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Barrick Gold (NYSE:ABX)

Q3 2012 Earnings Call

November 01, 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

Robert L. Krcmarov - Senior Vice President of Global Exploration

Ammar Al-Joundi - Chief Financial Officer and Executive Vice President

Igor Gonzales - Chief Operating Officer and Executive Vice President

Analysts

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

Jorge M. Beristain - Deutsche Bank AG, Research Division

Greg Barnes - TD Securities Equity Research

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

David Haughton - BMO Capital Markets Canada

Alec Kodatsky - CIBC World Markets Inc., Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Barrick Gold Third Quarter 2012 Results Conference Call. [Operator Instructions] As a reminder this conference is being recorded, Thursday, November 1, 2012.

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

Gregory S. Panagos

Thank you, Sylvanna, and good morning, everybody. Before we begin, I'd 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 latest year-end report or our most recent AIF filing.

I'm here today with our President and CEO, Jamie Sokalsky; our Senior Executive Vice President, Kelvin Dushnisky; our Executive VP and CFO, Ammar Al-Joundi; our Executive VP and Chief Operating Officer, Igor Gonzales; and our Senior VP of Global Exploration, Rob Krcmarov, all of whom will be available to answer questions after the presentation. And with that I'd like to call over to Jamie.

Jamie C. Sokalsky

Thanks, Greg, and good morning, everyone, and thank you for joining the Barrick Third Quarter Conference Call. I'd like to start the call by briefly going through our third quarter results and also give you a summary of what we've done to address the priorities that we outlined in the second quarter. Rob will provide an update on exploration after which I'll cover our 2012 and longer-term outlook and the more detailed progress we've made in support of our disciplined capital allocation framework.

So turning to our third quarter results. Gold production was 1.78 million ounces, a total cash cost of $592 per ounce and net cash cost of $537 per ounce. This was slightly below expectations mainly due to lower production and higher costs from Australia Pacific and African Barrick Gold. Total copper production in the third quarter was 112 million pounds at C1 cash cost of $2.33 per pound. Net earnings were $620 million or $0.62 per share compared to $1.37 billion or $1.37 per share in the prior-year quarter. We had some net adjusting items, which totaled $231 million and that included $148 million in impairment charges mainly related to a previously acquired exploration property in Papua New Guinea, and $71 million in unrealized losses on nonhedged derivative hedge instruments.

On an adjusted basis, net earnings were $850 million or $0.85 per share compared to $1.38 billion or $1.38 per share in the third quarter of 2001. The lower earnings primarily reflect lower gold and copper sales volumes, a higher cost of sales per gold and lower realized gold prices. Our third quarter operating cash flow was $1.73 billion, an adjusted operating cash flow of $1.27 billion compared to $1.9 billion and $2 billion, respectively, a year ago. Our adjusted operating cash flow excludes approximately $500 million of net proceeds related to the settlement of a portion of our Australian dollar hedge positions.

During the quarter, with the Australian dollar trading at historically elevated levels against the U.S. dollar, we took the opportunity to unwind approximately AUD 2.6 billion from our hedge book at an average spot price of about $1.05. So as a result, we realized net cash proceeds of approximately $500 million upon the settlement of these contracts in the third quarter. I should note that the corresponding gains that we realized will be recognized in the income statement based on the original hedge contract maturity dates going forward, which are between 2012 and 2014. So that will provide locked-in gains of approximately $90 million, $280 million and $110 million, respectively, which positively impacts our total reported cash cost per ounce in the fourth quarter of 2012 and the years 2013 and '14, respectively. So we will get the benefit of those Australian dollar hedges coming through our cash costs in the next couple of years.

The impact is that for the remainder of 2012, every $0.01 movement in the Australian dollar will have about a $2 per ounce impact on our consolidated total cash costs. At the end of the third quarter, we still continue to have approximately $1.8 billion of Australian dollars hedged primarily between 2014 and 2016 at an average rate of about $0.92, so we still have a fairly substantial Australian dollar hedge book to protect our Australian dollar costs going forward.

On the energy side, the contribution of production from Barrick Energy along with the financial hedge contracts that we have on energy provides hedge protection for approximately 75% of our expected remaining 2012 fuel consumption. And we also have floor protection on approximately 60% of our expected copper production for the remainder of this year with an average floor price of $3.75 per pound, while still having full participation to any upside in copper prices.

So just turning to our operating results. We are expecting much stronger production in the fourth quarter of this year and we expect to meet our gold production guidance for the year. In our North America region, production and costs at Cortez were in line with expectations and it's anticipated to return to higher production levels in the fourth quarter as a result of expected mine sequencing. Goldstrike benefited as anticipated from increased productivity following some maintenance improvements in the first half of the year and also from access to higher open pit grades.

