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Barrick Gold (NYSE:ABX)

Q2 2012 Earnings Call

July 26, 2012 9:30 am ET

Executives

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

Jamie C. Sokalsky - Chief Executive Officer, President and Director

Analysts

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

Greg Barnes - TD Securities Equity Research

Patrick T. Chidley - HSBC, Research Division

Jorge M. Beristain - Deutsche Bank AG, Research Division

Alec Kodatsky - CIBC World Markets Inc., Research Division

David Haughton - BMO Capital Markets Canada

Steven Butler - Canaccord Genuity, Research Division

George Topping - Stifel, Nicolaus & Co., Inc., Research Division

Kerry Smith - Haywood Securities Inc., Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Barrick Gold Second Quarter 2012 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, July 26, 2012.

Now I would like to turn the conference over to Greg Panagos, Senior Vice President of Investor Relations at Barrick Gold. Please go ahead, sir.

Gregory S. Panagos

Thank you, Lindsey. Good morning, everybody. Before we begin, I would like to point out that we will be making forward-looking statements during the course of this presentation. For a complete discussion of the risks, uncertainties and factors, which 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 will hand over to Jamie Sokalsky, President and CEO.

Jamie C. Sokalsky

Thanks, Greg, and good morning, and thank you for joining the Barrick Second Quarter Conference Call. I'm here today with our CFO, Ammar Al-Joundi; our COO, Igor Gonzales; our EVP of Corporate and Legal Affairs, Kelvin Dushnisky; and our Senior VP of Global Exploration, Rob Krcmarov. We'll all be available to answer questions after the presentation.

I should that we are pleased to have Ammar join us for the call today as our new Executive Vice President and CFO. Ammar has a deep knowledge and experience in the mining industry and a track record of exceptional performance not only at Agnico-Eagle, but also as a key member of the Barrick team for over a decade. It's a tremendous advantage for us to have him return to Barrick as CFO and be a key part of our talented senior management team.

This is my first conference call as CEO of Barrick. So let me say first that I have total confidence in this company. Next year, Barrick will be 30 years old, and I've been for almost 2/3 of those 30 years. Barrick's track record speaks for itself. I know the company. I know it's assets, and I know it's people. I know what we've done, and I know what we can do. And that has allowed me to hit the ground running as I assume this job.

When I became CEO in early June, I said Barrick would focus on 2 things: maximizing shareholder value and superior performance. The first step was my directive for a thorough review of our business and to identify the changes necessary to deliver performance that maximizes value in every respect. That objective was simple: deliver improved share price performance.

So today, I will tell you where we stand, what we've done and what we'll do. You'll hear about a focus on high quality, profitable ounces. You'll hear about a rigorous, disciplined approach to capital allocation with a focus on maximizing free cash flow and rates of return on our capital investments.

Going forward, returns will drive production. Production will not drive returns. And you'll hear that for me a few more times on this call. I'll also start briefly by reviewing our second quarter results and our outlook for 2012, and we'll spend a fair amount of time discussing the reasons for the revision to Pascua-Lama's cost estimate and schedule that we just announced and the action plan to bring Pascua-Lama into production.

The fundamental value of Pascua-Lama remains. Pascua-Lama is a world-class asset. Once in production, it will contribute significant free cash flow for many years to come. Today's announcement of the capital cost increase and schedule delay is a result of a number of internal and external factors, which I'll review. Make no mistake. These revisions are very disappointing to me and our team. Of most importance is to outline how we are fixing these issues to bring this important project into production as successfully as possible within the revised cost and time frame.

I'll also the discuss Lumwana. With the time needed to bring this asset up to Barrick standards was longer than we anticipated since we acquired it last year. As a result, short-term performance has been disappointing. However, we are making progress on our improvement initiatives and expect significantly better performance next year. As well, the results of our exploration drilling program continued to increase our confidence in the upside potential of this large, long-life asset.

There is excellent news from Pueblo Viejo, which is essentially complete, with CapEx anticipated to be within guidance. Pueblo Viejo will soon begin contributing significant low-cost production over a 25-plus-year mine life. We are focused on successfully ramping up Pueblo Viejo, as well as the startup of Jabal Sayid next quarter, our corporate project in Saudi Arabia.

Finally, I will outline the more disciplined capital allocation framework I have initiated and how this strive higher returns and free cash flow. My overwriting objective is to translate these results into higher shareholder returns. I trust with that, you will get the sense that we're more closely aligning our interest with our shareholders' expectations. Again, going forward, it is important to repeat we're focusing on returns driving production, not the other way around. That is the basis of a more disciplined capital allocation framework.

Using this framework, which also considers the current economic environment of inflation and other uncertainty, we have concluded that certain projects do not meet our risk-adjusted return targets and free cash flow criteria. As a result, we have adjusted our longer-term gold and copper production expectations. They are lower than previous targets, but importantly, they now represent higher-quality ounces and a recalibration to a more profitable base, a more profitable base from which we can build on. These production levels are the outcome of selecting the best projects with the highest returns, all with an emphasis on delivering free cash flow.

Going back to the some of the challenges that we're dealing with, I don't know of a high-performing company where there haven't been situations that didn't go according to plan. While I take no pleasure in delivering some of today's news, I have no doubt we'll resolve it. I am certain we're already laying the groundwork to deliver the results, the results that we intend to deliver. I can tell you that we are completely focused on these challenges. My goal is to deliver on our promises and run the business in a disciplined manner. Once we do that, the share price should respond accordingly. I'll try to be as thorough as possible in my presentation today, and most importantly, I'm happy to take your questions at the end of the call.

Let's first turn to our second quarter results. While we had a weaker quarter operationally, which was as expected and then we indicated with our quarter 1 results, Barrick continues to generate strong operating cash flow and earnings. Net earnings in the second quarter were $750 million or $0.75 per share compared to net earnings of $1.16 billion or $1.16 per share in the second quarter 2011. Adjusted net earnings were $784 million or $0.78 per share compared to $1.12 -- $1.12 billion or $1.12 per share in the prior year quarter. Operating cash flow and adjusted operating cash flow was $766 -- $763 million for the quarter compared to operating cash flow of $750 million and adjusted operating cash flow of $938 million in the second quarter of 2011.

