Barrick Mining Corporation (B) Q3 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Barrick Gold Q3 Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference call is being recorded, Thursday, October 31, 2013. I will now turn the conference over to Amy Schwalm, Vice President, Investor Relations. Please go ahead.

Thank you, operator and good morning everyone. 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 in the estimates contained in our forward-looking statements, please refer to our latest year-end report or our most recent AIF filing. With that, I will hand the call over to Jamie.

Thanks Amy. Good morning and thanks everyone for joining us today. I am here today also with our Senior Executive Vice President, Kelvin Dushnisky; our CFO, Ammar Al-Joundi; and our Senior VP of Capital Projects, Ivan Mullany as well as other members of Senior Management all of whom will be available to answer questions after the presentation. Over a year ago now we introduced a more disciplined approach to capital allocation, one of the key elements of this framework was and still is a sharp focus on cost reduction companywide. Today we reported another strong operating quarter and it is rewarding to see that our efforts were once again reflected in our results and has enabled us to further improve cost guidance this year. We’re on track with our 2013 gold guidance including our all-in sustaining cost range of $900 to $975 per ounce which we lowered for the second time this year last quarter. This quarter we also narrowed our operating cost guidance by lowering the high end of the range and based on the continuing turnaround Kwilimuna we have substantially improved our 2013 copper guidance this quarter. In line with our commitment to cost reduction we have targeted $500 million in annual cost savings through the implementation of a flatter operating model and other companywide initiatives. We have also decided to temporary suspend construction activities at the Pascua-Lama project, expect those required for environmental protection and regulatory compliance. As a result we expect to further reduce our previously lowered 2014 CapEx guidance by upto $1 billion while still addressing our social, environmental and other regulatory obligations. This is the right course of action for the company and we decided on this path for a number of key reasons. Metal prices have continued to remain at lower levels for…

Thanks, Jamie and good morning everyone. As Jamie has mentioned, Barrick has some of the best long-life low cost mines in the world. This portfolio of mines positions us very well in any gold price environments, including a lower gold price environment. We have five mines, Cortez, Goldstrike, Veladero, Lagunas Norte and Pueblo Viejo which will generate more than 55% of our production this year of all-in sustaining costs of about $700 per ounce well below the industry average. We have another six mines which although smaller for Barrick are still sizeable by industry standards which are solid performers and are still highly profitable. Our other 10 mines which represent about 25% of our portfolio are higher cost and as we have discussed on previous calls our goal is to reduce this percentage. We are committed to improving cash flow throughout all areas of the company. Last year we discussed our plans to improve cash flows at higher cost mines and said we would take whatever action is needed changing mine plans, suspending production, closing or divesting these operations to improve the overall quality of our portfolio. We have been working on this quite aggressively and we can report substantial progress this quarter. I won't go through each mine here but I would like to highlight some in addition to the divesture of one of our non-core assets, Barrick Energy. As part of our portfolio optimization process we sold Yilgarn South and we now have a sale process underway for Plutonic and Kanowna. We have also decided to initiate closure of Pierina. This is an example of reducing production to make improved returns. African Barrick Gold is also seeing positive results from it's operational review which included changes to the North Mara mine plant. As a result it has improved…

Thanks Ammar. As everyone knows all through well, the industry has faced some multitude of challenges, but if there is one thing I would like you to take away from this call is that Barrick’s response has been proactive. It’s been swift and it’s been far reaching. There is not a single aspect of our business that we have not been evaluating and working on improving. And underpinning that approach is our disciplined capital allocation framework. We are consistent, analytical and disciplined with respect to how and where we allocate our capital and choose to invest and Pascua-Lama is no exception. Yes, it is disappointing that we have had to make this decision, but it’s the right one for us at this point in time. Our progress on cost reduction continued this quarter and the results once again reflect the quality of our assets and our efforts companywide. We have met or exceeded our operating targets. We have sold assets that are not core to us and substantially reduced budgeted operating and capital costs. In summary, I believe we have met our challenges head on and will continue to make disciplined decisions that need to get made. With that, operator, we would be happy to start taking questions.

