Barrick Gold (ABX) Q2 2016 Results - Earnings Call Transcript

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Barrick Gold Corp. (NYSE:ABX)

Q2 2016 Earnings Call

July 28, 2016 11:00 am ET

Executives

Angela Parr - Vice President-Investor Relations

Kelvin Paul Michael Dushnisky - President & Director

Catherine P. Raw - Chief Financial Officer

Richard J. Williams - Chief Operating Officer

Bill MacNevin - General Manager, Goldstrike

Nigel Bain - General Manager-Turquoise Ridge

Rick Baker - Executive General Manager-Veladero

Tim Dimock - Manager of Operations, Pueblo Viejo Dominicana Corporation

Robert L. Krcmarov - Executive Vice President-Exploration & Growth

Analysts

Andrew Quail - Goldman Sachs & Co.

Jorge M. Beristain - Deutsche Bank Securities, Inc.

John D. Bridges - JPMorgan Securities LLC

Stephen David Walker - RBC Dominion Securities, Inc.

David Haughton - CIBC World Markets, Inc.

Kerry Smith - Haywood Securities, Inc.

Anita Soni - Credit Suisse Securities (Canada), Inc

Operator

Hi, Angela Parr, Vice President of Investor Relations, please go ahead.

Angela Parr - Vice President-Investor Relations

Good morning, everyone. Our apologies for the technical difficulties we are experiencing. We are going to start from the top. So you will now hear me for the third time and certainly had time review by the scheduled slide.

So good morning, and welcome to our second quarter conference call. We'll begin with formal remarks from management and welcome any questions you may have thereafter.

Before we begin, I would like to highlight that during this presentation, we will be making forward-looking statements. This disclaimer slide includes a summary of the significant risks and factors that could affect Barrick's future performance and our ability to deliver on these forward-looking statements. A review of our most recent AIF will provide you with a more complete discussion of these risks and factors.

This conference call is being recorded and a replay will be available tonight on our website, barrick.com.

With that, I'd like to turn to our President, Kelvin Dushnisky.

Kelvin Paul Michael Dushnisky - President & Director

Thank you, Angela and good morning, everybody. Let me apologize as well for the technical difficulties. I would like to thank everyone for joining us today and I know it's a busy day for earnings calls.

I'm here today with our Chief Financial Officer, Catherine Raw; Chief Operating Officer, Richard Williams; and Bill MacNevin, who is recently appointed General Manager at Goldstrike. I want to start by reiterating our strategic goals. These goals drive everything we do and are reflected in our progress in the quarter. First goal is building partnerships of depth and trust with both external and internal stakeholders. This is a cornerstone of our culture and one of the most distinctive features of Barrick today.

You will have seen this in June the Zambian government replaced 9% royalty on copper production with a sliding scale royalty, which is 5% at current copper prices. This change stems in part from our ongoing dialogue with our partners at Lumwana, the Zambian government. We work together with our industry peers and the government to identify a solution that would allow the country's copper industry to flourish while still ensuring that Zambian people benefit when copper prices rise.

Our second goal is to produce industry leading margins in support of our ultimate objective of growing free cash flow per share. Our step in this regard is particularly evident in the quarter, our fifth successive free cash flow generation.

Our third and final goal is superior portfolio management. Through strong capital allocation, we aim to ensure that our investments generate the return we expect for our shareholders and we will not compromise on this. These strategic goals underpin our 2016 priorities. Growing free cash flow per share, our target is to generate free cash flow even with a gold price of $1,000 per ounce.

Continuing to improve our balance sheet, we plan to do so by reducing total debt by $2 billion in 2016 and over the medium term to below $5 billion. Continuously driving operational excellence is another priority. This is underpinned by our aspiration to reduce all-in sustaining costs below $700 an ounce by 2019. And finally, maintaining capital discipline at all levels of the business. Our Growth Group and our investment committee have complementary mandates in this regard.

So turning to the highlights of the second quarter, interacting our progress against the priorities I just outlined, our operations generated just over $0.5 billion in operating cash flow and $274 million in free cash flow. Strong cash flow generation has helped us to advance our debt reduction goal. Halfway through the year, I'm pleased to report that we're tracking well to our $2 billion debt reduction target, with $968 million repaid year-to-date.

Our production in this quarter increased to 1.34 million ounces at all-in sustaining cost of $782 per ounce. You will recall that we highlighted last quarter that all-in sustaining costs would increase in the second quarter, in line with our mine plans and capital sequencing. Based on a greater level of confidence for the remaining half of the year, we are narrowing our cash cost guidance range and reducing our all-in sustaining cost guidance by another $20 per ounce for the year. Furthermore, as we refine our capital budgeting process, and apply the best-in-class principle to sustaining capital expenditures, we have identified approximately $125 million in potential savings and deferrals for 2016. We've adjusted our capital guidance accordingly. In short, it was a very solid quarter and we're tracking well to achieve our improved guidance and our long-term goals.

As I mentioned earlier, our investment committee and Growth Group's mandates are aligned and complementary. Together, they help facilitate our goals to deliver low risk profitable growth. To maximize near term returns, we are investing in infrastructure and technology that, through our Best-in-Class program, have the potential to improve free cash flow from operations.

An example of our success in this regard is the investment in underground infrastructure at Turquoise Ridge that delivered over 50% more ounces at 15% lower cost between the first and second quarters. Our increased focus on Minex with a view to ore body extensions at our existing operations is also delivering near-term and medium term returns.