As we experienced last year, operating cash flow was impacted by higher cash tax payments in the second quarter. Our second quarter gold production was 1.74 million ounces of gold at total cash cost of $613 per ounce and net cash cost of $534 per ounce. Our second quarter gold total cash margins and net cash margins were $995 per ounce and of $1,074 per ounce, respectively. And total copper production was 109 million pounds at C1 cash costs of $2.28 per pound in the second quarter.

Our full year gold production guidance of 7.3 million to 7.8 million ounces is unchanged, and we have an expectation of a better second half. We are experiencing cost pressures at a few operations and consequently, increased and narrowed our full year cash cost guidance slightly to reflect this. We now expect total and net cash cost for gold to be slightly higher with a narrowed range of $550 to $575 per ounce and $460 to $500 per ounce on a net cash cost basis.

Despite this increase in cash costs, the fact remains that Barrick continues to have the lowest total cash cost profile among the senior gold producers. Cost management has always been a priority for me and for the company. But it is an unrelenting focus now more than ever, and it is an integral component of our capital allocation strategy.

Our total cash costs are expected to be lower in the second half of the year as a result of higher overall production levels, with lower-cost mine sites contributing a greater share of the total company production.

Our full year copper production now expected to be about 460 million to 500 million pounds at C1 cash costs of approximately $2.10 to $2.30 per pound, primarily due to Lumwana.

Turning to our exploration spend. We are investing substantially in this very successful program, and I plan to ensure that continues. In my view, our exploration group, led by Rob Krcmarov, is second to none in the industry, and we have the results to prove it. Our 2012 exploration guidance is between $450 million and $490 million, a record for the company; and about 35% of the total is allocated to Nevada. Over 50 drill rigs are currently operating there, 12 of which are located at Goldrush.

Overall, the robustness and continuity of the Goldrush system continues to be demonstrated. The limits of the entire system still remain open in multiple directions. And based on results to date, we expect to further increase indicated inferred resources by the 2012 year end.

In addition to the presence of high-grade mineralization between the 2 resource areas, we've also identified shallow, high-grade mineralization, which potentially represents an even more favorable mining scenario. We also have some very encouraging drilling results from Lumwana, and I will discuss that in a moment.

Let me turn to our Pascua-Lama project in construction. As we discussed with our first quarter results, due to lower-than-expected productivity and persistent inflationary and other cost pressures, we initiated a detailed review of Pascua-Lama's project schedule capital cost estimate in the second quarter. Rising input costs and an intensely competitive skilled labor market have been characteristic not only of this project, but of the industry as well and certainly exacerbated the challenges that we have been facing at Pascua-Lama. And for that very reason, we ask for a detailed evaluation estimate and understanding of those costs.

This is a very large binational project at altitude and a dynamic cost environment, and getting a clear understanding takes some time. The preliminary results from the review are disappointing. And they have indicated a greater-than-anticipated increase in project capital costs and a delay in the schedule. While the review is not yet complete, they indicate that initial gold production is now expected in mid-2014 with an approximate 50% to 60% increase in capital cost from the top end of our previously announced estimate of $4.7 billion to $5 billion.

We didn't learn about the magnitude of these changes until recently, certainly not -- until after I became CEO. And we immediately launched a more detailed business review to understand the results and determine the root causes to determine what we needed to do. While not the only cause, a major factor is that our overall project management structure let us down, and this is now being addressed. I am as disappointed as you undoubtedly are, but I give you my commitment that we will take corrective actions, and we will begin producing gold at low cash costs in 2014.

I visited the site last week with our CFO, Ammar Al-Joundi; COO, Igor Gonzales; and our new Co-Chairman, John Thornton. We met with the Barrick project management team, the Tethyan team and the floor team. This was my second visit to the site in a couple of months, and I'm sure it will be a regular destination for me and our team going forward.

We've had extensive dialogue about the reasons for the increase in CapEx and the schedule delay and the changes already underway. I also met personally with the CEO of floor to go over what we collectively need to do to get this project back on track and to make sure the A Team is on the project.

Most importantly, the entire team of Barrick and our partners have had extensive discussions on what we need to do going forward to complete this project within the revised cost and time frame. I would like to share the information we have to date, and we will provide a progress update with our quarter 3 results.

First, let me be clear. As the CEO, I accept full responsibility for this. This is the #1 priority for me and my team, and we are 100% focused on delivering on this project. Equally important, progress has already been made, and we are acting quickly to make the necessary changes to get this project back on track.

From our assessment, the challenges that have led us to this point are as follows: First, in my view, we underestimated the complexity of this project; Second, a number of external factors impacted the project as well; and third, we took on construction management of this project ourselves, a departure from how Barrick has historically built projects using an EPCM contractor.

If we look back about 5 years ago, Barrick made a decision to develop in-house mine-building capabilities. The company set up a sizable construction workforce for which Pascua-Lama represents higher costs compared to running this with the comparable EPCM. That's an engineering procurement and construction management approach. But this approach was taken to reduce the markup of costs embedded within those EPCM contracts.

So Barrick traditionally had not built its own mines, rather we had used EPCM contractors like SNC, Fluor, et cetera to build our mines. In fact, most large construction projects globally are built with EPCM contractors.

In retrospect, the challenges that come with a project of this size and unique complexity were greater than anticipated and proved to be on -- to be beyond the capabilities of the Barrick in-house construction team.

As I mentioned, there are very few projects that have the combination of scale, altitude, extreme weather conditions and cross-border complexities of Pascua-Lama, all issues which further compounded the situation.

Although we have experienced building and operating at high altitude under extreme weather conditions, such as with the success of our Veladero mine, this project is of an entirely different scale. The challenges at the project were exacerbated by some other external elements including persistently high annual inflation in Argentina and to a lesser extent, in Chile. Increased competition for labor on account of the global commodity boom also prevented the project from meeting its extensive skilled-labor requirements. Since the inception of the project, we have also seen less-than-expected contractor productivity, placing that additional stress on both cost and schedule, which impact each other very significantly.

Let me give an example of the external cost pressures that we're facing. We're all aware of inflationary pressures in the market. We've dealt with the same pressures on Pueblo Viejo, which has just been completed. But consider the labor process that we have in Argentina this year. We have had a 54% increase in per-hour labor rates this year, and labor in Argentina is 25% of total estimated project costs.

