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Barrick Gold (NYSE:ABX)

Q1 2012 Earnings Call

May 02, 2012 4:30 pm ET

Executives

Gregory S. Panagos - Former Senior Vice President of Investor Relations & Communications

Aaron W. Regent - Chief Executive Officer, President, Director and Member of Corporate Responsibility Committee

Robert L. Krcmarov - Senior Vice President of Global Exploration

Jamie C. Sokalsky - Chief Financial Officer and Executive Vice President

Peter J. Kinver - Chief Operating Officer and Executive Vice President

Analysts

Stephen D. Walker - RBC Capital Markets, LLC, Research Division

Greg Barnes - TD Securities Equity Research

David Haughton - BMO Capital Markets Canada

Paretosh Misra - Morgan Stanley, Research Division

John Charles Tumazos - John Tumazos Very Independent Research, LLC

John D. Bridges - JP Morgan Chase & Co, Research Division

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Barrick Gold First Quarter 2012 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, May 2, 2012. I would now like to turn the conference over to Greg Panagos, Senior Vice President, Investor Relations at Barrick Gold. Please go ahead, sir.

Gregory S. Panagos

Thank you, operator, and good evening, everyone. Before we begin, I would like to point out that we will be making some forward-looking statements during the course of this presentation. For a complete discussion of the risks, uncertainties and factors that may lead to our actual financial results and performance being different from the estimates contained in our forward-looking statement, please refer to our year-end report or our most recent AIF filing.

With that, I'll hand the call over to Aaron Regent, our President and 4:31 AM CEO.

Aaron W. Regent

Thanks, Greg, and good afternoon, everyone. Thank you for joining our first quarter conference call. I'm joined here today by our CFO, Jamie Sokalsky; our EVP of Corporate and Legal Affairs, Kelvin Dushnisky; our Head of Exploration, Rob Krcmarov; and Peter Kinver, our Chief Operating Officer; and we also have Igor Gonzales with us today who's the Head of our South American unit, who's going to be our new COO going forward.

Along with the results we announced this morning, we did announce that Peter is retiring in June, and so this is a sad day for us as Peter has made an outstanding contribution to Barrick over his 9 years with the company and has been an important partner on our team. Although leaving as COO, Peter will continue to be an adviser with the company, while we complete Pueblo Viejo and Pascua-Lama. But amongst Peter's many accomplishments, he had developed a strong succession plan, and I'm delighted to welcome Igor Gonzales as our new COO effective today.

Igor has been the Head of our South American region since 2005 and has developed a strong track record and is perfectly positioned to take over for Peter. So again, I'd like to thank Peter for his years of outstanding service to the company and would like to welcome Igor with us today.

I'll start by covering some of the highlights of the quarter and provide an update on our projects. And then I'll turn it over to Rob to give an update on our exploration programs, and then Jamie will walk through our financial results.

So turning to the first quarter highlights. We reported solid financial results. Earnings per share were up 3% to $1.03 per share, which compares to $1 last year. And adjusted EPS increased 8% to $1.09 per share compared to $1.01 per share last year. First quarter adjusted net earnings translates into an annualized return on equity of around 18%. We generated operating cash flow of $1.27 billion and adjusted operating cash flow of $1.37 billion.

The first quarter gold production was 1.88 million ounces, with a total cash cost of $545 per ounce or net cash cost of $432 per ounce. Gold total cash margins increased 20% to $1,146 per ounce, while net cash margins rose 16% to $1,259 per ounce for the same prior year period. First quarter copper production was 117 million pounds at a C1 cost of $2.08 per pound.

I'm pleased to report that the Board of Directors has authorized a 33% increase in our quarterly dividend to $0.20 per share or $0.80 per share on an annualized basis. And this increase is consistent with our practice of paying a progressive dividend, reflects our commitment to returning capital back to shareholders while also continuing to make high return investments in the business.

Reviewing the operating results by region. North America produced 888,000 ounces of gold at a cash cost of $485 per ounce, reflecting better-than-expected performance from Cortez on higher-than-budgeted grades from the Cortez Hills underground. Cortez produced 416,000 ounces at total cash cost of $304 per ounce in the quarter.

The Goldstrike mine contributed 242,000 ounces at cash cost of $546 per ounce. Production for the quarter was impacted by increased maintenance activities and construction on the autoclaves to prepare the autoclaves as part of the implementation of our thiosulfate project. Second quarter production at Goldstrike will also be impacted primarily due to, again, planned maintenance at the roaster, but is expected to increase in the second half of the year, primarily due to the mine access to higher-grade underground ore. We continue to expect full year production from North America of 3.4 million, 3.6 million ounces at a cash cost of between $475 and $525 per ounce.