One example of this is the – in the near term is evidenced at Hemlo where expansions into the contiguous (5:29) property is expected to provide more consistent production across the life of the mines. Medium term growth for Minex is expected with the discovery of further satellite earth bodies such as those discovered at Arturo at Goldstrike, and Monte Oculto at Pueblo Viejo.

Also over the medium term, investments contemplated in our four organic projects are expected to deliver new ore sources, increased mine site production, as well as mine life extensions. Goldrush has the potential to deliver first production from a new mine by 2021 and a long-term all sustaining cost of under $700 an ounce.

The phased construction of a third shaft at Turquoise Ridge is expected to facilitate a potential increase in production at this mine to above 500,000 ounces per year, also at low-cost. Development of a sulfide processing plant at Lagunas Norte and the expansion of the Deep South at Cortez has the potential to extend mining at both those operations, and we intend to supplement our longer term growth opportunities by extending our track record of successful greenfield discoveries.

Our Arturo discovery in the Andes where we recently announced initial resource has the potential to be developed into a large scale, long-life mine on the El Indio belt, an area that's very familiar to us.

While Pascua-Lama, Cerro Casale, Donlin Gold, with the appropriate optimization, could be developed to provide new sources of stable long-term production in the Americas, we will continue to invest in partnerships on properties that we believe have high prospectivity as well as we did with the Arakaka project in Guyana. With a de-levered balance sheet, significantly improved cash flow and an equity valuation that reflects some of these achievements, growth opportunities across all timeframes could also be supplemented with discerning acquisitions capable of delivering long-term shareholder value.

So with that, I would like to hand over now to Catherine to provide more details on the quarter.

Catherine P. Raw - Chief Financial Officer

Thank you, Kelvin. Before I go into the quarter and the half year results in detail, I just want to summarize our approach to growing free cash per share sustainably. What we are trying to do is ensure that we focus on all of the drivers of free cash flow that we can control and not just one aspect.

As we all know in the past, as the gold price rose, the focus is on production and not cost, CapEx or working capital. In recent history, as the gold price has fallen, the shift has been to capital expenditure, cutting project CapEx, relooking at sustaining CapEx, and also looking at cutting cost more broadly. What we are now trying to do at Barrick is systematically tackle all of the drivers of free cash flow together. Understanding, for example, that there are trade-offs between those different drivers.

For example, a good one would be the impact on immediate cash flows versus long-term cash flows of investing in CapEx to grow production. Kelvin has already outlined strategically how we're approaching growth in production whether it's through exploration, through development or through potential acquisitions.

Richard will go on to cover how our focus on being Best-in-Class and seeking to improve productivity in operating efficiency at mine site, with the aim of course of increasing production and lowering unit costs. But this focus on Best-in-Class has also had the effect of putting greater scrutiny on our capital budgeting, which in part explains the further reductions that we're seeing in sustaining CapEx this year.

The other areas of focus, for the drivers of free cash flow are, for example, the ways in which we manage working capital. We're looking at supply chain more closely. We are looking at seeking to reduce debt thereby reducing our finance costs. To put this into context with $4.1 billion that we've reduced over the last 18 months in total debt, we've reduced our annualized payments by around $185 million.

We're also looking at our holding costs on projects. So this includes Pascua-Lama and we're looking and managing our (9:15) more efficiently. And finally, we are looking at G&A keeping a watchful eye on G&A and ensuring that the speed – that the spend there is focused and appropriate.

So I what wanted to leave you with is that our focus on free cash flow is not just on cost, it's on production. It's not just on production, it's not just on any one thing. But we're increasingly trying to look at this in a balanced way, systematically tracking all the drivers of free cash flow and ensuring that we understand the tradeoff between any one of those drivers. So that's the theoretical background.

Now let's look more into the numbers. Given our focus of management is on cash flow, I'm really just going to focus on these numbers today in the presentation. In Q2, our operating cash flow was $527 million and for the first half as a whole it was $978 million. Our free cash flow, or in other words operating cash flow less CapEx, in Q2 was $274 million. Our fifth consecutive quarter, as Kelvin has already mentioned, of free cash flow generation, and it really highlights the changing way in which we are operating at Barrick.

Looking at the variance year-on-year to Q2 and our cash flows, you can see that the greatest positive impacts have come from a reduction in our sustaining capital expenditure this year, some of which is timing, and we expect to see that unwind in the second half of the year and also why we now expect the third quarter to be our highest all-in sustaining cost quarter.

But if I look at the year as a whole and look at the way our guidance has changed from the beginning of the year to what we're releasing in these results, about a third of the change has come from actually removing capital from our budgets. Some of that is through improved contractor rates, improved input assumptions and improved overall timing and assumptions for the projects as well as change in scope. The remainder then comes from plan adjustment, Best-in-Class associated maintenance adjustments and deferrals into next year.

Our operating costs have benefited from a combination of factors. We have seen the change in our sales mix year-on-year with higher production coming from our lower cost mines being beneficial to costs. Those mines have also had the benefit of high grades year-on-year which in turn has helped volumes.

We see lower input costs and better productivity driven in large part by our Best-in-Class program. Other positive impacts have come from lower finance costs as a result of reduced debt, I have already talked about that. But this has been offset by higher income taxes as well as some increase in (11:50) capital related to – an increase (11:53) some unsold gold at the end of the quarter. And then finally, of course, we can't forget that gold prices have helped year-on-year.

Now, our free cash flow breakeven and what I mean by that is the gold price that we need to make – to break even or to make zero after the quarter was approximately $1,020 an ounce. So while we're not quite at our $1,000 target, we're still working towards that after the end of the year.