And while we have made significant progress, our review is not quite yet complete, but the preliminary indications of cost increases are approximately as follows: 30% of the increase is the result of lower-than-expected contractor productivity. Some of this is due to the difficult environment, but with improved supervision and planning, which is underway, there is room to improve this. 25% is the result of gaps in engineering and planning. This is being addressed immediately and dealt within our comprehensive review. The further 25% is a result of cost escalation and inflation. Where possible, we have purchased materials; and going forward, we are emphasizing fixed price contracts. In addition, we have increased our assumption for future inflation. And then about 20% of the preliminary forecasted cost increase is the result of the extension of the project completion date to mid-2014. Due to the additional cost that accumulate with each day that is added to the schedule, those are significant. The delay to the schedule arrives primarily from delays to completing the camps, the tunnel and the process plant.

We have instituted and are implementing immediate actions to get this project back on track. I mentioned the project management structure. We're strengthening that by seeking to have Fluor takeover a greater proportion of the construction management from Barrick. In addition, we have also engaged another EPCM organization -- another leading EPCM organization to provide an independent assessment of the status of the project over the next few months. We're reviewing engineering and planning to ensure the scope of remaining work is well executed. We have expedited procurement of key equipment and supplies to protect against adverse forward price movements and expanded our procurement efforts in local markets.

On the labor side, since last year, we have been ensuring that new contracts for major work packages are done on a fixed-fee basis to the extent possible, which should help mitigate significant labor increases. We have already brought in additional experienced, top-quality people to better manage the construction as well.

Finally, I would like to make it clear that we have the right plans in place. But we will do what is necessary, including making changes to strengthen the organization to ensure we execute on them. And in the second quarter, we have achieved some critical milestones. I was certainly impressed by the visual progress when I visited last week. To date, approximately $3 billion has been spent on the project.

There is absolutely no doubt that Pascua-Lama is going to be one of the world's great gold and silver mines. It's important to note that these revisions do not result in a change to our expected production levels going forward. Annual gold and silver production in the first 5 full years is still expected to average 800,000 ounces to 850,000 ounces and 35 million ounces of silver.

While inflationary pressures also had an impact on total cash costs, costs clearly remain at the bottom end of the industry cost curve. Total cash costs are still anticipated to be negative in the range of $0 to negative $150 per ounce based on a silver byproduct price of $25 per ounce.

Based on a world-class resource of nearly 18 million ounces of gold reserves plus silver contained within gold reserves of 676 million ounces, Pascua-Lama has a mine life of 25 years. That's in keeping with our objective of owning long-life, low-cost mines. I can't stress enough that addressing our challenges head on with strong actions in the shortest time frame possible and with the help of our partners is of paramount importance to us.

Let me spend some time on Lumwana. Lumwana is also another large, long-life asset with a 30-plus-year mine life and tremendous upside potential. Since our acquisition of the mine, our confidence in this upside potential continues to grow. Assets like this do not often come up for sale. That and Lumwana's potential to become much larger attracted us to make this acquisition. I was at the site earlier this year, and I was very excited at what I saw. However, we have experienced disappointing short-term results to date, but we have identified key action plans, all of which are underway right now in order to substantially improve the performance at the site, as well as also proving up the potential we saw at the time of our acquisition and still see today.

The previous owner, Equinox, had planned and operated the mine with a view to maximizing short-term production. So as a result, waste stripping and sufficient maintenance practices were, quite frankly, neglected. Production and costs have been primarily impacted by this historical waste stripping deficit.

As we also disclosed with our Q1 results, the second quarter, as expected, was also impacted by planned mill maintenance and poor ground conditions from the wet season that also led to even lower equipment availability. As a result, we now expect 2012 production from Lumwana of between 145 million pounds and 165 million pounds at C1 cash costs of $3.30 to $3.50 per pound. We need to bring this mine up to Barrick standards, and that, unfortunately, is taking some additional time.

We are enduring some short-term pain right now to maximize the long-term value of the mine, and we will start to see that long-term value surface in 2013. We've concluded that we need to advance a number of the key actions in order to maximize the full long-term potential of these -- of this asset. These include addressing the waste stripping deficit; migration to owner maintenance, which is currently underway and will improve maintenance practices and equipment availability -- in fact, the majority of Barrick's sites successfully practice their own maintenance -- infrastructure improvements to mitigate the impact of the annual rainy season; and importantly, key leadership changes at site, the majority of which have already been made.

In addition to these initiatives, we are advancing work on a Chimiwungo deposit. To date, mining has occurred in the Malundwe deposit and only just recently expanded into the Chimiwungo deposit on schedule. Chimiwungo becomes the primary future supply of ore for this operation. About 2/3 of our production in 2013 will come from Chimiwungo, and that is where we see the potential.

So substantially higher production is expected in 2013, as we access higher grades at Chimiwungo, and production is anticipated to be about 250 million pounds at lower C1 cash costs. And beyond 2013, the scale of the Chimi ore body is expected to allow for more productive mining.

It's also important to note how big this resource has gotten. Since acquisition, total 2001 copper inventory increased by about 75% from the 2010 Equinox reserve and resource statement, and almost the entire amount of inferred resource is contained within the Chimiwungo deposit.

We currently have 23 exploration rigs operating at Chimi. The substantial infill drilling program will give us a more precise model of the ore body for mine planning purposes. You've heard us comment in past presentations on the favorably thickened ore shoots. Our drilling is now providing definition and extension to these thick, high-grade zones. Results have also identified strong mineralization between the shoots, typically grading 0.7% to 0.8% copper. These results are expected to substantially upgrade and increase copper resources at the end of 2012. As well, the results will be incorporated into a pre-feasibility study on the expansion opportunity, which has the potential to double processing rates.

When we acquired Equinox, we went from resources of about 11 billion pounds to 18 billion pounds at the end of 2011. And I have complete confidence we will be able to realize additional resource increases and the huge potential of this mine. And that Lumwana will be a significant cash flow generator for years to come.

I'm extremely pleased to report on some good news regarding the status of Pueblo Viejo, our large 60%-owned gold project in the Dominican Republic, where construction is essentially complete and on schedule. It is the result of tremendous efforts from across the company and reflects the successful EPCM approach we have used in the past to deliver many other projects on time and within budget. Pueblo Viejo is an outstanding asset and an excellent example of the kind of high return opportunity in which we want to invest capital.