Our South American region produced 451,000 ounces at total cash cost of $421 per ounce. The Veladero mine produced 214,000 ounces at a cost of $461 per ounce. Lagunas Norte contributed 206,000 ounces at a cash cost of $284 per ounce.

Second quarter is expected to be the lowest production quarter for Lagunas, primarily due to mine sequencing. Production will begin ramping up to high levels in the third quarter as mining moves into higher-grade areas.

For 2012, South America is expected to produce between 1.55 million to 1.7 million ounces at a total cash cost of $430 to $480 per ounce.

Australia Pacific contributed 426,000 ounces at a cash cost of $748 per ounce. Production for the region was impacted by some operational disruptions at Porgera, including power supply interruptions. Production at Porgera is anticipated to increase in the second quarter. Full year production from Australia Pacific is expected to be between 1.8 million and 1.95 million ounces at a cash cost of between $700 and $750 per ounce.

Our share of the production from African Barrick was 107,000 ounces at a cash cost of $925 per ounce, that also reflects mine sequencing for 2012. Higher production levels is anticipated for the second half of the year, and our share of production from ABG is expected to be between 500,000 and 535,000 ounces at a cash cost of between $790 and $860 per ounce.

Turning to copper. Our first quarter copper production was 117 million pounds and C1 cash costs of 200 -- I'm sorry, $2.08 per pound, that includes 76 million pounds from Zaldivar, and 41 million pounds from Lumwana. Zaldívar's cash cost were $1.51 per pound, and Lumwana's were $3.15 per pound. The indicated production and cash cost at Lumwana in the first quarter were impacted by lower mine rates, primarily as a result of ground conditions from the wet season, which will also impact the second quarter. In addition, second quarter production is anticipated to be impacted by some planned maintenance activities that we have.

Total copper production is expected to increase in the second half of the year, primarily due to the commencement of mining in the large Chimiwungo pit at Lumwana and with the startup of production at Jabal Sayid.

Turning to our projects. We made good progress in the first quarter on our 3 major projects in construction. At Pueblo Viejo overall construction is currently about 93% complete and initial production continues to be expected at midyear. Our 60% share of 2012 production is anticipated to be around 100,000 to 125,000 ounces at the cost of about $400 to $500 per ounce. In its first 5 years, PV is expected to contribute between 625,000 and 675,000 ounces to Barrick at a cash cost of under $350 per ounce.

Approximately 90% of the mine construction capital has been committed at the end of the first quarter. During the quarter, power was connected to the site, and the first 2 autoclaves are now undergoing pre-commissioning and testing. They are expected to be commissioned in the second quarter, along with the oxygen plant. Commission of the third and fourth autoclaves and commercial production are scheduled for the fourth quarter.

We have more than 50 million tons of ore or approximately 1.7 million ounces of contained gold stockpiled. The tailings facility has now received all necessary approvals to permit construction of the starter dam to its full design height. We've also begun construction of a 250-megawatt dual-fuel power plant at an estimated cost, our share, of around $180 million. And we expect that the plant to be completed in the third quarter of next year.

At the Pascua-Lama project, overall construction is about 30% complete, and first production is anticipated in mid-2013. Average annual gold production for the first 5 years of operations is expected to be between 800,000 and 850,000 ounces, and we're also expected to produce about 35 million ounces of silver. Taking silver as a byproduct credit, our cash costs are forecasted to be a negative $225 to $275 per ounce. Approximately 70% of the mine's construction capital has been committed. The project is being impacted by labor and commodity cost pressures, primarily as a result of high inflation in Argentina and to a lesser extent in Chile. Competition for skilled labor is also a factor and labor productivity is also impacted in some of our development.

We have strengthened the project team with experienced supervisors and miners from our North and South American regions and have increased our oversight of external contractors and accelerate procurement of long lead items and other necessary equipment. In conjunction with these activities, we intend to complete a detailed cost and schedule review in the second quarter.

During the first quarter, the initial phase of pioneering road construction was completed. This will help enable the plant commencement of pre-stripping in the second quarter. We expect to finish the transmission line in Chile in the fourth quarter this year. Completion of the ore conveyor tunnel is scheduled for the first quarter of 2013. And the second quarter of 2013, we expect to complete pre-stripping and the transmission line in Argentina, which will enable us to achieve mechanical completion ahead of our first goal in the middle of next year.

In terms of more detailed progress, underground development is approximately 40% complete. Earthworks construction was about 97% complete at the end of the first quarter in Chile and 73% complete in Argentina. Approximately 45% of the concrete had been poured at the processing facilities in Argentina and about 20% of the structural steel has been erected to date. Occupancy of the construction camps in both countries continues to ramp up, with about 6,800 beds available by the end of the quarter. The camps are expected to reach their full capacity of about 10,000 beds in the middle of this year.