Moving on to the balance sheet, our total debt as of the end of the quarter was $9 billion. Our consolidated cash balance was $2.4 billion, leaving us with a net debt of $6.6 billion. Year-to-date, we've reduced our total debt by just under $1 billion, meaning we're approximately halfway through our $2 billion debt target for the year. Assuming prices remain at or around current levels, we're confident that we can meet our debt reduction target as in cash on hand or operational cash flow.

Then, finally, looking at our debt maturity profile and how that has evolved, with less than $150 million now due before the start of 2018, $5 billion of our $9 billion debt matures after 2032. So we feel we're in a very strong position with regards to our liquidity. And of course, don't forget we have a $4 billion revolving credit facility. While we remain focused on reducing our debt further, we'll do so with discipline, with the context of our business needs in mind and most importantly, on terms that are favorable to our shareholders.

So with that, I'll now hand it over to Richard. Thank you.

Richard J. Williams - Chief Operating Officer

Thanks, Catherine. As you can see from your slide, our drive for operational excellence is delivering the results that Catherine has described. With the exception of Veladero where we experienced challenging weather conditions, all of our operations performed according to plan in the quarter. And this solid progress confirms our confidence in our ability to deliver these operational improvements over the long term, enabling us, of course, to adjust guidance this year. But our aim is looking at below $700 all-in sustaining costs, as you know, in the near future.

Moving to introduce Cortez and Matt Gili is on the line. He has been leading Cortez through a very strong quarter, driven in part by a change in the oil type process, away from low-grade leach material into higher-grade oil from both the underground and open pit operations. Therefore, production guidance has been increased along with a further reduction in cost guidance for the year. In this, we're pleased say it's the second consecutive quarter of guidance improvements from Cortez, which you'll recall was the first site to implement our Best-in-Class program. And Matt and his team down there are leading the way for the company. Worthy of mention from me here – and Matt can follow up, if necessary, was the success that Cortez had in reducing the conveyor downtime with planned maintenance from an average of 76 days to just 12 days on the last maintenance cycle.

And as with a lot of these improvements, they were achieved by breaking down silos between teams, by drawing the maintenance workforce fully into the planning, thereby, capitalizing on their experience and expertise. And this approach is not limited to Cortez, nor it is limited to conveyor repair, and is being deployed across the Cortez operations as well as the whole organization.

Now, on to Pueblo Viejo, which itself led by Ettiene Smuts had a solid performance this quarter with both tonnes mined and processed in line with Q1 and the mine plan. Lower grade and less carbonaceous oil was processed in the quarter, which delivered – which allowed us to deliver higher gold recoveries, while silver recoveries improved to 60% with concerted improvements. And this mine is on track to meet full year guidance and potentially outperform, with some of our Best-in-Class initiatives currently underway are successful within year. Improving the performance and throughput of the autoclaves at PV has the potential to unlock substantial value for the mine.

We've given example of how these things are working. Each autoclave is required, recently, on average of 22 days maintenance shutdown every six months. The team bottom up, challenging and pushing past the technical limits of this particular design has devised a plan to increase autoclave availability by extending the period between planned maintenance shutdowns. They did this by delivering a number of critical modifications to the autoclave's internal structures. And having tested these, the initial results are positive, indicating two months of longer run time between maintenance being achievable, sustainable, and even the minimum that we can go to.

And if successful on all four autoclaves, this initiative has the potential to increase throughput at PV by 240,000 tonnes a year ultimately increasing production, a good example of Best-in-Class.

Now, on to Lagunas Norte, production is currently in line with guidance due to process improvements in the carbon-in-column plants and leach pads. Jim Whittaker has been leading the Best-in-Class process down there and it's focused on material movement through the primary and secondary crusher to debottleneck the plant's throughput.

The operations unit costs in the second half however are expected to increase by approximately 20% to 25%. And this is as a result of a lower proportion of stripping being capitalized combined with lower silver by-product credits being expected. But the impact of this is reduced by a higher level of production expected throughout that half of the year. But the combined effect of all of this means that the overall cash cost of the year are expected to be higher than initially budgeted. A number of reasons for this, but it's primarily a result of higher labor costs. As is following negotiations, our employee wealth participation increases as part of our ongoing discussion. This itself has been partially offset by reduced operating costs over the year.

Development initiative over the quarter has focused on the Phase 6 leach pad expansion, which was successfully completed under budget. Over the large scale project such as this, led by Jim Whittaker, who should take the credit for this, it is particularly pleasing that with 2.3 million man hours expended on the project not a single LTI was recorded.

Moving down to Veladero, Veladero has been buffeted by severe weather. 29 days of such weather impacted road access, mining rates and processing levels during the quarter, even though we budgeted for eight days of severe weather. So you can see what the issue was.

This being the most challenging weather event since 2007 and as the events are preventing 8,000 ounces from being sold in this period. Given the significant effect of the weather, we don't expect to make the ounces up by the end of year and we've adjusted guidance down where there's a result, although, Best-in-Class and other efforts will continue to work on that.

On a portfolio level, the affect of what's happened at Veladero is offset by production increases in Nevada where we are producing at lower costs, as you know. With the improvements to mine planning at Veladero, the favorable macro environment for costs and the positive impact of Best-in-Class, cost guidance remains unchanged.

Now, going to Turquoise Ridge, Turquoise Ridge has done well. It's a great example of our successful efforts to increase throughput while maintaining costs to achieve significant productivity improvements. Strong performance across all levers with significant increasing gold produce combined with reduced cash and all-in sustaining costs is the story.