In South America, Veladero was impacted by lower recoveries due to lower leach pad kinetics. However, leach recoveries have improved with higher solution rates and better ore permeability. This is expected to continue and result in higher fourth quarter production. The Lagunas Norte Mine benefited from access to higher grades following the completion of pit dewatering. Our Australia Pacific region was primarily impacted by lower equipment availability and lower tonnage from the underground at Porgera.

Gold production and cash costs for North America, South America and Australia Pacific are expected to be in line with their previous respective guidance ranges. However, our share of ABGs 2012 production is expected to be about 5% to 10% below the low end of the previous guidance range of 500,000 to 535,000 ounces, and our total cash cost there are expected to be about $900 to $950 per ounce compared to the previous guidance range of $790 to $860 per ounce.

Looking at copper, the Zaldivar mine produced 66 million pounds of copper at C1 cash costs of $1.63 per pound. Sales from Zaldivar were however, impacted by a labor strike at the port of Antofagasta, which delayed a shipment of 26 million pounds. The strike has ended though, and these sales will be recorded in the fourth quarter.

Lumwana produced 45 million pounds at C1 cost of $2.90 per pound. The expected full year production for Lumwana is 155 million to 165 million pounds at C1 cost of $3.30 to $3.50 per pound, both within prior guidance. Our production at Lumwana in the third quarter was impacted by equipment availability and maintenance issues and lower grades, but we've completed the pressure maintenance and we expect ore grade to increase going forward.

We're making good progress on the priorities I outlined in the second quarter call. With stronger production expected in the fourth quarter, we're on track to meet our 2012 gold production guidance at slightly higher total cash costs. Despite this increase, however, we remain the lowest cost senior on a total cash cost basis. And at Pueblo Viejo, I'm very pleased to report we poured [ph] first gold on schedule and budget in August and we expect to reach commercial production next month. And we've made considerable progress at Pascua-Lama by resetting and strengthening project and construction management, and the final detailed cost and schedule review will be complete by the time of our year-end results release.

At Lumwana, we began processing ore from the Chimiwungo pit on schedule and completed infrastructure improvements to mitigate the effects of the rainy season. This operation is positioned to deliver substantially improved results next year.

We've also made some important strides in implementing our disciplined capital allocation strategy, a focus on free cash flow and risk-adjusted rates of return. In June, we initiated a full review of our portfolio. Cost control is a vital part of this review and during the third quarter, we have cut or deferred a further $1 billion of sustaining and mine site expansion capital from the initial budget submission for 2013. We've also initiated a G&A review and are reviewing company-wide costs to identify ways to reduce our overall spend further.

We're in discussions with China National Gold related to the potential sale of our 74% interest in African Barrick Gold, which is clearly in line with our focus on portfolio optimization. And also in the quarter, we've strengthened our copper business unit with the appointment of a new senior leadership team that will be focused exclusively on optimizing and maximizing the value of this significant business.

Since July, we've done an enormous amount of work to get a more precise cost and schedule estimate on Pascua-Lama. We've reset and strengthened the project management and construction teams and have commenced the transfer of project management from Barrick to Fluor. Fluor is the leading global EPCM contractor that successfully managed the construction of our Pueblo Viejo project. We've reorganized and strengthened Barrick's project team and appointed a new Project Director and we've also hired construction industry experts to improve the oversight and leadership of the project. Our partners there are delivering on their commitment to provide their A-team for leadership and supervision. We now have a conventional EPCM management structure staffed and incentivized with some of the most experienced and skilled professionals in the construction industry, people who have a demonstrated track record of building some of the largest and most complicated infrastructure projects in the world.

Since July, we've been working with a team of 60 experienced Fluor professionals on a comprehensive top-to-bottom review. As I mentioned, the review will be complete by the time we release our year-end results. However, our confidence level has substantially increased and work to date suggests the capital costs will be closer to $8 billion to $8.5 billion, with first production in the second half of 2014. Delays in the earthworks and underground works for the process plant are the primary reason for the indicated shift in schedule. The increase in total construction cost is split about equally between the impact of the delay of first gold to the second half of 2014, increased labor hours and installation rates after reviewing these and significantly more detail with Fluor and also the addition of incremental payments to Fluor to assume project management and additional construction management, as well as increased incentives for Fluor and other contractors to bring the project in on time and on budget.

Approximately $3.7 billion has been spent to date. The tunnel is approximately 60% complete, and 90% of the required material and equipment for the process plant has been committed.

So in terms of the more specific work done in the third quarter, we reviewed all the major contracts and work packages of which there were many and verified material quantities, prices and unit cost of bulk materials for concrete, steel, piping and electrical, and we've also updated and benchmarked installation rates and productivity against other large high-altitude projects. We've progressed the detailed review of the project schedule, including related logistics like transportation, camps and plans are underway to increase the camp capacity to provide additional construction flexibility like night shifts or double shifts.