Once completed, the financial contributions from these projects is substantial. At $1,600 gold, PV is expected to contribute about $800 million of EBITDA to the company, and based on the same assumptions and $30 silver, Pascua-Lama is expected to generate about $1.65 billion of EBITDA to the company. So combined, these 2 mines will contribute about 1.5 million low-cost ounces and $2.5 billion of EBITDA a year to Barrick for their first full 5 years. They're world-class mines, and with their 25-year-plus mine lives, they will be major contributors to the company well into the future.

Our total cash cost basis, we are already positioned in the second quartile of the global cost curve as the lowest-cost senior producer. And you could see the positive impact PV and Pascua-Lama are expected to have when they come online in mid-2012 and mid-2013. When you combine this with our input cost hedging, we feel we're well equipped to mitigate inflationary and other cost pressures in the future.

Moving on to the Jabal Sayid copper project in Saudi Arabia. Overall construction was about 80% complete at the end of the first quarter. About 80% of the total mine construction capital of $400 million have been committed. Bulk earthworks are about 96% complete, and approximately 214,000 tons of our underground ore have been mined, representing about 10.6 million contained pounds of copper at the end of the first quarter. The process plant is scheduled for completion in third quarter, along with the receipt of all the necessary permits to begin shipping.

Subject to the final receipt of these approvals, we expect first production to begin in the second half of 2012. In this year, we expect Jabal to contribute about 35 million to 45 million pounds of copper at cash cost of about $2.15 to $2.50 per pound. But as we ramp up, we expect to produce on average around 100 million to 130 million pounds at cash cost of around $1.50 to $1.70 per pound.

In addition to these projects, we continue to advance the other projects in our pipeline, which are at various stages of permitting and feasibility. At Cerro Casale, we expect to complete the EIA permitting process by the end of 2012. Following this, we will then consider how best to advance the project. At the Donlin Creek project, we're working to conclude negotiations on surface land use agreements, at which time the board of Donlin expected to accept the revised feasibility study, and we'll then start the permitting process. Pre-feasibility studies are scheduled for completion on the Lumwana expansion and Turquoise Ridge open pit project by the end of this year and on the Zaldivar and Lagunas Norte deep sulfide projects by the first quarter of 2013. And we are moving forward in the scoping stage at Goldrush.

And with that, I'd now like to turn it over to Rob who'll give you an update on our key exploration programs.

Robert L. Krcmarov

Thanks, Aaron. It's been 2 months since our last comprehensive exploration update in the Q4 2011 call, so this will be a brief progress update on our key exploration projects. A more complete exploration update will be provided in Q2 once results from the programs underway are received.

Now exploration teams currently have around 100 drill rigs operating throughout the world and the top projects are Goldrush, Turquoise Ridge open pit and Lumwana. These are the key projects with large drill programs, which will add to and operate the gold and copper resources in 2012 and 2013 and which would directly contribute to various planned scoping feasibility and expansion studies. Today, I'll focus on just these 3 projects in the coming slides.

So in Nevada, we've currently got 52 rigs operating, 11 of which are located on the Goldrush complex, which we previously called Red Hill-Goldrush. Activities in Q1 have tracked well, with over 20% of this year's planned drilling completed to date. And this slide shows the year-end 2011 stated resource, 7 million ounces, in the blue outlines surrounding the colored shapes. The colored dots outside of the resource area represents the individual grade, multiplied by thickness of the holes, which weren't of sufficient drill holes spacing to qualify as compliant resources.

But from the colors, you can clearly see that we continue to index a strong mineralization well beyond the resource areas. And the yellow dash lines of minerals on the left is really drill constraint, and you can see examples with the arrows pointing to and particularly west and south of Goldrush.

While we've got many drill results pending, the stepped up drilling to the west and south is, in effect, a favorable and significant alteration including silica-sulfide breccias and replacement style alteration, and these are normally good indicators of strong mineralization. Additionally, in-field results to upgrade the resource were in line with expectations, as shown by the broad intercept from the top of the slide, sample at 108 feet at 0.14 ounces per ton. We'll provide a more extensive update next quarter as more results become available.

But the mine update on these projects since last quarter is concurrent with the exploration drilling. A full steering committee, comprising operations and other technical and support services personnel has been established to coordinate a scoping study. Pit optimization in pits have been initiated by the strategic planning group. The technical drilling will begin in earnest this quarter, and that should also contribute to realistic pit design assumptions. Hydrology studies are also continuing, as are various environmental baseline studies. We're also in the process of contracting to build a permanent camp nearby with this growing project.