Gold was up 60%, from 50,000 ounces in the first quarter to 79,000 ounces in the second quarter. Similarly, cash costs were down 20% to $4.86 an ounce, and all-in sustaining costs down 15% to $6.21 an ounce from the previous quarter. And you recall in the last call, we outlined our focus area for Best-in-Class and they included improvements to capital labor and planning efficiency.

And to give you an example of this, in this quarter a number of these were delivered at Turquoise Ridge. Increased number of mechanized top cuts which has resulted in more consistent oil flow from the mine on a month to month basis, change in the shift change increasing face time, improved maintenance practices, increasing equipment utilization, and optimized development plan, reducing drifting and stripping.

Combined with improved ventilation from earlier investment that allowed throughput increases, the combination of all of those efforts has delivered the results that we've outlined, I am pleased to say.

So I'll now welcome Bill MacNevin to his first earning call as the new General Manager of Goldstrike mine. Over to you, Bill.

Bill MacNevin - General Manager, Goldstrike

Thanks, Richard. Goldstrike continues to perform in line with guidance and expectations. Gold production was up 5.6% from 249,000 ounces in Q1 to 263,000 in Q2 and this was primarily driven through higher grades (22:04) 5.5 from the previous quarter. Improved weather facilitated increase mining tonnage, and we're up from 16.7 million tonne in Q1 up to 18.2 million tonnes.

And operating costs declined, with lower open pit mining costs and reduced underground contracted costs. Increased strip at Arturo is on track and we expect to deliver first commercial production early this quarter. Regarding the TCM circuit, focus in Q2 has been on rectifying the physical issues impacting circuit performance and this is now adding significant value. Through these changes and focus on operations controls, the system is stabilizing and performance continues to improve. This is seeing recoveries go up, and we're getting considerable better alignment with predicted recoveries.

Now, Best-in-Class is our approach at Goldstrike for our improvement and is focused across the whole property. The story I will tell today is a great example of that. Historically in that open pit, we had a perceived technical limit on our oil truck utilization of only 79%. In pursuit of Best-in-Class performance, this was challenged utilizing staff across all levels of the organization, and changes were made. Excess trucks were shut down and relief drivers were designated to keep these trucks operating through breaks, when traditionally equipment would simply be packed up. With this, to support there's a series of modular break rooms were put across the mine in strategic locations and this supported that process and looked after our people. So since the start of the year, this has seen some very impressive results.

The mines achieved a 6% improvement in oil truck utilization and now we're tracking at 85% or higher. What this has meant is that from operating with a unit mining cost of $1.40 per tonne at the start of the year, we've now reduced that down to $1.25. And through the efforts of not just this and many other things we're focusing on, we're pushing to take that lower again.

Thank you, Richard. I will hand back to you.

Richard J. Williams - Chief Operating Officer

Cheers, Bill. And we're on to Lumwana now where you just come from. Now, it's interesting to note that Lumwana just like what you've been describing at Goldstrike has had a steady performance in Q2, led now by Sam Ash.

And the way the (25:03) mining costs in the quarter increased with higher stripping. Mining costs per tonne were on target at $2.70 per tonne. The mill relining operation in the quarter impacted tonnes processed, and therefore, unit costs. But overall the mine produced in line with budgeted costs. In addition, the lower royalty structure signed into law in early June, we project will clearly have a positive impact on all-in sustaining costs in the second half.

Moving from Lumwana down to Jabal Sayid. As was recently announced by our joint venture partner, Ma'aden, Jabal Sayid achieved commercial production on the 1st of July. During the ramp-up, as you would expect, unit costs will be higher and will not be typical of steady state operations. In that respect, we believe – we expect, forgive me, all-in sustaining costs to be at $1.65 to $1.80 per pound over the life of mine. However, during this first six month ramp-up period, JS is expected to produce 20 million to 40 million ounces of cooper and all-in sustaining costs of $2.80 to $3.10 per pound.

This production will ramp up further to 100 million pounds in 2018 once underground development has been completed in the second half of 2017. With 50% of Jabal Sayid's production attributable to Barrick, full year copper production guidance has therefore been increased to 380 million to 430 million pounds to reflect this change. Total copper, all-in sustaining cost guidance hasn't changed across that group.

Okay. I'll hand back now to Kelvin to summarize, wrap-up.

Kelvin Paul Michael Dushnisky - President & Director

Thanks, Richard. Our improved guidance demonstrates our progress year-to-date and our increasing confidence in the operational performance of our mines. We're narrowing our cash cost guidance, reducing the top end by $10 an ounce as we improve productivity, particularly at the low-cost Cortez and Turquoise Ridge mines.

In addition, we've again reduced our all-in sustaining cost guidance across the gold portfolio to $750 per ounce to $790 per ounce for the full year. And finally, we've adjusted our copper production outlook upwards to 380 million to 430 million pounds for the year.

So in closing, I am pleased that at the end of the second quarter, we're tracking very well to our full year targets. We continue to deliver strong free cash flow and the outlook in this regard is improving. And with the combined success of debt reduction and improved operational performance, we're even better positioned to advance our multiple growth opportunities.

So, thank you, and now I would like to open up the call to any questions.

Question-and-Answer Session

Operator

Your first question comes from the line of Andrew Quail with Goldman Sachs. Your line is open.

Andrew Quail - Goldman Sachs & Co.

Yeah, morning, Kelvin, Catherine and Richard. Thanks very much for the update and congratulations on a solid quarter. Just a couple from me. Just, on the growth projects which you outlined at your Investor Day, just wondering if we – especially something like Turquoise Ridge which had a good quarter, would we be expecting some sort of update on any of those four, maybe especially Turquoise in the next quarter or two?