We substantially increased the quantity and the quality of skilled labor with almost 2,000 new hires in the third quarter, mainly from the province of San Juan and elsewhere in Argentina. So I'd like to stress that we've made quite a bit of progress in strengthening and progressing the project, and remaining work will focus on consolidating the results of the review inputting those results into Fluor's construction management systems and coming to the more definitive estimates. As I said, we have significantly increased our confidence that we're getting on top of this project.

I'd also like to reiterate that Pascua-Lama, while it has its challenges, is a world-class asset. Annual gold and silver production in the first 5 full years is expected to average 800,000 to 850,000 ounces and 35 million ounces of silver. A total cash cost of 0 to negative $150 per ounce based on a silver price assumption of $25 per ounce. This will be a mine with a 25-year mine life, providing significant low-cost production to Barrick for many years to come.

I was just down at the site again a couple of weeks ago along with other senior members of our leadership team. And that's my third time in about 5 months, actually at site, and observed some notable progress on the structures, particularly on the Lama site in Argentina where the processing facilities are under construction. These photos are from that visit and show the progress on the mills, the covered stockpile, the pebbles crusher and the leach circuit. And construction is now entering the summer season and we expect to make considerable progress over this period. I want to reiterate that Pascua-Lama is our top priority, for me, management team and a significant amount of people at Barrick, and we're very focused on getting this project into production as quickly as possible.

Turning to Pueblo Viejo. I'm very pleased to report on the status of Pueblo Viejo. It's an outstanding asset and an excellent example of the kind of high-return opportunity in which we will invest capital. I was at Pueblo Viejo for the first gold pour in August, and that was a great moment for the company, and I'd like to congratulate everyone involved in bringing this high-quality mine into production on schedule and within capital guidance. The mine is currently ramping up towards commercial production, which is anticipated in December. Our share of 2012 production is expected to be about 80,000 ounces of gold and results will, of course, vary depending on the progression of the ramp up. The oxygen plant has been commissioned and the first 3 autoclaves have been tested at up to 100% of the design capacity. Results have been in line with our expectations for the initial ramp-up period.

We've had some typical start up issues, which one would expect with a large project like this, but nothing of significance. And we continue to expect a further ramp up throughout 2013. The fourth autoclave is currently undergoing precommissioning and is expected to be commissioned in the fourth quarter. Our share of average annual gold production from Pueblo Viejo in the first full 5 years of operation is expected to be between 625,000 and 675,000 ounces at total cash cost of just $300 to $350 per ounce. And it has reserves of over 25 million ounces on 100% basis. It has a very long mine life of over 25 years.

As I mentioned at the beginning of the call, we strengthened our copper business unit during the quarter. These changes were made in line with our objective of maximizing returns and free cash flow from all of our assets. The copper assets now report to a new senior leadership team led by President Marc Fisher, who will report directly to Igor Gonzales. Mark has over 30 years of global mining experience as -- and has overseen 4 open pit mines in South America, as well as at Porgera. Complementing his technical and operating depth, Mark also has a proven record in dealing with the Social Security and community-related challenges facing large-scale mining projects. Mark and his team will focus exclusively on optimizing our copper business and I am very confident they will be successful in helping our copper assets achieve their full potential. This new leadership team will help address the near-term challenges, both at Lumwana and Jabal Sayid, as well as evaluate expansion opportunities at Zaldivar and Lumwana, and will also assist in the efforts to realize operational and commercial efficiencies and synergies.

We've seen some good progress at Lumwana following the action plans we identified in the second quarter to improve the operating performance and maximize the mine's long-term potential. We're still working to correct the waste stripping deficit we inherited and are making good progress. And the leadership changes at the site are also starting to pay further dividends.

We've completed infrastructure improvements to mitigate the impacts of the rainy season, and those involved an upgrade of all the pit ramps and the major haul roads and also an implementation of a pit dewatering strategy. All required pumps are on-site and primary in-pit pumps are established for the entire wet season. We've also commissioned additional equipment for the wet season road maintenance and in-pit for maintenance. So we should see some very good improvements during the rainy season, which has just started.

As I mentioned, the transition to an owner-maintained site to improve maintenance practices and equipment availability is progressing. Additional staffing and training is underway and maintenance technicians have been redeployed from other sites to assist with the transition. The mill has just started processing ore from the Chimiwungo pit since August. Chimi will be the primary supply of ore for Lumwana starting in 2013 and that's where we see the greatest potential. We continue to bring the mine up to Barrick's standards with a long-term view and we're going to see some of those benefits in 2013. We're making progress on our improvement initiatives and expect significantly better performance next year.

With overall higher grades, we continue to expect Lumwana to produce about 250 million pounds next year at lower C1 cash costs, a significant improvement from 2012 levels. And our extensive exploration drilling program continues to deliver positive results, which Rob will update you on.

And I'll now turn it over to Rob to give you a full update on our exploration program.