The drill program at Turquoise Ridge continues to successfully upgrade and expand both the underground and the open pit mineable resource. In Q1, resource definition drilling ramped up to 14 rigs and completed over 91,000 feet of drilling. At year-end 2012, drill spacing will be adequate to upgrade all of the presently 9 category full mineralization and inferred resources to measured and indicated status. Of most significance, the pre-feasibility study for the open pit project is well underway, and scheduled completion by year-end 2012, assuming success of submission of the plan of operations and permitting could then be initiated by the joint venture. Based on positive results from ongoing exploration resource definition drilling, resource modeling and engineering evaluations, we expect to have a few potential major project milestones this decade.

I think it's worth reiterating that superpit concept contemplates simultaneous high grade underground mining in conjunction with large tonnage bulk -- excuse me, with large bulk tonnage open pit mine. And the reason we're attracted to this project is that: we already own it; it's a pure gold play in a safe jurisdiction, and we can conceptually see production reaching over 800,000 ounces per annum; and the mine life in excess of 20 years; also, ore occurs at the surface; and conceptually, the project will be largely self-financing; and there are also some potential processing synergies with Goldstrike. And so as we advance Turquoise Ridge, through our feasibility studies, towards a construction decision, we anticipate that the increased project definition will show this to be another world-class project and catalyst for our long-term growth and sustainability.

Over to Zambia now where we'll look at recent developments at the Chimiwungo deposit at Lumwana. When we contemplated the Equinox acquisition last year, we recognized the potential for tremendous upside at Lumwana, especially at Chimiwungo. An updated reserve and resource statement was released at the end of 2011, which showed increases across all resource categories. And almost the entire 10.7 billion pounds of copper in the inferred resource category lies within the Chimiwungo deposit as shown by the powder green shade on the slide. Drilling would test the powder green areas. It will also test the areas in between the shades of green which haven't been tested nor included in any resources. It's these areas that we expect to really add to the interred resource base in the future.

As we discussed last quarter, an aggressive and advanced exploration driller is underway where an 18-month, 300,000 meter program to commenced in mid-2011 will grow and provide increased confidence and resources to the expansion study to materially increase production. Today, about 35% of the program as shown on the screen is being completed.

Results from Q1 from the resource definition drilling are in line with expectations, including confirmation of the thickened eastern Equinox chute as shown with the results on the screen. Confirmation of the high-grade Roan chute especially on the eastern boundary, where the copper grades are higher than some of the original very widely spaced holes, intercepts within and also outside of the current resource block, highlighting potential resource growth. Also, we're increasing the confidence in resource upgrade and conversion from inferred resources. And we're also demonstrating resource growth potential from results outside of the current resource areas.

At present, the entire contingent of exploration drill rigs on site is within the $3.50 optimize pit shell. And more specifically, now that we're moving out of the wet season, we'll have more control and say on where the rigs are placed, which was previously dictated by geography and weather. The plan for the coming quarter is to really focus in on the 2 thicker and higher-grade chutes, especially the Equinox chutes, and preferentially and systematically test that potential.

And I look forward to providing results for that drilling in the next quarter.

So with that, I'll hand it over to Jamie.

Jamie C. Sokalsky

Thanks, Rob. As Aaron mentioned at the start of the call, net earnings in the first quarter were up 3% from the same prior year period to $1.03 billion or $1.03 per share. On an adjusted basis, net earnings increased 8% to $1.09 billion or $1.09 per share from the same period last year.

The significant adjusting items include $93 million in impairment charges, primarily related to the write-down of an investment in Highland Gold, which was partially offset by $36 million in gains from the sale of assets, foreign exchange gains and unrealized gains on non-hedge derivative instruments. EBITDA increased 9% to $2 billion from the same prior year period. Our quarter 1 operating cash flow $1.27 billion and adjusted operating cash flow of $1.37 billion compared to operating cash flow and adjusted operating cash flow of $1.44 billion a year ago. Our operating cash flow in the quarter was reduced by an increase in working capital balances, primarily due to the timing of gold sales and increased tax payments.

On a total cash cost basis, our quarter 1 cash margin increased 20% to $1,146 per ounce from the same prior year period. While on a net cash cost basis, including the copper credit, margins were 16% higher than the year-ago quarter at $1,259 per ounce. These results and the margin growth we've demonstrated consistently over the past several years clearly highlight Barrick's strong leverage to the gold price.

And we benefit from having a diversified operating portfolio, which increases the stability of our operating results, and our input cost hedging mitigates exposure to foreign exchanges and oil prices, which also gives us greater predictability to our earnings. Approximately 60% of our consolidated production costs are denominated in U.S. dollars. Our largest currency exposure is the Australian dollars, so we are substantially hedged on our remaining 2012 operating and administrative expenditures effective average rate of just

AUD $0.81 to U.S. For 2013, about 85% of our expected operating expenditures are also hedged, an effective average rate of just $0.79, and we have additional coverage well out to 2016 levels, all below current rates.