Kelvin Paul Michael Dushnisky - President & Director

Well, Andrew, thanks very much first of all for your comment. As we progress through the feasibility study, if things are material that surface that make sense to report on a quarterly basis, we will. But as you know, Turquoise is progressing through the kind of three-phased approach. Listen we have – as Richard indicated earlier, and in keeping with our relatively new practice over the last number of quarters of having our mine GMs and those responsible for the studies on the call, we have got Nigel on the line. And so maybe, Nigel, you can just give a word and update Andrew on the progress at Turquoise.

Nigel Bain - General Manager-Turquoise Ridge

Thanks, Kelvin. Yes, we still believe in our three-phased approach on upgrading Turquoise Ridge, and right now we're in that first phase. We've increased the ventilation. We're pretty optimistic of continuing in that growth. Does that answer your question?

Andrew Quail - Goldman Sachs & Co.

Yeah. It was more about the expansion, but I'm sure we'll get some update when it comes due. My second question is maybe to Catherine. Look, we've seen a couple of your peers talk about increasing dividends or – and one actually increased it. Is that something that's on the plate for Barrick in the next 6 months to 12 months?

Catherine P. Raw - Chief Financial Officer

Dividends are always on the agenda, but why don't I hand it over to Kelvin who can answer that question.

Kelvin Paul Michael Dushnisky - President & Director

All right. Listen, Andrew, Catherine is right. The board reviews dividends every quarter. Our intention is to return Barrick to being a robust dividend payer. But in the immediate term, investors have encouraged us. They're focused on debt reduction which we'll do. But again, board will continue to evaluate this on a quarterly basis and weigh dividends versus debt repayment and other capital allocations. So rest assured, we're focused on it, but at this point, we're going to continue to drive hard on debt.

Andrew Quail - Goldman Sachs & Co.

Okay. And then my last question is in conjunction with it. You obviously talked about making public the sale process or intending the sale process of KCGM. There's obviously been some reports in the first – the last few days about monetizing or selling stake in Acacia. Can you guys give a comment on that?

Kelvin Paul Michael Dushnisky - President & Director

Yeah, sure. Look, no change, Andrew, in terms of Acacia. Even clear it's a very valuable asset, but non-core. There will be a point in time when there will be sellers if we see full value, but otherwise, we don't comment on market rumor or speculation as you expect.

Andrew Quail - Goldman Sachs & Co.

Okay. Thank you.

Kelvin Paul Michael Dushnisky - President & Director

You're welcome. Thanks very much.

Operator

Your next question comes from the line of Jorge Beristain with Deutsche Bank. Your line is open.

Jorge M. Beristain - Deutsche Bank Securities, Inc.

Thank you, guys, and congratulations on a solid quarter. I guess maybe just following up on the earlier question. You can't comment obviously on your sales proceeds, but they're in the public press. But if one was to occur, does that change anything on your balance sheet equation in terms of perhaps starting up growth projects again, I'm thinking more Pascua-Lama or any other of your JVs?

Kelvin Paul Michael Dushnisky - President & Director

It doesn't really change anything in the sense that we're progressing the growth project in any event. Those projects and feasibility, Turquoise is now out of it. The other work we're doing on Alturas, Goldrush, et cetera. So the non-core asset sales that maybe contemplated really won't make a change. We're going to move those forward. Of course, we're using the same metrics, $1,200 long-term gold price and the same internal hurdle rate for those investments. So I wouldn't link the two.

Jorge M. Beristain - Deutsche Bank Securities, Inc.

Okay. And then just maybe a technical question on Veladero, seeing as you incurred these 29 days of weather, you had budgeted eight. Is the gold that's been effectively lost for this year from weather, does that get made up in next year, or would you simply now be budgeting a more conservative weather days budget into 2017?

Kelvin Paul Michael Dushnisky - President & Director

Listen, Rick Baker is on the line, GM at Veladero, and so I will turn that over to Rick specifically. Thanks.

Rick Baker - Executive General Manager-Veladero

Thanks, Kelvin. Jorge, thanks for the question. Yes, some of the ounces will float over into 2017. As you can imagine, with the weather impact, it floats things backwards, so December floats them to Q1 of 2017. And we will review the number of weather days that we use for planning and budgeting going forward as a result of the storm. Noting that as Richard noted, you have to go clear back to 2007 to find a storm of the same significance in the history of Veladero.

Jorge M. Beristain - Deutsche Bank Securities, Inc.

Thank you. And if I could just get one last one in. On Pueblo Viejo, you talked about this, the new experimentation with the autoclave setup. And you did mention on a tonnes basis what the possible incremental throughput could be. Could you just give us that in terms of ounces at 100% as to what kind of increase we would be talking potentially for ounces if you would apply that new process to all four autoclaves?

Kelvin Paul Michael Dushnisky - President & Director

Jim, I am going to – sorry, Jorge, I'm going to ask Tim Dimock, the ADGM at PV to address that. Tim?

Tim Dimock - Manager of Operations, Pueblo Viejo Dominicana Corporation

Hi, Jorge, this is Tim Dimock at Pueblo Viejo. Yeah, so with the increased availability that we are getting from extending the time between down to 240,000 tonnes. So at today's – the grades that we're producing now, that's about a 25,000-ounce increase.

Jorge M. Beristain - Deutsche Bank Securities, Inc.

And that's for the – at 100%?

Tim Dimock - Manager of Operations, Pueblo Viejo Dominicana Corporation

Yes. Correct.

Jorge M. Beristain - Deutsche Bank Securities, Inc.

Yep. Thank you very much.