Robert L. Krcmarov

Thanks, Jamie. We have over 100 exploration drill rigs operational globally, but over 1/3 of these are growing and upgrading resources at Lumwana and Goldrush, which I'll focus on in the next couple of slides.

Outside of Lumwana and Goldrush, we've had some very good exploration successes, some of which I hope to showcase in the future quarterly conference calls. At Lumwana, the full contingent of 25 exploration drill rigs is operating at Chimiwungo and this major infill program is nearing completion. If we take a look at the progress of the entire program, the results can be described as above our expectations. So let's take a minute to explain this slide.

The yellow and the pink colors are the meters times copper percent grades. So for example, the 40-meter percent color red could represent a thick high-grade zone such as 40 meters at a percent or a second average-grade zone of say, 80 meters at 0.5%. So basically the hot colors represent thickened and/or higher-grade zones. And the 2 shades of green that you see overlying these colors represent the 2011 year-end resource and reserve areas. So as you can clearly see, the exploration drilling has vastly increased the minimum inventory.

Once economic considerations have been applied during our year-end resource and reserve calculations, we'll know how much will fall into a pit limit and convert into MI&I [ph] resources and 2P reserves. However, at this stage, we do expect increased reserves by the end of this year. The results from this drilling will form the basis for a new life of mine plan and will also be incorporated into pre-feasibility study on the expansion opportunity for Lumwana, which is considering a range of potential increases up to double the current processing rates.

At Goldrush, on the Cortez property, drilling continues to expand the footprint of the [indiscernible] and identify additional high-grade zones, and this is providing multiple development options. As you can see on the slide, high-grade zones continue to be defined and expanded in the central corridor between the 2011 resource areas and what's now the center of a single deposit. Shallow high-grade mineralization and affected [ph] west of the Red Hill zone indicates potential for the Western extension of the open pit of economics. And also high-grade mineralization remains open to the north, including an area to the east with grades -- high grades, potentially indicative of an underground potential.

The mineralized corridor has now almost doubled and has been delineated by the 7 kilometers in strike. Based on the results to date, a significant increase is expected by 2012 year end, that's to the already-defined 7 million-ounce resources. A scoping study has just been completed, results were very encouraging and we've already started to proceed with pre-feasibility study work.

We focus much on Goldrush since we announced its discovery at a little over a year ago, but I think it's worth noting that stepping out from Goldrush, the Cortez camp contains a wealth of long-term district-scale exploration opportunities. The recent purchase of the Mill Canyon property from Victoria Gold brought the entire Cortez district on the Barrick management, which permits systematic exploration of high-quality targets. These include a parallel trend recognized to the West of Goldrush, and the Northern and Southern extensions of the Goldrush system. A pipeline of quality drill targets has been generated for drill testing in 2013, from which additional significant new discoveries and extensions could emerge.

With that, I'll turn the call back over to Jamie.

Jamie C. Sokalsky

Thanks, Rob. So turning to our 2012 outlook, we expect gold production to be 7.3 million to 7.5 million ounces, which is within our original guidance range of 7.3 million to 7.8 million ounces. Our total cash costs for 2012 are anticipated to be about $575 to $585 per ounce, about $10 an ounce higher than the top end of our previous guidance of $550 to $575 per ounce, primarily due to higher costs from Australia Pacific and African Barrick Gold.

Net cash costs are expected to be about $480 to $500 per ounce within our previously guided range. As we disclosed during the third quarter, 2012 copper production is anticipated to be about 450 million pounds as a result of the delay in first production at Jabal Sayid. C1 cash costs for 2012 are still anticipated to be in the range of $2.10 to $2.30 per pound. With respect to Jabal Sayid, during the quarter, we are notified that it was not in compliance with standards for safety and security in Saudi Arabia, and therefore, we were not able to commence production as originally expected.

Jabal Sayid was originally designed by the previous owner in compliance with Western Australia standards. A dedicated EPCM team is working towards achieving full compliance under Saudi Arabia standards and the mine is currently expected to achieve this compliance in 2014, at which time production will commence. Our total project capital expenditures are still anticipated to be about $400 million, and we continue to expect average annual copper production of between 100 million and 130 million pounds over the first 5 full years at C1 cash costs of between $1.50 and $1.70 per pound.

As I indicated in our second quarter call, we do have a renewed focus on maximizing shareholder value and we intend to deliver this through an increased rigor on capital allocation and based on maximizing risk-adjusted returns on investment and free cash flow.

When I talk about capital allocation, I mean we are looking at the entire business. It's a portfolio management approach. And under this approach, all capital allocation options, which include organic investment and exploration and projects, acquisitions or divestitures to improve the quality of the portfolio and other expenditures all will be assessed on the basis of maximizing risk-adjusted returns. All alternatives to invest shareholder capital will compete against each other.

Our increased emphasis on free cash flow will position the company in the future with the potential to return more capital to shareholders, repay debt and make additional attractive return investments to upgrade our portfolio. And with our high-quality existing portfolio, we have the ability to do these things.