Thank you. We will now take questions from the telephone lines. (Operator Instructions) The first question is from Brian Yu from Citigroup. Please go ahead.

Thanks and congrats Jamie on a solid quarter. My question is on your Pascua-Lama, I infer from your comments in prepared remarks that you had some insight into what perhaps that new CapEx level might be and what the timing is involved as you go into a more phase approach? Would you build and share with us that information the new CapEx estimate if you got it and then if you decide to restart it, what would be the remaining construction time?

Sure. Well, Brian thanks for your question. As we were – we have been looking at the project for some time during the slowdown and the capital cost was not the sole determinant in why we made this decision. We didn’t actually end up doing a definitive or new estimate, but we saw as we were progressing we saw the trend of capital costs moving up and with the uncertainty with respect to the granting of the permits and timing and the slowdown, there were cost pressures associated with that. And taking that and other factors such as the metal prices into consideration, we changed our approach quickly to what we have just announced. And so we didn’t again commission a definitive new estimate. Suffice it to say, we did see the trend of capital costs going up, but then we change gears and we couldn’t really come up with a new definitive cost estimate, because it would be impossible to do that under a completely changed scenario of suspension. So it’s a better approach now. We will be able to recalibrate and spend the time to you know look at how we do this more effectively once we start up and perhaps renegotiate contracts, look for other cost improvements et cetera. You know we still got to complete the environmental obligations ultimately we would do a rebase line and a complete recalculation of the capital cost at a specific stage when we feel we want to proceed and at that time we will have a better idea of the overall cost estimate and so the timing is going to very dependent on those stage gates and you know once we are happy, we’ve the appropriate permits once we have done the engineering et cetera, once we see where the price of metals are et cetera only then will we make a decision to then build to begin building the project again at about 100 capacity.

And just a follow-up just in the quarter report I’m just quoting here the suspension to generate adverse reactions from the government, can you discuss what level of interaction you’ve had with them on this announcement?

Sure we have an ongoing very constructive dialogue with the governments of both Chile and Argentina at both the provincial and the federal level and we have informed both governments of this temporary suspension but we’re working very closely with them in a constructive manner and we believe that the suspension and the move to this approach is the correct one from a capital allocation respective and I believe we will be moving forward in a very constructive cooperative way, we both realize that we want this project ultimately completed and those conversations which have been ongoing will continue and hopefully that very good relationship will also continue.

Thank you. The next question is from Stephen Walker from RBC Capital. Please go ahead.

Just a follow-up question on Pascua-Lama, you made reference in press release that it's a world class resource and I guess it begs the question now that you’re sort of not going to develop it why it's not being written down, a $2 billion in carrying value, why was it not written down?

We wrote down the project significantly as you know at the second quarter to a billion $1.5 billion. We’ve in the third quarter we did spend more money that was capitalized to the project and now that’s the number that you indicated. In essence that will be something that we will look at the end of the year when we do our regular impairment calculations. We have highlighted that in the MD&A that and we will do that impairment test at the end of the year which includes quite a number of factors and ultimately that timing will be done with the impairment calculations of the entire assets of the company at the end of the year.

One thing Stephen it's Ammar here, just to reemphasize something Jamie said and tied in with the impairment calculation. The key driver of this approach on Pascua is because any way you liked it it's a better way to build the project, it gives us more flexibility, it allows us to coordinate efforts et cetera. So we will be as part of this whole exercise of valuing the assets which we do for all of our assets and Pascua-Lama we will be taking into account this different approach to building it which we will come into that calculation.

If it hypothetically what would have been written down, you still would not have triggered the net tangible and net worth – tangible net worth covenants on the line of credit, you would still have roughly about $4.4 billion, $4.5 billion in that tangible net worth?