And we've also been mitigating the impact of higher oil prices through the use of financial contracts and production from Barrick Energy. Our combined financial and natural hedges provide protection for about 80% of our expected remaining 2012 fuel consumption. We also have floor protection in place on approximately half of our remaining 2012 copper production at an average price of $3.75 per pound and have 100% participation to any upside in copper prices.

Realized copper prices in the first quarter benefited from provisional pricing adjustments of $0.19 per pound due to the increase in market copper prices from year-end levels, which more than offset the amortization of premiums we paid for our copper position. In addition to our input cost management, our cost profile has also benefited from the contributions of new low-cost mines like Cortez. As a result, we realized significant margin expansion and earnings and cash flow growth with the increase in the gold price.

You can see that this slide highlights our exceptional financial leverage and shows that the company's earnings and cash flow have substantially outpaced the rise in the gold price over the past 7 years. Since 2004, Barrick's cash flow per share have increased by about 500% and earnings per share are up about 900% compared to the gold price increase of 260%.

Turning to our financial position. At the end of the first quarter, we had a cash balance of $2.7 billion and the gold industry's only A credit rating. We continue to generate very healthy operating cash flow and started the year with adjusted operating cash flow of $1.4 billion. In addition, we have $4 billion available under our 5-year revolving credit facility after repaying the $1 billion that was drawn on in early April. Our overall financial strength and liquidity positions us well to make high return investments in our projects and also, to provide a progressive dividend to our shareholders.

As Aaron mentioned earlier, we increased the quarterly dividend this morning by 33% to $0.20 per share. The substantial increase reflects not only our positive outlook on the gold price, but our continued strong financial results. We have a consistent track record of dividend increases, and this latest increase marks the fifth time we've raised the dividend since 2006. The current $0.20 quarterly dividend represents more than a 260% increase in capital returned to our shareholders in the last 6 years or a 24% compound annual growth rate. It's part of our balanced approach to capital allocation, which is a focus on extracting the highest rates of return for our shareholders, while also continuing to return capital on a sustainable basis.

Looking at our 2012 outlook, we have maintained our gold production guidance of 7.3 million to 7.8 million ounces for the year at total cash cost of $520 to $560 per ounce or net cash cost of $400 to $450 per ounce. Our gold production in the second quarter is expected to be lower than the first quarter, primarily due to mine sequencing at Lagunas Norte and Cortez and some planned maintenance of the roaster at Goldstrike.

Overall, gold production is expected to increase in the second half of the year, mainly as the result of Goldstrike and Lagunas Norte returning to higher production levels and also, with the commencement of production at Pueblo Viejo.

Our second quarter total cash cost per ounce are expected to be higher than the first quarter, in line with the lower anticipated production levels, but are expected to decrease thereafter from the second quarter levels in the second half of the year as lower cost mines contribute a greater proportion of overall production.

We continue to expect full year copper production of 550 million to 600 million pounds. Our total copper production is expected to increase in the second half of the year primarily due to higher production at Lumwana and also the startup of production at Jabal Sayid. With our first quarter results, we've also adopted the Brook Hunt C1 cash cost methodology for calculating copper cash cost per pound in order to better conform our presentation to other significant copper producers.

The primary difference between the C1 cash costs and our previous total cash cost per pound calculation is that royalties and non-routine charges are excluded from C1 cash costs as they are not direct production costs. Based on the C1 cash costs methodology, our original copper guidance would have been in the range of $1.80 to $2.10 per pound. Due to the higher-than-expected production cost at Lumwana then, full year 2012 C1 cash costs are anticipated to be slightly higher at $1.90 to $2.20 per pound. Our total CapEx guidance is also unchanged at $5.5 billion to $5.9 billion.

Before turning it back to Aaron, I would like to make a few brief comments on our outlook for gold and copper prices, an outlook which continues to be very positive. Our expectation is that the policy responses to the global financial challenges, like the eurozone issues, will continue to put pressure on reserve currencies, reinforcing gold's appeal as an alternative currency and that one that retains its purchasing power. There are also some very supportive industry-specific trends at work, which will complement this.

On the official sector front, central banks purchased 455 tons last year, almost 6x the level in 2010. And we've just seen recent buying from Mexico, Russia and Turkey, which added about 45 tons in March. There continues to be a huge attitude change with the central banks. The high inflation rates in India and China are also increasing the appeal of gold as a way to protect capital, and there are more and more ways to buy gold as a result of continued Asian market deregulation.