Cost control is also an integral component of our capital allocation framework. We have been reviewing company-wide costs and evaluating ways to reduce these, including sustaining capital and G&A expenses.

I'd like to give you a more detailed progress report on what we've done in the last 2 quarters in support of this. In the second quarter, I announced that we had initiated a full review of our operations and projects. I'd like to stress that this isn't not just a onetime thing. This portfolio review will be an ongoing dynamic process.

As previously discussed with our second quarter results, in light of the increased rigor on disciplined capital allocation, we determined that a number of various pipeline projects do not currently meet our investment criteria. At that time, we cut or deferred a total of approximately $3 billion in CapEx that had previously been budgeted over a 4-year period as a result of recalibrating our long-term gold and copper production to ensure that we make the proper rates of return.

As I've said, returns will drive production; production will not drive returns. We will run this company with a goal of optimizing our overall investment portfolio and will apply target or risk-adjusted returns not only to potential new investments, but also to our existing assets. And assets that don't generate target returns or significantly impact our ability to generate long-term cash flow will be deferred, shelved or divested.

During the third quarter, we took a further hard look at our capital budgets for 2013. As a result, we cut or deferred an additional $1 billion from initially budgeted sustaining and mine site expansion capital for 2013. As a result, despite additional spending at Pascua-Lama and continued inflationary cost pressures in the industry, we expect total 2013 CapEx to be largely in line with 2012.

As I mentioned, we've also initiated a G&A review with the goal of reducing our spend in this area going forward. And also during the quarter, we confirmed we were in continuing discussions with China National Gold related to the potential sale of our 74% equity holding in ABG, and this is right in line with our focus on portfolio optimization.

So we made some good progress in driving our strategy forward and reducing costs, but we continue to look for ways to enhance this further. We're very focused on profitable production. Our annual gold production is expected to be about 8 million ounces by 2016 and our copper production is anticipated to be about 600 million pounds by 2015 with the opportunity to increase to more than $1 billion pounds should we decide to proceed with the Zaldivar sulfides and Lumwana expansions. These levels represent a more profitable base on which to build, and should generate improved free cash flow and higher rates of return.

My overriding objective and that of everyone at Barrick is to translate our company's strengths and results into higher shareholder returns. We're the industry leader in terms of reserves and production and are the lowest cost producer among our peers. We have an excellent track record of financial and operating performance and also have a high-quality portfolio of producing assets and projects in construction, which we are focused on upgrading further. We have some of the world's premier assets, and we will continue to focus on top-tier assets with long life and low cost. All of this combines to give Barrick exceptional financial and operational flexibility and outstanding leverage to the price of gold.

And as we continue to be in a high gold price environment with positive price fundamentals continuing, we feel that we have that outstanding leverage to increase our results even further. However, as I've mentioned before, we can't just rely on prices continuing to go up. We need to manage the business well, in a disciplined way with shareholder returns in mind. Our disciplined capital allocation framework is designed with shareholder returns in mind, with an objective to funnel capital to its best use on behalf of our shareholders.

So what are our fourth quarter priorities? As I've outlined, we've made a lot of progress in the last couple of quarters. But there are some clear goals we want to achieve in the balance of the year, these include meeting our 2012 production and cost targets, and we expect to do this with a stronger fourth quarter, bringing Pueblo Viejo into commercial production in December. And we are on track to achieve this, working with Fluor and our partners at Pascua-Lama to finalize a more definitive cost and schedule estimate for the project, and also identifying further measures to reduce company-wide costs through our ongoing review, including CapEx and G&A costs. One of the best ways to reduce cost is to develop a portfolio of long life, low-cost assets, which we're doing. While we still have some work to do, we feel that we are on the path that will deliver the right results.

By being disciplined with our capital and running the business well, I'm confident that we can deliver superior share price performance, and that is our ultimate goal. I should also mention that there are some critical social responsibility practices with which we have made great progress as well, not only because it is the right thing to do, but is critical to maintain our social license to operate and develop clients around the world.

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of John Bridges with JPMorgan.

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

Just wondered with Jabal, what's needed at that mine to bring it into compliance? It seems like quite a long lead time.

Jamie C. Sokalsky

Good morning, John, and thanks for the question. We inherited a situation, as I mentioned, where the explosives, which are a critical component of operating a mine and are also a very high-profile item in the country, where that permitting was done under standards that weren't acceptable to the operation of that mine and to the regulatory authorities in Saudi Arabia. As you can appreciate, when you're having to repermit something and the time horizon to permit a different explosives handling and security process, that those approvals, the permitting submissions and the approvals and also the work that has to be done to build the proper containment facilities, that takes some time. And we need to make sure that we go through the proper process, do the right thing, completely permit that accurately and build the containment facilities. And as it is with any permitting and construction progress, we're starting from a new base. That takes some time, unfortunately. But we're very committed to getting it done right and hopefully, we'll be able to shave some time off, but we are going to make sure that the process goes through the right steps.