Yes. I mean, our tangible – that level is at $3 billion. Our current tangible is at $6.4 billion which is double what we have got – roughly double what we have got Pascua on the books at, but again, I can’t conceive of the situation where it gets cutback to zero. That doesn’t really make a lot of sense.

Correct.

I mean, Steven, this is a temporary suspension. We are going to stay – we are going to continue doing work on the Chilean side environmentally etcetera. This isn’t something that we are walking away from at all. So ultimately, there is still an inherent amount of significant value to this project. So in a worst, there is no situation where there is no value on a project of this nature with such huge resources and a lot of infrastructure already built.

Of course. And just shifting gears a little bit here, I guess from an accounting perspective, the value of the silver stream on Pascua-Lama will have to be accounted forward as debt, that is the net amount paid deducted or net of – amount you received net of what was paid out to Silver Wheaton will have to be accounted for as debt, is that my understanding is that going to be correct and we estimate that amount to be about $370 million, does that in fact what would be part of that obligation?

It’s how the rating agencies S&P has determined how they are going to look at it as that is opposed to change in accounting or anything of that nature. So but ultimately then S&P would look at that amount that’s just over $300 million more as debt, which is pretty insignificant relative to our entire debt portfolio and balance sheet.

Okay. And I apologize, one last question here before I hand it off, you mentioned with respect to Lumwana that the way stripping volumes are much lower. Have you changed the life of mine way stripping ratio at Lumwana and what would that number be going forward?

Yes, Steven, it’s Gary here. The striping ratio is somewhat down and as we went through the review, we have got ahead of ourselves in terms of developing a chimney and after review that we are actually back into a more normalized strip level and can proceed on that from production standpoint.

What would you provide – what would you suggest for users like the mine or is there more normalized strip ratio?

The overall strip ratio here that we have got is still running about 3.1 and that certainly will be going forward at that level.

Great, thank you very much Gary. Thanks Jamie. Thanks Ammar.

Thanks Stephen.

Thank you. The next question is from Anita Soni from Credit Suisse. Please go ahead.

Hi. Could you just give us an idea of what the total capital spend that you are looking at, including sustaining capital, sustaining in growth capital for next year?

Hi, Anita, it’s Ammar here. We haven’t given that guidance for next year, but we had already said that 2013 was going to be a peak for us and that was before we reduced before we announced the suspension of Pascua, which will take about $1 billion off of next year’s number.

But if you look at in terms of our projects that we are spending $250 million to $300 million on Pascua-Lama next year and we don’t have any other big projects that are advancing. You can assess that the overall capital spending next year is largely going to be comprised of sustaining capital and development capital.

And not sustaining and development capital was running this year at around 2 billion to 2.3 billion and I guess you make your own assumptions about that net reduction or is that, is there something in the 2 billion to 2.3 billion that you had running out this year that we should think about increasing...

I wouldn't want to give you any more specifics than that. But the range that you are talking about, plus or minus, is a good one.

Thank you. The next question is from Jorge Beristain from Deutsche Bank. Please go ahead.

I guess I have two questions, maybe the first one for Jamie. What would be the exit costs that you would expect in the fourth quarter for slowing down Pascua-Lama? Would we expect some kind of one-time cash charge of severance as to break with the unions and the current contractors out there?

There will be some cost Jorge we're still accessing that as you know we've just announced this decision. And now we have to go and have some significant conversations with the contractors, some of the suppliers et cetera. So we'll be accepting that but that we're anticipating that number is not going to be hugely material to our overall costs.

Okay. And if I could have a follow up question and Jamie this has more to do with the corporate governance issues that you flagged on your own press release. Could you comment conceptually what is going on with the feedback you've gotten from clients buy side and maybe talk to any points or management is sharing some of the pain. Obviously a lot of your employees and business partners are being laid off and I am just trying to understand what management and the board are doing sort of to contribute to lower cost going forward?