For copper, GDP growth rates and the industrialization of emerging economies continue to bode very well for increased demand, and our expectation is that mine supply copper is expected to be constrained over the longer term as the industry continues to be challenged to provide a supply response to this expected increase in demand. So we should see demand continue to outstrip supply well into the future, and we continue to remain quite bullish on both copper and gold.

With that, I'll turn it back over to Aaron.

Aaron W. Regent

Thanks, Jamie. So to summarize, as Jamie said, we're maintaining our gold production and cost guidance for 2012, with the expectation that the second half will be stronger with respect to production and lower cost. We believe the fundamentals for gold and copper are positive, and as the largest gold producer, with a strong cost profile, we will be and continue to be a major beneficiary in the current high price metal environment.

Our world-class gold projects are nearing completion. PV will begin contributing production in the middle of this year, and Pascua-Lama will be just behind that. We have a suite of other large projects that will continue to advance and derisk and create options for us for the future. And as Rob indicated, we expect further positive news from our exploration efforts, and we'll provide a more detailed update with our second quarter results. And we will constantly be maintaining a sharp focus on our responsible mining practice and continue to look for ways where we can do better to strengthen our performance.

So that concludes the formal part of our presentation. And at this point, operator, we'd like to turn it over to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Stephen Walker with RBC Capital Markets.

Stephen D. Walker - RBC Capital Markets, LLC, Research Division

Just quick questions. The first one is on the thiosulfate technology. I guess, the question is twofold. First of all, the expected 2014 production of 350,000 to 400,000 ounces, is that effectively going to replace declining grades at the existing -- through the existing open pit and underground or will that be an incremental improvement to the existing production profile? Or if you could give us some sense of where production could be in 2014 vis-à-vis where we'd be in, say, 2012. And then, just second part of that would be -- my understanding is that this technology allows you to process more carbonaceous or blend the carbonaceous ore with some of the sulfide material in the autoclaves. Could you give us a sense of maybe the grades that you would expect to be processing through the autoclaves or through using the thiosulfate technology?

Robert L. Krcmarov

Maybe I can try and answer that. Let me start at tail end of the question. You're quite correct. This technology is going be amenable to process material that's going to be carbonaceous. So it's basically material that would have been treated in the roaster later in the life of the operation. We're bringing those ounces forward. They're not totally incremental because the overall profile of the other material has decreased slightly, so this will not be totally incremental. But there will be partial increments. And the grades, I'm not sure, I don't have it in front of me, but they'd be probably close to 2 to 3 grams, something like that.

Stephen D. Walker - RBC Capital Markets, LLC, Research Division

Okay, great. And then just on the dividend policy, congratulations on the increase in the dividend. This is again roughly an 18% payout of earnings. I'm just curious. Is there a goal or is there a guidance that the board and management are using as far as what the dividend policy is going forward? The 25% -- 24% compounded growth is impressive, but is this a level that we can expect going forward? And as part of that, where would you put, I guess, debt repayment, Jamie, in the use of capital aspect of the strategy between capital spending, paying down debt and increasing dividend payout?

Jamie C. Sokalsky

Why don't I take that, Stephen? We don't have a specific target from a payout ratio perspective. We really are trying to balance the advance for capital or the opportunities to deploy capital, whether be into developing projects or balance sheet management and returning capital back to shareholders. So I think when we look at the cash flow generation of the company, we can look at those 3 different buckets and allocate the capital accordingly. I think that what we are trying to signal is we do have a policy of paying the progressive dividend in line with the financial resources and the earnings generation of the company. I think the dividend announcement today is kind of consistent with that. It's the track record that has been established over the last 5 or 6 years, and we hope to continue to -- continue that trend in the future.

Aaron W. Regent

And Stephen, maybe I can just add that we definitely are focused on using some of our free cash flow particularly early as that starts to increase next year. We're paying down some debt. We have some debt maturities next year, and we are definitely looking at using some of that cash flow to reduce our debt.

Operator

The next question comes from the line of Greg Barnes with TD Securities.

Greg Barnes - TD Securities Equity Research

Reading through the press release, as mentioned in the Cortez Hills lower zone and you’re doing a pre-feasibility study on that. It's going to be done by the end of 2012. I'm just wondering what it is you're looking at there, what's the concept and where is that taking you.

Peter J. Kinver

Greg, it's Peter here. The Cortez Hills lower zone is really a zone of ore that will not be taken out by the pits, and we're looking at how we can get access to that through a ramp system and a series of raised board shafts. And that's basically engineering work to figure out how we can actually do it.

Greg Barnes - TD Securities Equity Research

Any impact on production longer term? Does maintain the underground at current levels?

Peter J. Kinver

This would be probably incremental ounces to the current underground production. But it's still too early to actually put a number on it on the level of production.