Tim Dimock - Manager of Operations, Pueblo Viejo Dominicana Corporation

Thanks, Jorge.

Operator

Your next question comes from the line of John Bridges with JPMorgan. Your line is open.

John D. Bridges - JPMorgan Securities LLC

Good morning, everybody, and congratulations. We've been hearing the press comments about restarting of Pascua-Lama. I just wondered what your view was on that – that potential?

Kelvin Paul Michael Dushnisky - President & Director

Sure. Thanks, John. Listen, on Pascua-Lama, as we indicated, I think on the last call, we've been working on an optimization study. First of all, we looked at what it would take to complete the project for the original design, we're thinking of with what capital efficiency could we plan in that context. More recently, we've been looking at if we weren't constrained by the original design, and look creatively at other options, some as – have even been considering perhaps underground, starting one process train on the Argentinean (35:18) side and generating cash flow for the rest.

So that work is underway. We'll have a better sense that towards the end of the year in terms of reporting back to the board. And so we don't want to get ahead of ourselves, but the thinking is if we could restart Pascua-Lama as a stage concept, kind of minimize capital upfront, generate cash flow and move forward on that basis, it would be interesting something that we want to explore. We don't want to get ahead of ourselves, but that's the general thinking.

John D. Bridges - JPMorgan Securities LLC

So what level is that? Is that scoping? It's not feasibility or anything like that yet, right?

Kelvin Paul Michael Dushnisky - President & Director

Scoping, but as you can imagine we have a lot of data in Pascua-Lama given our long history and the fact that stripping proportion is already built but in terms of the optimization work we are looking at, now, you are correct, that is scoping level.

John D. Bridges - JPMorgan Securities LLC

What sort of grade could you generate from an underground deposit down there?

Kelvin Paul Michael Dushnisky - President & Director

Well, early to comment and I don't want to get into specifics, but certainly we've been looking on the Lama side, there is areas that are high single digit, low double digit grade. And actually, I've got Rob Krcmarov. Rob knows the deposit. Well, maybe, Rob, you can comment.

Robert L. Krcmarov - Executive Vice President-Exploration & Growth

Sure, they are high grade pockets of both gold and silver and there are significant areas that might be up to about 3,000 per tonne.

John D. Bridges - JPMorgan Securities LLC

Okay, great. Appreciate it. Many thanks.

Operator

Your next question comes from the line of Stephen Walker with RBC Capital Markets. Your line is open.

Stephen David Walker - RBC Dominion Securities, Inc.

Thank you and good morning. Just a question for Catherine on the capital allocation. Kelvin, you mentioned that there is $125 million in capital savings year-to-date, some of which is direct savings and some of this is deferred. Catherine, two things that could we expect further capital savings as the year progresses in H2? And then how would you break out the split between what is actually a unit savings in capital versus what is being deferred? And is that – do you think that split can be maintained should there be further capital savings in the second half of the year?

Catherine P. Raw - Chief Financial Officer

So, good question. We spend a lot of time trying to understand exactly how these CapEx savings are coming through. And as I talked about, through our analysis we can see that around a third is coming from actual sort of structural removals of CapEx. Just to give you some more sort of specific numbers and we've got around $43 million coming from actually just changing the prices, lower prices for materials and contractor rates. So through the Best-in-Class processes, renegotiated contracts through the fact that we see deflations versus some of the assumptions we are getting those kinds of improvements.

We then got improved assumptions, so we added continuity that actually hasn't been required and then we changed the scope of actually the CapEx that we're spending. So do we need to do shovel maintenance, et cetera, et cetera? So around a third of the improvements that we've seen and for the year versus our initial guidance come from that. The remainder then is a combination of deferrals which is just we're not going to be able to do them in 2016, so they've moved them to 2017, plan changes. So an example would be spending at Turquoise Ridge on the third shaft. We're not doing that because we don't need to do it this year, because we're delivering that production improvements versus our original budget.

And then it's actually through plan optimization. So the example that we had on Pueblo Viejo is a good example of that changing the maintenance of the autoclaves. So that just gives you a sort of background to those improvements that we've seen.

So moving into the second half of the year, we do see that CapEx increase, and there may be some slippage if we don't get it all done, but given that we can see what our expenditure is going to be, what has been approved through the investment committee to date, we're relatively confident that our guidance range is appropriate.

Stephen David Walker - RBC Dominion Securities, Inc.

Okay. Thank you. That's very helpful. And maybe if I might ask Richard a question, when you speak about, the pushing beyond technical limits and pushing out maintenance schedules or re-examining pit slope stabilities and operating assumptions that have been in place for some time, can you talk a little bit about the internal audit or external audit process that could happen or would happen normally when you start pushing normal technical expectations, whether that's at an autoclave or whether it's within an operating assumptions around slope stability and so forth.

Richard J. Williams - Chief Operating Officer

Yeah, sure. Firstly, in terms of the process by which we review these opportunities and then book them into forecast/plan is every month shared by Michelle Ash, which is all about technical staff involved. The proposals that are identified on the ground some which are advised by our technical staff. The majority of that comes from the guys on the ground, their technical teams. I'll review in detail in both – in terms of their viability and also in terms of their risk. And so whenever something associated with – like no stiffening in the pit walls, as would (41:22) be the case in Veladero, or adjusting the technical dimensions of the autoclave, the full technical audit associated with risk is conducted before it's executed.

The autoclave is a good example. External contractors came in. We assisted in advising the change. And as Tim Dimock will know, sitting there at Pueblo Viejo, we didn't execute on anything unless both us as well as contractors, as well as the designers were 100% happy that this looked like it would be sustainable. So with respect to the general principle of pushing technical limits, what we're finding here, in general, is that technical limits are set on what would be achieved in previous years on a straight-line basis, and that's just being rolled forward, rather like our capital budget, next.