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

Okay, great. And then as a follow-up, I just wondered if you had any sort of examples of the new sort of high rate of return, higher cash flow initiatives that you're coming through with. Because what you've been saying is it makes a whole lot of sense, but a lot of it is what we were thinking you were doing anyway.

Jamie C. Sokalsky

I'd say that as I discussed, looking at some of the dispositions of assets by reducing costs across the company, looking at some of our overall assets, determining how core they are to the business going forward, we're still in the stages of doing that. And I'd say that you'll see some results of that, and that is an overall framework that I think we will be able to tick the boxes on as we move forward. I'm very encouraged by the process of capital allocation. We are beefing up that area in the company with senior people. And I'm confident that we'll be able to deliver on high return assets through cutting expenditures that don't make a high enough rate of return, potentially divesting assets, but also making investments in the existing business in high-return projects to provide for a double-digit or better rate of return with our existing assets.

Operator

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

Jorge M. Beristain - Deutsche Bank AG, Research Division

I just wanted to follow-up on the status of the sale of your stake in Africa Barrick Gold. I understand that when that was initially announced, potentially it was a little earlier than you had expected for that to be made public. But could you comment in terms of how far along you feel you are with that transaction and comment a little bit around the price of that potential sale relative to the IPO price? Does one have anything to do with the other?

Jamie C. Sokalsky

Hi, Jorge. As you could probably guess, for reasons of confidentiality and the processes is ongoing, there's really not a lot that I can tell you today. However, the discussions are continuing and we'll provide an update when we have additional information to report as soon as possible. But unfortunately, because of the nature of the process, I can't really give you any more information. But we'll do that as soon as we have it available and -- if capable of giving that out.

Jorge M. Beristain - Deutsche Bank AG, Research Division

Okay. If I could just maybe have a follow-up then. In terms of your priorities for enhancing shareholder return, a popular theme for precious metals equities has been to continue raising the dividends, whether linking them to the gold price or other metrics. Is this something that you guys would consider? Are you comfortable with your current dividend policy where it is? Or do you see that as another avenue to potentially also enhance your share price by returning more cash to shareholders?

Jamie C. Sokalsky

Well, Jorge, you saw that yesterday we announced the dividend at the same rate of $0.20 per share. So we're certainly comfortable with the existing dividend. And as I've said in the past and as I'll continue to say, we have increased the dividend. We've paid a progressive dividend. It certainly a goal. And as we move forward and finish building Pascua-Lama and start to generate additional free cash flow, it's certainly a goal of the company to continue to pay a progressive dividend, provided that makes sense as part of our overall capital allocation program. We've increased the dividend in the last 5 or 6 years by about 270%. It's been a big part of a program to continue to deliver more, return more cash to shareholders. So it's definitely one of the components of how we want to improve the share price.

Operator

Our next question comes from the line of Greg Barden (sic) [Barnes] with TD Securities.

Greg Barnes - TD Securities Equity Research

Jamie, I might be splitting hairs a little bit, but on Pueblo Viejo, I don't think you've seen commercial production yet. And the press release notes that once it is, you expect your share production this year to be 80,000 ounces post commercial production. That seems like an awful lot given where you are now apparently in the ramp-up, although it does seem to be going well.

Jamie C. Sokalsky

It's something that we feel that is definitely achievable, Greg. The -- that's the overall production level of Pueblo Viejo. Commercial production is basically an accounting term as to when you start to record production. And so, we fully expect to meet that 80,000 ounces of production in terms of our overall guidance. So that's the accounting term of commercial production. Some of that production will get netted against the capital cost before you disclose it as commercial production.

Greg Barnes - TD Securities Equity Research

Fair enough. Goldrush. I think that was mentioned in the call that you've done a scoping study on it, and in the press release you talked about various options to develop the deposit. I wonder, how's your thinking evolving there and what do you see happening?

Jamie C. Sokalsky

Rob, can you take that question, please?

Robert L. Krcmarov

Yes, yes. Sure, Jamie. So I think, having a look at some of the grade that we're intersecting, they're certainly high enough that you could envisage underground potential. The continuity is very good, some of the thickness of the mineralization is very good. And so in the scoping study, which is really based on the -- an earlier resource model, and I would consider as incomplete data, we contemplated doing a combination of open pit and underground. I guess, since the area in between the 2 ore zones has infilled quite well, it's conceivable that we could contemplate all scenarios. For example, completely underground, open pit and underground, and perhaps even a single large pit. So all of those are up for grabs. The fact is we still haven't defined the full extent of the mineralization in the Goldrush complex. And while we continue to do prefeasibility study work, we'll continue to do in-fill drilling and step out drilling and define the ultimate limits. And I guess the prefeasibility study will be based on a lot more drilling going forward.