Greg Barnes - TD Securities Equity Research

Just a follow-up to Steve's question on the thiosulfate, and you said a partial incremental production boost. How partial are we talking about?

Peter J. Kinver

Well, the current production at Goldstrike is roughly about 1.2 million ounces a year. We didn't do the thiosulfate, and the production of Goldstrike would probably drift down to below 1 million ounces a year over the next couple of years. But by bringing this project in, we should maintain more or less this level of production over the next few years.

Operator

The next question comes from the line of David Haughton with BMO Capital Markets.

David Haughton - BMO Capital Markets Canada

Just picking up the thread of this thiosulfate again. Is this allowing you some flexibility for how the Goldstrike facility could be used for potentially Turquoise Ridge in the future?

Peter J. Kinver

Yes, that's one of the equations. I mean, we have to look at where can we get the maximum value if we don't want to extend or expand existing facilities. So obviously, we will be doing trade-off studies to look at where we get maximum value.

David Haughton - BMO Capital Markets Canada

Okay. Over to Cortez, a very strong quarter at Cortez. Are you expecting this kind of level of production for the balance of the year because if so your guidance appears quite conservative?

Peter J. Kinver

No, we expect to see the next 2 quarters come back to more of a lower run rate. We expect to see the Q2 drop by about 40,000 ounces, which is in line for the average for the annualized run rates.

David Haughton - BMO Capital Markets Canada

Okay. Because whether -- I was looking at the combination of Goldstrike and Cortez, the North American maintenance guidance might be maintained. But Cortez picking up some of the slack of a slower Goldstrike, are you expecting Goldstrike to reverse its position quite markedly for the balance of the year?

Peter J. Kinver

Goldstrike had a roaster shutdown in this quarter, which was a 14-day shutdown, which, obviously, impacts the production. But the shutdown is now complete and we'll see an improvement in Q3 and Q4.

David Haughton - BMO Capital Markets Canada

Okay. Switching now over to Lumwana, I understand that you had the weather impediments in the first quarter likely to have an adverse impact to second quarter. What kind of throughput rate and grade should we expect through second quarter and then into the balance of the year?

Peter J. Kinver

The grades for the second quarter is going to be more or less in line with first quarter, which is about 0.45. But as Chimiwungo comes in, we're going to see the grade move to the 0.55 to 0.6 and with slightly better recovery.

David Haughton - BMO Capital Markets Canada

Okay. And the throughput, should we expect to see that get up towards the 60,000 tons per day mark with...

Peter J. Kinver

Yes, correct. We will actually have -- because we got a better ore availability, we will be processing a couple of million tons a month more in the Q3, Q4 and slightly better recovery.

David Haughton - BMO Capital Markets Canada

Okay. And given the kind of thinking that you've got for the second quarter, the cost structure that we're seeing first quarter likely to be sustained through the second quarter, maybe a slight improvement, but then a marked improvement at the back end of the year with the additional ore body coming on. Is that the kind of way you're seeing it?

Peter J. Kinver

That's correct, yes.

Operator

The next question comes from the line of Paretosh Misra from Morgan Stanley.

Paretosh Misra - Morgan Stanley, Research Division

One question on your Lumwana where you had a lot of success in exploration. As you think about maybe potentially even a larger expansion longer-term, what are the smelting and the power bottlenecks in that region?

Robert L. Krcmarov

We're currently doing trade-off studies, looking at those very issues. We're doing an expansion feasibility or pre-feasibility. And one of the issues we have to look at is power, water, infrastructure, housing, smelter offtakes. And those will be part of the pre-feasibility.

Paretosh Misra - Morgan Stanley, Research Division

Got it. And second, just on your 2 projects and your feasibility in Cerro Casale and Donlin Creek, how would you compare the attractiveness of these 2 projects to each other? Is there one of these which is more likely to proceed early on? Or how should we think about it?

Aaron W. Regent

I think the 2 projects are probably comparable in many ways in that they're about, I think, high-quality deposits, but they also have a large capital cost associated with them as well. From a timing perspective, they really are out of sequence, and that Cerro Casale is much further advanced than Donlin Creek. As I mentioned in my remarks, Casale permitting will be likely completed towards the end of this year, so that project will be in a position to make a construction decision a lot sooner, where Donlin is probably going to take us 3 to 4 years the permit, so we're a bit further away from making a construction decision. I think with Casale, we are looking at again, and I think we've mentioned before, we have an active exploration program on the property. It's a satellite deposit called Luciano, and we're continuing to drill that out. And there's the potential, if it plays out of the way we hope, you might have an attractive sweetener, if you will, to the project, which might have positive implications in terms of how we might advance the project. So we're doing a lot of work in parallel. But as I said, towards the end of this year, we'll have greater visibility on what the various possibilities might be.