And then when we're asking people to see what it is one can do, we're starting to find that if you remove the straight-line basis assumptions and then start looking at innovation, and looking at improving labor intensity and capital intensity – in other words doing more with less people, or a lot more with less capital, we're finding previously set technical limit is broken through. The driver for that, of course, is doing benchmarking comparisons between mine sites to see if he has got the best performance and seeing if he can raise it across our own operations. And where data is available externally, he's benchmarking to other companies, as indeed is a standard business improvement process in any mining company. But the hub of your question, I believe, is associated with are we taking risk when we push technical limits? And the answer is not in an unsustainable way. But everything is examined in great detail before it's locked in, into the plan and before it's then locked into our forecast.

Stephen David Walker - RBC Dominion Securities, Inc.

Richard, thank you for that. And thank you for bringing it back to risk management. That's all the questions I have.

Kelvin Paul Michael Dushnisky - President & Director

Thanks, Stephen.

Operator

Your next question comes from the line of David Haughton with Imperial Bank of Comm. Your line is open.

David Haughton - CIBC World Markets, Inc.

Good morning, Kelvin, and team. Thank you for the conference call. As you've noted, Q3 is going to be a heavy spend for sustaining CapEx. Are there any particular operations that we should be keeping an eye out for, for a particular lift, i.e., significant lift in that spend?

Kelvin Paul Michael Dushnisky - President & Director

David, thanks for the question. Catherine, you probably are in a position to respond to that best.

Catherine P. Raw - Chief Financial Officer

Yeah, I think – yes and no. Across the board, we're seeing some of it, but I think we just had – it's my recollection we're seeing some CapEx increase at PV, (44:07) – but I can come back to you with some more specific answers on that. But when we're talking about an increase in CapEx, it is done on a measured basis. So it's spread over the two quarters. And really the ASIC Evolution (44:23) is very much more also around how our cash flow evolves in the second half of the year as well.

Tim Dimock - Manager of Operations, Pueblo Viejo Dominicana Corporation

Again, just to add something, the guys on the ground here. But with Goldstrike transitioning more into underground mining, you will see a little bit more high development costs within Goldstrike.

And Turquoise Ridge, obviously, and (44:44) can talk to this, because the nature of the ore body is pod (44:47) light. There's a requirement for increased capital to ensure that the drifting is done between these pods (44:52) as well as significant ground support. But in terms of it, there's no particular mine who is going to be outstripping others in terms of capital spend through Q3. It just happens to be where the capital spend is lying.

David Haughton - CIBC World Markets, Inc.

Okay. So a little bit of CapEx spend everywhere, nothing really standing out except for the few that you've mentioned.

Tim Dimock - Manager of Operations, Pueblo Viejo Dominicana Corporation

Yeah, that's right.

David Haughton - CIBC World Markets, Inc.

Seeing now Bill MacNevin is on the line, maybe I could ask about the TCM. I saw that the recovery in your slide is getting to 64%. Wondering how you see it moving towards the ultimate goal up near the 80% level?

Bill MacNevin - General Manager, Goldstrike

David, we had a very good quarter in terms of – I mentioned fixing a lot of physical issues and physical constraints. So, it's been rectified and the process works with a lot of the focus on just better operations, controls. We'll see ourselves getting the predicted recoveries. And let me clarify predicted, because predicted is driven by both the grade they're feeding as well as the proportion of acidic or carbonaceous ore. So when we initially looked at this circuit there had been (46:22) feeding some of the higher grade material; these days we are prioritizing that higher grade material to the (46:28).

So, I don't expect to see us having numbers that were suggested with the recoveries, not because the recoveries won't be going well, but because we're feeding a lower grade material. So in the low 70%s, around the 70% mark is what we will be getting, more so driven by the grade and also the blend of acidic and carbonaceous we're feeding. So we'll be performing to expectations.

David Haughton - CIBC World Markets, Inc.

Yeah. I understand complex chemistry here. What about the throughput? What kind of rate are you getting as a throughput on the TCM?

Bill MacNevin - General Manager, Goldstrike

We're starting to – we've had some issues with reliability with the circuit, which we're working on, but we're achieving the throughput that was planned. We put a secondary crushing step, a temporary step in front of the combination circuit and that's working well. So, we've shown we can get the flow-through now. It's just about working on some reliability. So, we've achieved what we needed to do now we have to do it consistently. We're very happy with what's happened there.

David Haughton - CIBC World Markets, Inc.

Excellent. Thank you, Bill. Thank you, everybody.

Kelvin Paul Michael Dushnisky - President & Director

Thanks, David.

Operator

Your next question comes from the line of Kerry Smith with Haywood Securities. Your line is open.

Kerry Smith - Haywood Securities, Inc.

Thanks, operator. So, just on TCM to follow up on David. Are the costs still far in line with what you were budgeting?

Bill MacNevin - General Manager, Goldstrike

Kerry, the costs are slightly over where we were budgeting initially. Some of that has got to do with still rectifying some issues as we talked about correcting some of the physical constraints and also we're still doing some work on optimizing the water circuit, and that impacts on reagent costs. So at present, we're still running above what the initial expectation was. But we've got clear plans and projects to rectify that. So expect us to get to that albeit early next year.

Kerry Smith - Haywood Securities, Inc.

Okay. Okay. And, Kelvin or maybe Catherine, just on your target of $90 million of annualized G&A savings, you say that you are on track to achieve that. Where are you at today in terms of what's actually been achieved?