Mine construction capital is expected to be within guidance of $3.6 billion to $3.8 billion. That's on 100% basis, or $2.2 billion to $2.3 billion, which represents Barrick's 60% share. We expect to pour first gold in August, and commercial production is still anticipated in the fourth quarter.

Pueblo Viejo is expected to produce about 100,000 ounces to 125,000 ounces of gold to Barrick this year at total cash costs of between $400 and $500 per ounce. Full production is anticipated in 2013. Our share of average annual gold production in the first 5 full years of a 25-plus-year mine life is expected to be 625,000 to 675,000 ounces at total cash costs of $300 to $350 per ounce. And we've advanced construction on a 215-megawatt power plant, which will begin operating in 2013 using HFO but also has ability to subsequently transition to lower-cost liquid natural gas.

Here are a few more recent photographs of the completed systems at the site including the delivery of first ore to the primary crusher, the oxygen plant where the first of 2 trains are in production and the 3 lime kilns, the first of which is in operation. This is clearly another one of our world-class assets, and I look forward to updating you further as the mine ramps up production.

The team has also essentially completed construction of the Jabal Sayid copper project in Saudi Arabia, and total CapEx is anticipated to be within guidance of $400 million. Ore is expected to be processed in the third quarter, and 2012 anticipated copper production is 25 million to 35 million pounds, slightly below original guidance as plant commissioning has been delayed by 1 month. This production will be included in finished goods inventory until the project is in receipt of authorization to enable the shipment of concentrates. Average annual copper production is expected to be 100 million to 130 million pounds over the first 5 full years of operation at C1 cash costs of $1.50 to $1.70 per pound.

So while Pascua-Lama and Lumwana are our immediate priorities, the final item to discuss this morning is the company's increased focus on disciplined capital allocation. And when I talk about capital allocation, I mean looking at the entire business, not just new projects, but also sustaining capital, existing assets, return of capital to shareholders and our overall cost structure. When I assumed the CEO position, I launched a full review of our operations and projects and initiated a program to apply a much more rigorous and disciplined approach to capital allocation. That, in my view, should enable Barrick to manage our business better and distinguish ourselves in our industry. It is a significant part of our process to focus on the things we can influence like our capital allocation decisions and costs rather than on the things we can't control like industry-wide multiple contraction.

As you well know, investors have been dissatisfied with capital allocation decisions in our industry, and that is clearly reflected in the gold equity valuations. One of the reasons for that is they're looking for higher returns on capital. Investors in Barrick and gold shares, in general, have made it clear that they do not reward production growth just for production's sake to the same extent as they did in the past. In my view, they're looking for higher rates of return and free cash flow, not just production growth for the sake of production growth.

I understand that. And since I know this company very well, I know we are in a great position to be a leader in our industry by being more disciplined in our capital allocation. Barrick's investment decisions will emphasize economic returns as a core element, which with returns measured by a simple framework focused on the following 2 key metrics: free cash flow and risk adjusted return. Both of these metrics will also be evaluated within the context of the existing economic and political environments we operate in as well. So they won't be evaluated in a vacuum. All alternatives to invest shareholder capital will compete with each other based on these criteria: We will run the company with a goal of optimizing our overall investment portfolio and will apply target, risk-adjusted returns not only to potential new investments, but also to our existing assets. Assets that do not generate target returns or significantly impact our ability to generate long-term free cash flow will be either deferred, shelfed or divested. By focusing on free cash flow, we should be in a position to enable the company to return more capital to shareholders, pay down debt and make additional attractive return investments, which upgrade the company's portfolio. And with our existing high-quality portfolio, we have the ability to do that.

So to repeat, returns will drive production. Production will not drive returns.

As part of our top-to-bottom review of all our assets, we've also evaluated our next tier of projects under our framework. As a result, we have determined that our large, longer-dated projects, Cerro Casale and Donlin Gold, do not currently meet our investment criteria, primarily due to their large initial capital investments; but also under our disciplined capital allocation framework of rate of return and free cash flow, we would not make a positive decision to construct them at this time. However, we will continue to maintain and enhance inherit option value of these large, long-life assets by continuing to advance permitting activities at a reasonable cost. In the case of Donlin Gold, this will take a number of years.

In essence, this keeps the ball moving down the field and maximizes the significant option value of these large resources. Together, they represent almost 50 million ounces in gold inventory to Barrick and have the potential to produce a significant amount of gold annually in stable political jurisdictions.

So what we are doing is maintaining our flexibility to realize significant value going forward. And over time, we will monitor the attractiveness of these projects and evaluate alternatives to improve their economics and can make the construction decision later if investment conditions change. So by advancing the nonconstruction activities like permitting, we will put ourselves in a better position to do that while not committing significant capital at this time.

This process has also led to eliminating other lower-return projects from our existing asset base. We took a complete and hard look at our 9-million-ounce target and determined that there were projects there that did not meet our return or free cash flow hurdles. Every ounce -- every single ounce we produce has to make an acceptable rate of return and have the ability to generate free cash flow. If they don't, we won't produce them.

The capital required to get those incremental high-cost gold ounces was significant, in the billions of dollars. Meaning, we would have been putting significant capital to work at relatively low rates of return to meet that target if we continued to make those investments. As a result, we have recalibrated our annual gold production base to 8-million-plus ounces by 2015 once Pueblo Viejo and Pascua-Lama are in full production from the 9-million-ounce target we had in 2016.

For copper, our original target of 1 billion pounds of copper by 2017 included the Lumwana expansion and Zaldivar, our deep sulfide project, which we will continue to assess and progress to pre-visibility stages at reasonable cost. Until this assessment is complete, our annual copper production base is expected to be 600-million-plus ounces -- plus pounds beginning next year.

So these new levels represent a more profitable base on which we can build while generating higher overall returns on capital and again, more free cash flow.

To wrap up, we have an excellent track record of financial and operational performance, a track record that I am very focused on continuing. We have substantial near-term, low-cost production from the new Pueblo Viejo mine; exploration discoveries like Goldrush; and a history of paying a progressive dividend. We are the world's leading gold company with significant gold production and a large, high-quality, long-life resource base. Our portfolio includes some of the world's premier assets, and we will continue to focus on top-tier assets with long lives and low cost.