Greg Barnes - TD Securities Equity Research

Conceptually, production ranges that we're talking here or timing?

Robert L. Krcmarov

I think it's too early to say. As I said, that scoping study was really based on a resource model that was completed around about midyear. And we know that we've added a lot more ounces since then.

Operator

Our next question comes from the line of Stephen Walker with RBC Capital Markets.

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

Just a couple of questions. You mentioned that in 2013, you're going to be transitioning at Lumwana into the higher-grade Chimi pits. Could you give us a sense of the average grades for the year 2013? Is it going to be the 0.8, I guess, reserve -- percent copper reserve grade in that range? Or is that -- is there -- can you give us some guidance on how you expect the grades to transition?

Jamie C. Sokalsky

Stephen, I'd say that the grades will be slightly higher than where we are now. A little early to say on the -- on that, but we're in the sort of the neighborhood of 0.6% now. I'd suggest that we potentially can see a slight increase in those grades.

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

Okay. And just want to understand how you're going to account for the Australian dollar hedging gains. You've realized $500 million here. You're going to amortize it against the operating costs in Australia, and we're looking at what, Potentially $100 an ounce if not more, a benefit from those noncash gains, I guess, from future years? Is that something that you've done in the past where you've tied the gains and losses to future production? Or will that be challenged by the auditors?

Ammar Al-Joundi

Stephen, it's Ammar here. That -- what we are doing is that we are going to apply the gains against the original positions and the original dates that they were set against. That is the correct accounting and the only accounting that we can do. So as Jamie said, those gains will come in spread $90 million for the remainder of this year, $280 million next year and $110 million in 2014, again, against the original positions and the original dates.

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

Right. I was going to say it's going to be probably a significant impact. I was just curious. Okay, and that's -- okay, we'll work that through the numbers. And just one last question on the sustaining capital in 2013, you're taking $1 billion out of that deferring capital or cutting costs. Can you give us a sense which projects that may be cutting that capital back from and sort of the nature of those cutbacks? Just maybe a little more granularity on where that $1 billion in savings, capital savings may be deferred and at which mines?

Ammar Al-Joundi

Stephen, it's Ammar again. That is spread along. We've looked at all of our assets. As Jamie said, we are taking the capital allocation process very seriously. In the second quarter, you start with the bigger items that have the more impact. And the second quarter, as Jamie said, we affected $3 billion. We eliminated $3 billion of spending on some over the next 4 years. In the third quarter, we went down to the next level of granularity. We looked at, for example, every single line item by item on our 2013 sustaining CapEx. We looked at what was absolutely necessary to do, what was nice to do and what were the economic reasons to do things. We had to prioritize them. We risk adjusted them. So it was a very detailed line by line exercise that we went through. What I can tell you is that there really is no material impact on production in 2013, and most of these were either cuts, roughly 50% cuts and roughly 50% deferrals. But some of those deferrals, we are only going to do them in the future if the economics of the proposals, individual proposals, are more robust.

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

So is there one particular mine or one particular region that's impacted to a greater extent than another?

Ammar Al-Joundi

No, it's spread out on all mines and all regions.

Operator

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

David Haughton - BMO Capital Markets Canada

One of the things that I did not see is your current guidance for CapEx in 2012. Previously, it was $6 billion to $6.3 billion, but given some of the savings and potential deferrals, can you remind us what your current guidance is?

Jamie C. Sokalsky

The current guidance is $6 billion to $6.3 billion, David. Since we've made some reductions in a few areas but as we're also spending an additional amount on a couple of items and including Pascua-Lama, we've -- that number has maintained at about approximately the same level.

David Haughton - BMO Capital Markets Canada

Okay. And given the statements earlier that '13 will look like '12, we should be looking at the $6 billion mark into 2013, too?

Jamie C. Sokalsky

Yes. I'd say that's a good estimate at this point. We're still finalizing our budgets. We'll be updating that guidance as we do with all of our guidance early in 2013. But that's where we see us coming out at this point, approximately in that [indiscernible].

David Haughton - BMO Capital Markets Canada

Okay. Now a big area of that spend will be Pascua. When you're stating your latest CapEx, I'm presuming that you're starting the clock back in 2010 for your current $8 billion to $8.5 billion guidance?

Jamie C. Sokalsky

Yes.

David Haughton - BMO Capital Markets Canada

All right. And would you be able to give you a ballpark kind of idea as to what the spend should be in 2012, '13, '14?

Jamie C. Sokalsky

So we've spent about $3.7 billion now. And so, if you look at the new range of $8 billion to $8.5 billion, 2013 proximately 60%, and 2014, approximately 40% of that to go...

David Haughton - BMO Capital Markets Canada

Okay, of the outstanding -- okay, and some a little bit more in the fourth quarter, too, I would expect?

Jamie C. Sokalsky

Yes.

