been doing up to now in terms of Best-in-Class, which we've outline in the brief early on was done in conjunction with the mines. So, it's been a team effort across the wave here.

We've identified this year, already, a couple of hundred million dollars' worth of savings that we're going after, and that's actually not in terms of capital deferments. That's actually stripping out real sustainable costs. And as we look forward through to next year and on, a couple of programs in the very early days that we're looking at on how we're going to be adjusting things through that next sort of 48-month period. As identified an additional $200 million (01:00:33) and this is being done with the mine analysis.

So, want to give you sort of texture on the IR Day on specifics of each of these things. But there has been quite a remarkable amount of opportunity identified through this process. And all of it's come from bottom up. And if you'll remember, Greg, a year and a bit ago we had the regions sitting on top of these mines. And things were running slightly differently.

And so, as a result of getting Andy, Matt and the others to sit and say, all right, let's have a really good look at how we can strip out any waste that we've got in terms of operating efficiencies, adjust how we're organized, bring in new systems and then have at it, they've actually come up with some pretty remarkable opportunities themselves. And as a result of central advice as well as support, and Michelle, Basie and others are providing that from top down. We're actually seeing some really remarkable changes already this year, a lot of which will come out on the IR Day.

So, fundamentally, Greg, my view is, it's aggressive, but I'm looking at a whole series of things that are achievable and the only thing that will stop it happening really, to (01:01:43) be blunt, is a failure of leadership either at the mine site level or at our level which clearly we're not really interested in tolerating. So frankly, it's looking pretty good.

Greg Barnes - TD Securities, Inc.

Okay. Thank you. That's all on you then, Richard. Just a follow-up. You had a really strong Q4 with lots of momentum on the production side. So, last year, forecasting to a 45 to 55 waiting (01:02:06) first half, second half. Are we going to see a reverse of that this year, so you see stronger production in the first half and weaker in the second half?

Kelvin Paul Michael Dushnisky - President

It's reasonably balanced. In fact, Greg, throughout the quarters, I think we're about maybe 100,000 ounces or so higher in Q4. But this year as opposed to last year, it's relatively smooth through the quarters.

Greg Barnes - TD Securities, Inc.

Okay.

Shaun Usmar - Senior Executive Vice President and Chief Financial Officer

(01:02:25) Actually, you'd see about half the volume effect being sort of more back-end weighted, but it is a lot smoother.

Greg Barnes - TD Securities, Inc.

What was that Shaun? Sorry.

Shaun Usmar - Senior Executive Vice President and Chief Financial Officer

I said it is a lot smoother but it's about half the volume effects weighted toward the second half of the year. Q2 is going to be probably our weakest quarter.

Greg Barnes - TD Securities, Inc.

Okay. Thank you.

Operator

Your next question comes from the line of David Haughton from CIBC. Please go ahead.

David Haughton - CIBC World Markets, Inc.

Good morning, Kelvin, Shaun, Richard and Basie. I got a couple questions. Firstly, just a little bit of clarity on your expectation of 10%, 15% return on invested capital through the middle cycle. Is that applicable to new projects? Or is it your ambition to put that measure against your existing operations?

Kelvin Paul Michael Dushnisky - President

The 15% hurdle is on new investment, David, and eventually the intent is it will be 10% to 15% during the cycle.

David Haughton - CIBC World Markets, Inc.

Okay. And through the cycle, I presume you mean scenario testing up and down from where we are today. Is that a reasonable way to think about it?

Shaun Usmar - Senior Executive Vice President and Chief Financial Officer

David, I think it is. But if you also look at our scorecard, it's reinforced through that. So, I think as we've touched on prior calls, there's not a lot we can do (01:03:43) same capital. But we certainly made sure that the go-forward investment will meet those hurdle rates and they're sort of risk appropriate for our needs. And then we're driving down cost and the things we've been focusing on and continue to do, obviously, we'll look to on a go-forward basis generate those sort of returns through the cycle.

David Haughton - CIBC World Markets, Inc.

All right. Shifting, I got two operational questions. First, Jabal Sayid, Richard was saying, is in production now. I didn't see the numbers in the guidance. What's required for it to be running through the P&L for you, guys?

Kelvin Paul Michael Dushnisky - President

Maybe I can comment, Richard. I mean, we're going through the ramp-up phase now at JS targeting the 100 million pounds production in 2017. But as we're going through the ramp-up stage this year, we didn't guide specifically on JS, David. Anything to add, Richard?

Richard J. Williams - Chief Operating Officer

No. Unless, at the moment, to actually get it sort of registered. There's a couple more of agreements required with our partner in Ma'aden and the local government to actually ensure that all the permits in places to declare that production valid. So, at the moment, we're basically at the end of our sort of commissioning phase really. And then a couple of more sort of permit and legal agreements were in place, and it will go straight to, as you said, into the P&L.

David Haughton - CIBC World Markets, Inc.

Okay.

Shaun Usmar - Senior Executive Vice President and Chief Financial Officer

That's at the end of Q1, maybe Q2 commercial production. But we'll be clear on it later.

David Haughton - CIBC World Markets, Inc.

Right. So, we may see it coming through at least in the second half of the year, but just with some uncertainly of time, you're just giving yourself some breathing space.

Kelvin Paul Michael Dushnisky - President

Yes, that's fair.

Richard J. Williams - Chief Operating Officer

Yeah.

Kelvin Paul Michael Dushnisky - President

Fair comment.

David Haughton - CIBC World Markets, Inc.