Operator

The next question comes from the line of John Tumazos with John Tumazos Very Independent Research.

John Charles Tumazos - John Tumazos Very Independent Research, LLC

The Pueblo Viejo sequencing sounded a little remarkable with large amount of gold and ore stockpiled and tailings just getting permitted and electricity just getting hooked up and the oxygen plant underway and sounds like the mine is 6 to 12 months ahead of the rest of it. And adding the Argentine delays, I guess, just illustrate the era we live in. And you have 6 or 7 incremental projects or brownfield round-outs that are much lower risk than Casale, Donlin Creek, Kabanga greenfields. Why not put the greenfields all on the shelf? It's pretty clear that none of the big investors believe anyone's NPV model, and $5.2 billion, $5.5 billion it's a lot of money to spend in 1 year.

Aaron W. Regent

Well, John, look, I think our strategy is one of advancing all of these projects, derisking them and then giving us choices. And you're right, we will then look at a comparison of returns, do-ability, risk. And in an ideal world, you'll then sort of sequence and allocate your capital accordingly. But I think the immediate focus for us right now is to finish the projects that we're constructing. We've got to get PV done. We've got to get to Pascua done and get Jabal Sayid done. Once we...

John Charles Tumazos - John Tumazos Very Independent Research, LLC

Sure, you can't drop the bomb on -- the issue is if you want your stock to go up, it might be good not to start too many until the world cools off and the engineers rob you less.

Aaron W. Regent

Well, what I was going to say John is we're going to focus are finishing these 3. And as we get through that, then we'll be making some decisions about what to do next. And your points are not lost on us.

Operator

The next question comes from the line of Greg Barnes with TD Securities.

Greg Barnes - TD Securities Equity Research

Aaron, on Pascua-Lama, you made some comments about a detailed review in Q2 on the schedule and on the CapEx. Does it look like you're slipping from the second half of 2013 startup?

Aaron W. Regent

Well, Greg, we're -- right now we're still working towards that date. And we've had some slippage in some areas. We've made progress in other areas. We've got mitigation and plans that are being developed to get us back on track. And so there's a lot of -- as you can expect in a project like this, there's a lot of moving pieces. I think what we're just highlighting is that we are working in an environment where it is challenging, and there are pressures from a cost perspective, inflationary pressures in Argentina, as an example, productivity issues at altitude. We are spending additional capital. I think we've highlighted this before. We are spending additional capital to keep the projects on schedule. We think that's a good decision given the cash flow that this mine could generate. I think that what we're saying, second quarter, we'll be looking at a number of different factors, and we'll be in a better position to give more specific direction on the numbers and the schedule. But as I said, we're still working right now towards the mid-2013 time frame.

Greg Barnes - TD Securities Equity Research

Just quickly back to Lumwana. I know in the original pit they had some problems at the beginning with some transition ore that really negatively impacted recoveries. Are you seeing the same type of ore -- transition ore at Chimiwungo or not, does it look cleaner?

Peter J. Kinver

Well, we haven't got to the ore grade yet. We're basically one bench away. We did drill some holes into that -- it's called the transition zone, and some of the transitional will obviously put to one side. And then hopefully get into the clean ores quick as possible.

Greg Barnes - TD Securities Equity Research

Well, you don't expect that to impact your recoveries in the second half of the year really?

Peter J. Kinver

Recoveries will improve, in fact, and we expect to see a couple of percentage points improvement because any ore that's going to have a very low recovery, obviously, won't treat. So we'll only try and treat the cleaner ore.

Operator

[Operator Instructions] Our next question comes from the line of Kalpesh Patel with JPMorgan.

John D. Bridges - JP Morgan Chase & Co, Research Division

It's John Bridges. I don't have a question I just wanted to congratulate Peter on leaving what I guess is a pretty stressful job with telephone calls in the middle of the night. I seem to remember a few on the street, including myself. So congratulations, Peter and best of luck in whatever endeavors you have in front of you going forward.

Peter J. Kinver

Thanks, John, I appreciate the comments. Thanks.

Operator

And there are no further questions.

Aaron W. Regent

Okay, before concluding, John, thanks for making those comments. And we are going to miss Peter. He has done an amazing job over his 9 years with the company. But he does leave a great structure in place, and as I said, we got Igor here, and Igor I think has got big shoes to fill, but he's up for it. So I think again, like you said, we want to just thank Peter, congratulating him for the success that he's had at Barrick. And the good news is he's not leaving the family. He's still part of the family for quite a while yet, and so you may still see him from time to time.

But with that, we appreciate everybody taking time. It's the end of the day, but we appreciate you taking the time, and look forward to seeing you on the circuit. But at the very least, we'll see you during our second quarter call. And with that, we'll call it a day. Thanks very much.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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