David Haughton - BMO Capital Markets Canada

All right. And now just turning your minds back to PV. In production now, commercial production, likely December-ish, what kind of ramp-up do you have as your expectation of that mine getting to its full throughput? You've got a number of order clause there coming in through various sequences. I've seen that you've been testing at least 3 of those, but ultimately, there'd be 4. When do you think you'd get to full production rate?

Jamie C. Sokalsky

I'd say, David, that we're looking at about an 18-month ramp-up, but as a conservative estimate. And having said that, we expect that throughout 2013, mid-2013 or so of that, we should see a pretty significant ramp-up to close to full production.

Igor Gonzales

I'd like to add that -- this is Igor here. The nominal capacity for the autoclaves is 200 tons per hour. And so we're trying to reach that capacity right now in autoclaves 1, 2 and 3, and later in autoclaves 4. And we're mining -- we're processing ore from the ore that we have stockpiled earlier in the year and last year in 3 different types of stockpiles, and the grade of that ore is approximately 6 grams per ton.

Jamie C. Sokalsky

So we should see a very good performance in the mine in 2013. As we build that ramp-up, we'll get to a point where we think we'll be able to be operating at very close to full capacity some time not too far into 2013.

Operator

And our final question comes from the line of Alec Kodatsky with CIBC.

Alec Kodatsky - CIBC World Markets Inc., Research Division

I just wanted to have a quick follow-up on Lumwana. You say in the presentation that you transitioned into the Chimiwungo pit. Did that occur in the quarter? And just curious how much of the ore feed came from that pit and what the experience has been if any material did go through the mill?

Igor Gonzales

This is Igor here. Yes, on August the 12th, we commissioned the Chimiwungo pit and the primary crusher and it's overland conveyor. In this quarter, approximately 30% of the production came from that pit. However, next year, it's going to be almost more from Chimi than from Malundwe as we have more ways -- stripping to do in Malundwe than Chimi.

Jamie C. Sokalsky

We should see next year about 70% of the feed coming from the Chimiwungo pit.

Alec Kodatsky - CIBC World Markets Inc., Research Division

And I think historically, the transitional material at the top of the pit, it caused problems. And I think your plan was to do more advanced prestripping. And is that strategy proven to be successful? Are recoveries coming through the way that you planned?

Igor Gonzales

We've been processing Chimiwungo ore through the flotation [ph] facility, and we have seen recoveries in the high 80s and low 90s. So we haven't seen much of a impact in terms of recovery.

Alec Kodatsky - CIBC World Markets Inc., Research Division

Okay, so it's gone pretty well. And then just to sort of follow-up on the longer-term numbers and I guess with respect to the sustaining number that you've trended $1 billion, is that a number that you think is, and I guess, repeatable going forward? Is this sort of a 1 year element? Or is this part of the new philosophy in terms of how you'll be allocating capital for what's typically put into sustaining capital budget?

Ammar Al-Joundi

Hi Alec, it's Ammar here. This is absolutely the new paradigm at Barrick. We are sincere about being focused on this. What I will tell you is, one, every spend across all of our assets and frankly across corporate as well, will have to be justified and will have to compete for the money. And two, we expect our CapEx spend to drop materially after the completion of Pascua-Lama and our free cash flow to increase, our net free cash flow to improve materially as well.

Alec Kodatsky - CIBC World Markets Inc., Research Division

Yes. And I just wanted -- yes, and that sort of draws into my -- I guess, my last question. I just wanted to -- I guess you circled around to that in the final slide where at this point, the target on the production level is 8 million ounces a year in 2016 inclusive of African Barrick. Is that -- that, I guess, is sort of moderated in the last couple of quarters. But is that based on the core assets that you have now and what we see is basically what we're going to get going out for the next 4 years?

Jamie C. Sokalsky

Well, the -- we've -- the 8 million ounces in 2016 does reflect some of those changes that we talked about in the second quarter, the $3 billion, but also some of the reductions and the cuts, the deferrals of the $1 billion that we are also taking out of the program this year. So we, by 2016, that's a very solid profitable base from which we can grow on. But that's not a target, that's a forecast that I think we further refined to take out some additional lower-return investments. And so, our overall view is that 8 million ounces is even a stronger higher-returning asset-base, albeit in 2016 now.

Alec Kodatsky - CIBC World Markets Inc., Research Division

Okay, so the more profitable 8 million ounces then. Okay.

Jamie C. Sokalsky

Hopefully, yes. Thanks, Alec.

With that, I'd like to thank everyone for participating on the call. We are fully expecting that we are -- I've got our arms around a couple of the short-term challenges that we have been dealing with. We've got a very strong asset base. And we're very focused on the disciplined capital allocation program. We're looking for a stronger fourth quarter. And we feel that we are going to manage the business well, and hopefully that will result in enhanced returns to shareholders. I thank you for participating on the call today, and we look forward to our next call with you in the new year. Thank you again.

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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