We're in a high gold price environment and supportive price fundamentals seem well in trends to the future. I think there are many reasons to feel positive about both gold and copper prices, but we can't just rely on those prices continuing to go up. We need to manage the business well in a disciplined way with shareholder returns in mind. Our focus on maximizing returns and free cash flow is one of the ways to do that. The fact is it's paramount, and we will make the investments we believe -- make the portfolio adjustments we believe are the best use of capital to deliver on those objectives. And cost control is also a vital part of that mix. We will strive to contain costs right across the organization, and one of the best ways to do that is through the development of long-life, low-cost assets.

There are also some very critical corporate social responsibility practices in which we have made great progress, and we will continue to strive to enhance our performance in this area, not only because it is the right thing to do, but it is critical to maintain our license to operate and develop mines around the world.

But to strongly reiterate, I can't emphasize it enough. Pascua-Lama is my top priority. I am confident that the execution of our plans already underway will resolve the challenges to bring this project back on track. And I am confident we will deliver on that.

And we're also keenly focused on the operational initiatives at Lumwana, along with the exploration program in order to realize the value of this large long-life asset. That is another significant priority.

I know this company very well. It remains an exceptional company. The management team and all of the people in this great organization bring a wide range of experience, insight and perspectives. I firmly believe we have the best people in the industry.

And by being disciplined with our capital allocation and running the business well and focusing on profitable production, returns and free cash flow in a disciplined way, I am confident that we can deliver superior share price performance. And that is our ultimate goal.

On behalf of myself and the entire Barrick team, we feel confident we're on the path that will deliver the results and the returns our shareholders deserve and expect.

Thank you for listening today, and I will -- now I will open up the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from the line of John Bridges, JPMorgan.

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

What I've been hearing this morning is basically telling me that the gold price is just too low even at these levels. And I'm just wondering, in your discussions with investors over the last -- well, since you've been in the seat and also pushback you have been getting with respect to this new direction for Barrick.

Jamie C. Sokalsky

Well, thanks, John. I don't think the message should be that the gold price is too low. I think that's one of the factors that we have to look at in making investment decisions. Rate of return, the amount of capital we're spending, big projects, these are significant capital costs in an uncertain environment of inflation and other pressures. I think we have to look at a discipline on capital by not only looking at the gold price and where we think it's going but also with respect to broader business decisions on capital investments, and the gold price is just one factor in that. In terms of what investors have been saying to me, they would like to see companies generate free cash flow. And while these projects that we have in front of us could still generate attractive returns, they're also significant capital expenditures. And investors are looking for us to generate free cash flow and not just plow significant amounts of capital back into the business. And if we can do that, we should be able to make better investments and return more capital to shareholders. We've increased our dividend 270% in the last 5 years. And by focusing on what we have and making good investment decisions and deferring some of those very large capital decisions and if the gold price goes up and those investment decisions are looking even more attractive, well, we can make those decisions later. But investors are looking for cash returns now, and this disciplined capital allocation program, we feel, can provide more of that.

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

And particularly with Donlin Creek, you can't make a decision to go ahead with it now anyway, because you got a long permitting period in front of you.

Jamie C. Sokalsky

Well, that's right. We have years of permitting there. We can spend $30 million to $40 million a year or so, moving the ball down the field and being in a position later and maximizing the value of this option that we have to make that construction decision later. But my message -- what I want to make clear in my messaging is that we aren't embarking on a process now to build those projects. We are actually being more conservative, and the message while we can move -- we can continue to advance permitting is a message that I think will resonate with investors, that we aren't making these huge capital decisions, which are going to further defer our ability to generate free cash flow.

Operator

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

Greg Barnes - TD Securities Equity Research

Jamie, with the focus on returns and disciplined approach to capital allocation, can you share with us what your internal rates of return, whole rates are going to be? And I know companies never want to answer this question, but if we're going to benchmark you on something, we need some guidelines.

Jamie C. Sokalsky

Well, Greg, thanks for the question. The -- it is a moving target because you have to look at risk-adjusting returns based on the amount of capital your spending, the risk of where you're dealing, what countries you're dealing with and the capital that you're investing. Our -- if you look at our cost of capital, it looks pretty low. It looks like it's 5% or 6%. And I don't look at that as being our cost of capital. I think our cost of capital should be higher and should be more conservative. So what I can say is that we, certainly, are targeting investments that exceed our cost of capital, and that will be risk adjusted for a lot of these other factors that we talk about. So certainly, we are targeting double-digit returns on most of our investments. But giving a specific number really isn't accurate because it changes in the -- for different situations and in different environments, but over the -- over our cost of capital and targeting double digits.

Greg Barnes - TD Securities Equity Research

Okay. The new 8-million-ounce target, you had mentioned there are some projects that were $1-billion-plus projects you dropped that would have allowed you, I guess, to get to 9 million ounces. Which projects have fallen out of the pipeline other than Donlin and Cerro Casale that now reset to that 8-million-ounce target?

Jamie C. Sokalsky

Well, I should clarify that, Greg. It's -- collectively, the projects added up to amounts that are in the billions of dollars. There was no single project in our gold portfolio to get to the 8 million ounces that was a $1-billion-dollar project. This was a collection of a lot of smaller projects right across the organization that -- in essentially every region that were organic growth opportunities but required $50-million, $100-million-type whatever investments to add incremental ounces, and we looked at the actual cash cost of those ounces, the return on those assets. The ultimate free cash flows they will generate once we had to reinvest sustaining capital on and exploration and across the board, removed quite a number of different assets from that target. So it wasn't any one large asset in particular there was a lot of smaller ones that would have allowed us to move towards that 9-million-ounce target, but just didn't make sense under a disciplined capital allocation framework.

Greg Barnes - TD Securities Equity Research

Okay. And just one final one, Jamie. The sustaining number you had recently has been running about $2 billion a year. With the changes that you're making, where do you see that number perhaps going forward?

Jamie C. Sokalsky

I think we can get that number down, John. I think it's a bit early to really say what that number can get to. But I think we're all optimistic that we are going to be able to reduce that number. What I've just talked about in terms of the 9-million-ounce target and reducing that has already reduced some of that sustaining capital, I feel confident that we'll be able to get that number below $2 billion a year.