Kelvin Paul Michael Dushnisky - President & Director

Thanks, Kerry. Catherine has got the data on that. Catherine?

Catherine P. Raw - Chief Financial Officer

Okay. So when we talk about these annualized savings, owing to the changing way that we now report G&A, we're looking at how we are reporting back at the end of 2014. So versus 2014, we're already at a situation where we are over $90 million of core cost savings for 2016 based on our forecast. So that's sort of fulfills that obligation. We can't see it in the way in which we report G&A now in that we are allocating a lot of the corporate G&A to [such] (49:37). But that just reiterates that number.

With regards to G&A going forward, I think we are keeping a watchful eye on it. But there are some deliberate spends as well as some uncontrollable spends that are going to be influencing G&A and leading it to ebb and flow. The first is obviously the impact on share price. So it's obviously a good thing for our shareholders, but as the gold price rises as we deliver strong results, what we're seeing is that the share price contribution is now influencing our G&A going forward.

And then the second thing is around our business improvement work, which is that both with Best-in-Class and then digitization as an element of Best-in-Class, we are looking at re-sourcing that. We do so with discipline and we do it with the intention and ultimate aim of reducing our overall costs and increasing cash flow, but that will start to influence our G&A as we move into 2017.

Kerry Smith - Haywood Securities, Inc.

Okay. So I think what you're saying is you have already achieved $90 million in savings and the reason I ask is the corporate G&A, excluding stock based comp in Q1 versus Q2 is actually up a little $4 million. So I am just wondering, what the longer term target then is for the corporate G&A excluding the stock-based comp?

Catherine P. Raw - Chief Financial Officer

So as I said, I would say at or around current levels is now where we feel is sustainable but that it would ebb and flow depending upon the programs in place, the initiatives in place, in terms of business improvement. So for the year, we're confident in that total number of $240 million, $165 million for corporate – $165 million for corporate. But I think you should expect for 2017 that that number should increase slightly but only very slightly as a result of these business improvement initiatives.

Kerry Smith - Haywood Securities, Inc.

Right. Okay. Okay. That's perfect. Thank you. And then just on PV, with these modifications that you have made to the autoclaves, how long have the two autoclaves, with those modifications been running now versus the old cycle which was six months you needed 22 days of maintenance. I'm just curious how far you are into that maintenance cycle?

Kelvin Paul Michael Dushnisky - President & Director

Sure, it's okay. Maybe I'll – Tim, if you are on the line still, I'll turn that over to you, please.

Tim Dimock - Manager of Operations, Pueblo Viejo Dominicana Corporation

Yeah. So we made those modifications in our May shutdown, so it's been a couple months. Things are looking well. We're pretty confident in the design modification.

Kerry Smith - Haywood Securities, Inc.

And just a technical question. How do you actually know that the modifications are working? How do you monitor it because you don't shut the autoclaves down?

Tim Dimock - Manager of Operations, Pueblo Viejo Dominicana Corporation

Yeah. So we're able to do a thermal scan outside of the autoclave, and we can determine if an area is building scale from the scans.

Kerry Smith - Haywood Securities, Inc.

I got you. Okay. Okay, so, so far it looks pretty good then. That's good. Thank you.

Tim Dimock - Manager of Operations, Pueblo Viejo Dominicana Corporation

Thanks, Kerry.

Kerry Smith - Haywood Securities, Inc.

Yeah, thank you.

Operator

Your next question comes from the line of Anita Soni with Credit Suisse. Your line is open.

Anita Soni - Credit Suisse Securities (Canada), Inc

Hi, good morning. I just want to ask a quick question with regards to Pascua-Lama. Could we get an update on the progress there and what you guys are doing in terms of the study and plan to release anything?

Kelvin Paul Michael Dushnisky - President & Director

I didn't get the last part of your question. Anita, if you could just repeat, please?

Anita Soni - Credit Suisse Securities (Canada), Inc

Sure. So I was asking about Pascua-Lama and what the progress you have made there in terms of an optimized study and when you plan to publish some of those results?

Kelvin Paul Michael Dushnisky - President & Director

Okay. Well, thanks, Anita. In fact, I am glad you raised Pascua-Lama because Jorge raised – discussed a little bit earlier and Jorge just to go back to your question about potential underground grades; put a little more color on that. There's certainly – on the Lama side, there is some pockets greater or around 9 grams per tonne overall, that's preliminary, of course. But overall, more in the range of 6 grams per tonne, and about 50 grams per tonne silver, just to give you a sense.

And Anita, your question on the work of the optimization, making good progress. It's underway, it's scoping level at this point, and we think that by the end of the year, we'll have a pretty good sense of how things are looking. I don't know at that point we'll be in a position to disclose it to the market, but – and Pascua-Lama was one where – as we've indicated before, we wanted nothing before it's time. So we're going to look at it carefully, make sure that we understand well, what the optimization would look like. But that gives you a sense. We're making good progress and starting to just kind of narrow down what the options could look like.

Anita Soni - Credit Suisse Securities (Canada), Inc

All right. Thank you very much.

Kelvin Paul Michael Dushnisky - President & Director

You're welcome.

Operator

There are no further questions at this time. I will turn the call back over to the presenters.

Kelvin Paul Michael Dushnisky - President & Director

Well, thank you very much, operator. And given there's no further questions, we'll bring the call to a close. We look forward to updating everybody on our third quarter progress in October. In the interim, we ask everybody to be there. We would like to wish you all a very good summer. So thank you very much again.

Operator

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

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