Okay. Over to TCM, so this is one of your newer projects coming up and running. I'm just wondering if you could give a little bit of a commentary as to what you're seeing there. Richard, you said it's going to get up to capacity 11,000 tonnes a day by the third quarter. I just wonder what you're seeing so far. Is it extracting the gold to the level of recovery that you've anticipated? And what sort of trajectory can we see it on through to full production?

Kelvin Paul Michael Dushnisky - President

David, we've got Andy Cole on the line at Goldstrike. So, Andy, do you want to deal with that, please?

Andy Cole - General Manager-Goldstrike Mine

Yes. Thank you, Kelvin. David, we'll be covering more of this on the Investor Day as well. But first, as with any new construction, you do see some design defects and engineering challenges, we've been working through that over the course of the year to eliminate some of those mechanical and design defects. As far as overall – and so, that's helping us ramp up the tonnage and getting the tonnage up there.

Because it is a new technology and even though we ran lots of pilot plant work and had a pretty good understanding of the chemistry from the lab and from those pilot plant demonstrations, we are seeing some differences in the full-scale commercial operations. So, we're learning some of those new launches. So, our focus right now is really understanding and optimizing, and our expectation, as Richard mentioned earlier, is we've had a pretty steady increase. We hit commercial production in the third quarter last year. We're up to over 80% of capacity. By year-end, we continue to expect that that go up – it continue to go up through the second quarter this year. We're at full capacity this year or by the third quarter of this year.

Recovery is following a little bit, but we expect to be – the recoveries are down about 8%, 10% to where we are predicting – had predicted and hope to be again by the second half of this year more in line with our predicted expectations.

David Haughton - CIBC World Markets, Inc.

And my recollection of those expectations was 85% (01:07:46) for recovery. Is that correct?

Andy Cole - General Manager-Goldstrike Mine

It's really dependent upon the grade that's running through the facility. So, at this point in time, we're running the lower grade, longer-term stockpiles, as I referenced earlier. And so, those grades are a little bit lower. So, on the material that's going through the plant right now, we predicted should be around 70%, in that neighborhood. So, we're a bit lower than that.

David Haughton - CIBC World Markets, Inc.

Righty-o. Thanks, Andy.

Kelvin Paul Michael Dushnisky - President

Thanks, David.

Operator

Your last question comes from the line of Jorge Beristain from Deutsche Bank. Please go ahead.

Jorge M. Beristain - Deutsche Bank Securities, Inc.

Hey, guys. Jorge from DB. I guess my first question is for Shaun. I'm not sure if I misheard you, but did you say that your corporate effective tax rate could be as high as 133% under a $1,200 gold assumption? And was that for the entire corporate or just for PV? I just wanted to clarify that.

Shaun Usmar - Senior Executive Vice President and Chief Financial Officer

Yes. Thankfully you – Jorge didn't hear me. So, I have nothing to – I wasn't very clear on that. Luckily another (01:08:51) $1,200 it's going to be over $1,100 an ounce or so. That sort of 50% to 55% range would be appropriate. But we started seeing it at about $1,000 an ounce. As I've mentioned in the presentation is that 133% or so that you referenced. And that's a point where the – you've got a very low cost operation with PV at a high effective rate. So, it has a greater weighting. We've got losses in the other part of portfolio and then you've got non-taxable expenses from Pascua-Lama and other areas that contribute to that sort of calculation.

Jorge M. Beristain - Deutsche Bank Securities, Inc.

So, got it. It's kind of a regressive tax, not a progressive tax. I just wanted to make sure that if we do start to model spot gold, we're not nipped in the bud by a higher than expected tax rate.

Shaun Usmar - Senior Executive Vice President and Chief Financial Officer

No.

Jorge M. Beristain - Deutsche Bank Securities, Inc.

Okay. And then the other question I have was just maybe on how you guys think about your application, a consistent application of your metals methodology. Obviously, the world is becoming very confusing with every gold company choosing different short and long-term gold assumptions, and I get that you guys are being conservative at a discounted spot, but then I look across your copper operations, where you're still holding fast at about $2.75 copper short term and $3 long term, significant premium for spot.

So, could you just walk me through why you're treating copper differently than gold? And could you just sort of update us as to – are we going to expect more write-downs at year-end 2016 if we're in a still $2 copper world by then?

Shaun Usmar - Senior Executive Vice President and Chief Financial Officer

Okay. Just to be clear, we're not using $2.75. We're using $2. So, I think, if you look through our material, you should find that it does ramp up to longer runs, three (01:10:33) over a five-year period. But, no, we're not – we're using a similar approach which we think is appropriate, not conservative but appropriate in this environment.

Jorge M. Beristain - Deutsche Bank Securities, Inc.

Sorry. I must have misread somewhere in all those footnotes I thought I saw around $2.75 for your reserves. That's what I was talking about, reserves.

Shaun Usmar - Senior Executive Vice President and Chief Financial Officer

(01:10:49) the reserves. Look, we'll continue to revise and to look at this. We stress test our portfolio as we work through. But certainly for planning and evaluation purposes, the price deck is (01:11:06).

Jorge M. Beristain - Deutsche Bank Securities, Inc.

Okay. I guess I'll see you guys next week in New York. Thank you.

Kelvin Paul Michael Dushnisky - President

Thanks.

Shaun Usmar - Senior Executive Vice President and Chief Financial Officer

Thank you.

Kelvin Paul Michael Dushnisky - President

Thanks very much, Jorge. And I guess at this point, operator, let's thank everybody for joining us on the call. I appreciate everybody's participation, and we look forward to speaking with many of you again at our Investor Day next week and, of course, updating everybody on our progress against our targets as we move through the year. So, thank you very much again for joining this call.

Operator

This concludes today's conference call. You may now disconnect.

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