Operator

Our next question comes from the line of Patrick Chidley with HSBC.

Patrick T. Chidley - HSBC, Research Division

Just sort of a few broad-based questions I guess. Firstly, Jamie, what is the role of a copper business inside a gold business? Do you think that the 2 businesses fit together? And therefore, does that mean to say that you'll continue along the path of expanding your copper business as a same sort of business as the gold business?

Jamie C. Sokalsky

Copper and gold, as you know, often come together. The are significant copper-gold porphyries. So there are a lot of similarities in terms of mining copper and gold. And our focus is going to be on maximizing returns and cash flow. And we're going to continue to make that investment decisions on that basis. But gold is -- has been a foundation and will continue to be a foundation for Barrick, and that's a very significant part of our business. We'll look at our copper assets, Zaldivar, Lumwana and Jabal Sayid. We're going to look to see what we can do in terms of opportunities to expand those. But my first priority really is to get Pascua back up and running, focus on improving Lumwana's operational performance. And to say that we would never look at opportunities outside of gold under a focus on returns and free cash flow, no, I can't say that. But I can tell you that our focus is really on getting -- running this business right and getting Pascua-Lama done and making sure that we allocate our capital in the proper way.

Patrick T. Chidley - HSBC, Research Division

And you mentioned that your cost of capital is probably 5% or 6% in a nominal basis. I kind of agree with that. What -- but you're not going to really use that as a benchmark. Why would you do that? Do you feel as if those numbers are either not real or true numbers? Or do you feel as if investors really are just seeking excess -- much higher profits than or much higher rates of return than your cost of capital?

Jamie C. Sokalsky

I think it's a combination of both. I think investors are looking to us to make better investment decisions and earn higher rates of return. And I don't believe that the 5% or 6% cost of capital really is the appropriate one to make long-term decisions that -- with uncertain commodity prices, big capital investments, often not a return of capital for a significant period of time. So I feel that we should use a more conservative cost of capital and risk adjust that somewhat and allow ourselves the ability to earn higher rate of return or target a higher rate of return, which gives -- will benefit us and also benefit shareholders. And I think shareholders are looking for higher returns than those single-digit returns.

Patrick T. Chidley - HSBC, Research Division

And just then on the -- you mentioned that Barrick is still looking at long-life, low-cost assets. Now what I understand about that is that this is always going to be, therefore, costing significant capital. Do you -- what do you expect to change when you talk about the optionality of, say, Donlin or Cerro Casale? Do you expect costs to come down? Do you think we're in a sort of a period where costs are unreasonably high and set to come down? Or do you rather really just say all this is just a metal price optionality?

Jamie C. Sokalsky

Well, I think Cerro Casale is a good example of something where we might be able to change the economics and scale that project and maybe start out with a smaller amount of capital. We have another area at Cerro Casale called Luciano, which we're doing exploration on. And that if we can find higher-grade ore, if we can look at maybe doing a smaller initial investment, improve the economics by finding higher-grade or more ore and starting a stage process, then perhaps that's a way to improve the economics and not have to put up a significant amount of capital right off the bat. So there are opportunities like that within the asset base that are not just going to rely on higher commodity prices but exploration upside, the amount of investment that we're making, some other synergies that if we can do that, then ultimately that may change that investment decision.

Patrick T. Chidley - HSBC, Research Division

So supposedly, exploration success and/or ridging in the mine plan a little bit.

Jamie C. Sokalsky

I think those are 2 major points, yes.

Patrick T. Chidley - HSBC, Research Division

Okay. And just finally, just a follow-up to Greg's question on the -- this 2 -- the collective projects that add up to the 8 million or 9 million ounces. First, just to push it a bit further, are there -- which particular projects would be the bulk of that? And secondly, if you're not going to do some of these investments, I imagine that this might lead to some mine closures or shorter mine lives. And then does that then mean your more likely to be selling assets in the next few years maybe to investors who have a different view on metal's prices or what they can do with the assets?

Jamie C. Sokalsky

I think in terms of the individual projects, there aren't any real significant ones that make up that differential from the 9 million to the 8 million. So rather than actually talk about specific items at the regions, it's a myriad of projects that where growth opportunities and existing assets required a high level of investment as I mentioned. So there weren't any kind of major assets. There was a lot of individual mine expansions and further investments. So I can't really delineate. I don't think it's fair to delineate any one project. I don't see this as really impacting significantly our ability to build on, let's say, 1-million-ounce base and grow the company. Those are -- again, were marginal projects in many instances. And if we can generate better return and higher free cash flow, I'm sure we'll be able to find other investments that will make sense and allow us to grow the company and redeploy that money into potentially even better assets than what we are looking at here.

Operator

Our next question comes from the line of Jorge Beristain from Deutsche Bank.

Jorge M. Beristain - Deutsche Bank AG, Research Division

I guess, my question is 2. One is could you just quantify or what has really changed since you've become that CEO in terms of your capital allocation strategy? Is -- are there more internal processes now? Does the board have a different view as to how projects get the green lit than in the past? That's my first question.

Jamie C. Sokalsky

Jorge, yes, there is a different process. First, it starts with how we are looking at every single project and operation, and we've instilled a very thorough review process. We have people that are assigned completely to capital allocation, looking at the assets. So a program that's more formalized to look at everything that we're doing, and we're going to expand that. I think the concept of free cash flow and a more disciplined rate of return is now inherently being communicated across the organization. The board has given full support to how we're looking at the business from that standpoint and understand that we should be looking at generating free cash flow. So I'd say that there are some actual concrete things that we are doing differently now in terms of how we're managing it and assigning people, communicating that philosophy across the company and also a focus on what we're looking at in terms of any acquisitions, our corporate development guys are looking at both how we manage the portfolio from what we buy and also looking at opportunities to optimize the portfolio. So it's a cultural change, I think, throughout the organization, but backed up by systems and people that are running the numbers and doing that and bringing that to senior management and also being endorsed by the board.

Jorge M. Beristain - Deutsche Bank AG, Research Division

And what would be the course of action for assets that are clearly not meeting your internal rates of return? And what is the timeline to divest those kind of assets that are nonperforming?

Jamie C. Sokalsky

That depends. It's -- I have to say, this isn't a -- it isn't something that is resulting in a big housecleaning of a number of our assets. If assets are worth more to someone else than they are to us, we have to take a look at that. There are opportunities to sell assets, and we just have to make sure that what we're getting -- we don't have to divest these assets. We can maintain the optionality. But if we look at those and have a view that someone else is willing to pay us more than what we think they're worth, we have the ability to do that. But we have the luxury of also maintaining those assets and maintaining the optionality that they have. I don't have a specific time horizon for any of these things, and we will be thoughtful about this, and we'll make sure that we aren't knee jerking anything in -- with respect to selling assets or doing anything that doesn't make sense for us in the long run.

Jorge M. Beristain - Deutsche Bank AG, Research Division

Okay. And maybe one last question, just in terms of these -- the megaprojects like Pascua-Lama that are now approaching an $8-billion price tag, has the thought of doing more a joint-venture-style projects like what you just did in the Dominican Republic in terms of risk sharing, is that going to be a more common feature going forward? Because it just seems that these projects are -- they can be company makers, but they can also be company breakers.

Jamie C. Sokalsky

I think that's a possibility of risk sharing. Traditionally, we have always liked to have control and ownership of our projects. But the world has changed, and these are big tickets. And I think it helps to have someone share financial -- the financial cost of the projects but also share in the overall risk of the project. So I'd say we'd be open to looking at that. It depend on the opportunity and depend on who the partner is and depends on where we are.

Operator

Our next question comes from the line of Alec Kodatsky with CIBC.

Alec Kodatsky - CIBC World Markets Inc., Research Division

I just had a couple of questions around both Pascua and Lumwana. But starting with Pascua, given where you've seen CapEx head, do you believe that the project will be able to meet internal target rates or hurdle rates that you're targeting now?

Jamie C. Sokalsky

Well, thanks, Alex. Yes, I do. This is still a very good project. It's a very robust project, producing 850,000 ounces a year at close to 0 cost. And that is a very significant free cash flow generator, EBITDA generator, and our view is that this is still a very attractive return project for Barrick.

Alec Kodatsky - CIBC World Markets Inc., Research Division

Great. And in terms of your remarks, you brought up the element of labor inflation and particularly in Argentina. I'm just curious if you could give a sense as to the extent to which you think you may have immunized yourself to labor inflation with the fixed cost arrangements that you're entering into?

Jamie C. Sokalsky

Well, I think what we've done there as well is put in conservative assumptions, and this is a go-forward estimate on Pascua-Lama. We have done some fixed price contracts on some labor. But we're not going to be completely immune to further significant labor increases. We are reflecting that in our overall contingency that we have on the project but -- and have assumed some fairly significant rates of inflation on labor. But I believe that we've been able to mitigate that somewhat and have reduced that exposure. But we haven't completely eliminated that exposure, but we've done it through fixed contracts. Argentinian labor is about 25% of the overall cost of the project, and we've factored in conservative rates. And I think we've done some very good things to control the overall project cost, including overall fixed prices for a lot of the machinery and equipment that has been committed as well.

Alec Kodatsky - CIBC World Markets Inc., Research Division

Okay, great. And maybe just to get some thoughts on the expansion at Lumwana. Is there -- in reviewing the project, is there something that's arisen in terms of the operating cost or capital cost that have sort of given you pause? Or is it the situation that you want to get the operation functioning as you see fit and then determine what that ultimate cost structure maybe?

Jamie C. Sokalsky

I think we really need to just get this operation running like we thought it could and know that it will and then look at how we may further expand this. We're working on the pre-feasibility study of the expansion, but that pre-feasibility will be done by the end of this year. But our first focus is on improving the operating performance, growing the size of the assets, and then we'll look at what we do to expand it. I think we're very optimistic that we will be able to do that, but we have a first priority of really getting this mine under control.

Operator

Our next question comes from the line of Dave Haughton with BMO Capital Markets.

David Haughton - BMO Capital Markets Canada

Just having a look at the CapEx profile, you're guiding to that $6 billion plus in 2012. It does look as though the CapEx just kind of drop off quite markedly next year and the year beyond. Does that give you greater confidence of the ability to increase your dividend perhaps in 2013?

Jamie C. Sokalsky

Thanks, David. Well, we will be looking at higher capital cost for Pascua next year as well with this new revision, but ultimately, as we move forward, there are a number of things that we can do with the cash flow that we'll be generating. Pay down debt. We can pay higher dividends. We can make further investments in capital. So we'll look at the entire balance of what we do with our free cash flow. But I'd say that 2013 will still be a reasonable CapEx year as we finish -- as we move forward with Pascua-Lama. But ultimately, yes, that is our goal, to be able to turn some of this free cash flow into higher dividends for shareholders. But that -- certainly that will be a, obviously, a board decision. But our goal has been to pay a progressive dividend, and this disciplined capital allocation program, I think, gives us the potential to do more of that. And that's our goal.

David Haughton - BMO Capital Markets Canada

For Pascua, $2-billion-plus CapEx escalation, how much of that would you see falling in 2012 and '13? What's your general feeling?

Jamie C. Sokalsky

Well, if you'll look at our capital guidance increase this year, we're up at $6 billion to $6.3 billion, and that -- essentially, that's about $500-million increase from where we were is primarily related to Pascua-Lama. And then if you'll look at the -- where we're going to be spending the money, we've got the start of 2013, we've got a -- let's say, about 1.5 years of construction left. So if you factor in, that's about $500 million for the -- additional for the rest of this year. Then, that percentage increase would be 2/3 in '13 and about -- and 1/3 in 2014 very roughly.

David Haughton - BMO Capital Markets Canada

That's helpful. With the deferral of these projects that don't meet your investment criteria, does this sort of accelerate your thinking on the brownfield opportunities that you've got within Nevada? I noticed that you've got a very big commitment as far as drilling is concerned there. But at Goldrush and also at Turquoise Ridge, do these pop up better in your screening than the greenfield projects?

Jamie C. Sokalsky

I think that's fair to say that we're going to do everything that we can to advance our projects in Nevada. They do pop up well on screening because of where they are and the fact we have infrastructure there already. And our overall risk-adjusted rates of return, combined with the overall free cash flow that we can generate relative to the capital that we're spending and the ultimate size and the return, they definitely do rate highly in terms of our overall investment metrics. So we will really do what we can to advance these projects at as expedited pace as possible.

Operator

Our next question comes from the line of Steve Butler with Canaccord Genuity.

Steven Butler - Canaccord Genuity, Research Division

Oh, geez, Jamie, just within the 1.5 hour mark. Question for you, I believe that today or near today, maybe the deadline to file an appeal on the El Morro case. Can you make any comments there as to whether an appeal is planned or has been filed or not?

Jamie C. Sokalsky

Sure, Steve, thanks. Yes, today is the deadline, and while we feel that the decision was not correct, we will not be filing an appeal on that.

Operator

Our next question comes from the line of George Topping with Stifel, Nicolaus.

George Topping - Stifel, Nicolaus & Co., Inc., Research Division

So I was interested in gold and silver prices you're using when you're running your stress test on IRRs for your projects.

Jamie C. Sokalsky

George, we use a multitude of prices and run sensitivities, and those would be anywhere from, say, $1,200 to the current price, and also look at some upside. So it's a multitude of ranges that we look at on gold and also on copper in terms of an approximate similar type of range that we use, so...

George Topping - Stifel, Nicolaus & Co., Inc., Research Division

I don't mean to pressure you, but which one do you select out of that range as your base case?

Jamie C. Sokalsky

We don't really select anything in particular, George. I don't want to sound like I'm avoiding the question, but in essence, we do look at -- everything that we look at has a grid, and it will -- we'll look at the risk and the upside in any of the assets that form a part of that analysis of the rate of returns. So we -- I can say that what we do is we use more conservative prices overall and not the current spot price. We will be looking at prices that are lower than where we are and are conservative. And if prices go up, then that's a bonus, and the leverage to the gold price through either exploration upside or just the gold price itself is part of our assessment.

George Topping - Stifel, Nicolaus & Co., Inc., Research Division

All right. well, just pressing on then. The -- what consideration was given to deferring the project similar to new ones, Congo, where they've had to shut it down for other reasons. But given the way Argentina is going and the government's becoming more unpredictable every passing month, was there -- was that an option cancel it on the table or just defer it for a couple of years because after all, the deposit will still be there in a couple of years?

Jamie C. Sokalsky

No, George. It was -- we have had and continue to have a great relationship in both Chile and Argentina. And we're operating in San Juan province, and we've had Veladero operating there quite well since 2005. We produced [indiscernible] number of years over or 1 million ounces there at Veladero. So we are -- we have a quite good and solid relationships. We are going to build this mine. It's been the subject of a number of cost and schedule pressures, but the concept of deferring this and not continuing with what's going to be one of the truly great gold mines in the world, that was not on the table.

Operator

Our next question comes from the line of Kerry Smith with Haywood Securities.

Kerry Smith - Haywood Securities Inc., Research Division

Jamie, for Pascua in Q1, you had -- in the press release, you've said that you were 70% committed on the capital, and I may have a different understanding of what committed means versus what the intention was. But does that suggest then that effectively the capital that was remain to be committed to 30% is effectively 100% over budget than what you originally planned, and that gives you sort of 50%, 60% increase for the entire project?

Jamie C. Sokalsky

That's a good question, Kerry. No, what it really -- the bulk of the increases that we're seeing are related to productivity and the schedule. And we are seeing some additional costs on quantities, that uncommitted portion that you mentioned. But a significant part of the cost of this project is related to that deferral schedule. You can imagine that the owner's cost and the contractor cost of each month of the deferral is a very significant amount of money. And that overall productivity that we're seeing and the inflation rates on labor -- and labor, as I mentioned, labor is a significant part of the cost of this project. Those costs are really what have been driving up the overall capital cost of this project. And it's not the machinery and the equipments, and it is some quantities like concrete, et cetera. But that's a much lower risk factor for us going forward. It's the other costs that I mentioned, the cost of actually constructing the mine and how long it takes.

Kerry Smith - Haywood Securities Inc., Research Division

Okay. And the review of your existing operations, is there -- have you given the operations a timetable to complete that review? Or is that something that would be ongoing? Like should we be waiting to hear an announcement on that, say, Q3 or Q4?

Jamie C. Sokalsky

We'll update the market in Q3, Kerry. So you'll -- we'll give you some more information and report on our progress.

Kerry Smith - Haywood Securities Inc., Research Division

Okay. And just perhaps on George's question about -- because I was curious about the metal prices you would use for this capital allocation program. For the 2 projects that you've sort of said you wouldn't go head on now, which is Casale and Donlin, what sort of long-term metal prices would you have used to make that assessment?

Jamie C. Sokalsky

Those prices would be certainly lower than today's price, Kerry. They'll be -- it's a fair a bit lower than what today's prices. We aren't trying to justify projects by using higher spot prices or even higher forward prices.

Kerry Smith - Haywood Securities Inc., Research Division

Okay. Because I think this -- if I remember the feasibility, for Donlin was 12 50 was the base case. Would that have been kind of the long-term price that you would have considered and at that level, you felt that the IRR was high enough? Or were your core price higher than that?

Jamie C. Sokalsky

We would have looked at those feasibility prices, but also again, we use sensitivity. But that would have been in the ballpark.

Kerry Smith - Haywood Securities Inc., Research Division

Okay, okay. And then just the last question, you talked about increasing dividends. What about a share buyback, which is a bit more tax efficient? Is it something that could be more of an ongoing program with Barrick?

Jamie C. Sokalsky

I think that is something that ultimately is in the toolkit, Kerry, but if you'll look at our capital expenditure program over the next little while and where we're investing our money, I think the aspect of the -- of a share buyback would be something that would be lower on the priority list at this point.

We've had a fairly long call, operator. So I'd like to actually conclude the call and thank everyone for participating and your time and your questions. And I think we have a very exciting opportunity to really add value and distinguish ourselves in this industry. And while we also need to make sure that we get a number of our priorities and challenges back on track, I think we have a very good opportunity and a great future to add value and increase shareholder returns.

With that, I'd like to sign off and look forward to speaking to everyone again. Thank you very much.

Operator

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

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