Well, I think what I would like to say, Jorge, is pretty much what we've said in our press release. We've engaged -- the Board members have engaged with some constructive discussions with investors to hear their feedback. And the Board is addressing the issues that have been raised with the directors, including the issue that includes the discussion of the modification of the company's executive compensation arrangements and the rejuvenation of the Board. So, what I'd like to just say is we intend to issue a more detailed announcement before year-end to update the shareholders on those initiatives and leave it at that.

Okay. And so if I can just get a last one and quickly to Ammar, Ammar what is Barrick's policy toward maintaining investment grade status? Is that something that the company views as fundamentally a keystone rating?

Yes, absolutely.

Thank you. The next question is from David Haughton from BMO Capital Market. Please go ahead.

Thank you for the update and the details provided on those various costs. I still have some questions on Pascua if that's okay. Year-to-date expenditure you're looking at 1.3 and Jamie correct me if I am wrong. Did I hear you say that for the year you'd expect about 1.8 billion to 2 billion?

Yes, that's the right range. And some of that, there will be some expensing of costs as we discussed.

Okay. Quite a step up from where you are year-to-date. What sort of things are you spending in the order of 0.5 billion to 0.7 billion in that last quarter?

Well, there is a ramp down that will occur over the last three months that ultimately we can't -- a suspension doesn't provide for an immediate demobilization. And so there will be as well a significant amount of activities that need to go on to prepare this site for care and maintenance. And so we will be maintaining a fairly significant level of employment through now and the end of the year to reflect the fact that there are notice periods. Again, there is work to be done and completed to prepare the site for that care and maintenance. There will be some cancellation penalties, etcetera. So the overall expenditures in the fourth quarter are not going to drop significantly from what we are anticipating from our previously reduced guidance that we gave.

David, its Ammar here. If I could also add, a lot of the expenditure that would happen in the fourth quarter will be expenditure that progresses the project and adds to the eventual value of it. It just logically makes sense that to the extent you have to provide let’s say for arguments sake 30 or 60 days’ notice for people, you might as well have those people working efficiently and effectively towards finishing things off that make it a lot easier to restart and a lot less expensive with regards to care and maintenance. So it’s not all cost, a lot of that is actual contribution to the long-term project.

Alright. Through the presentation and in your MD&A, you have discussed several times a phased approach to Pascua, can you just give us an idea of what sort of phases you have in mind? Could that be looking at the non-refractory versus the refractory, the different phases of stripping etcetera? What sort of things are you thinking about for those phases?

Sorry David, I will start that and then I will ask Ivan if he wants to add. When we talk about phased, we don’t mean changing the mine plan itself. What we are talking about is seizing the decisions to go forward to tie in with minimizing risk and optimizing returns. So as you know, in a situation where we were going towards, getting this built as quickly as possible, because the economics of the time made sense to do that in an environment, where we now have more time to build it and there is continued uncertainty and there is a lower metal price. What we are talking about phasing is one phase is get finalize the permitting issues, finalize the relevant regulatory issues, finalize engineering, finalize different stages of construction, which really is exactly how you would build this to give you the most flexibility and ensure that you are getting a good return on your investments. You know, when your spending, as you know a lot of money on a monthly basis that doesn’t give as much flexibility as this will going forward. So by phasing we are referring to construction process.

Okay. So I guess, thinking about it from a financial point of view, Ammar, then these permitting regulatory engineering relative lower costs, so it’s almost like an exponential increase in your capital outflow as you progress through those different phases if you were to commit ultimately to construction. Is that a reasonable way to think of it?

Is that’s a good way to think about it and what you basically said is you spend a little money as you can to get more certainty before you decide to spend more money. So that’s exactly right.

Alright. And final one on Pascua if I may you do refer to JVs and strategic partners, have you had any of those discussions yet or at least just hypotheticals that you are putting out there?

In the past, we have always had various discussions with various parties from time-to-time on these types of things. And those are always in our toolkit in terms of increasing the risk adjusted rates of return on the project. For example, as you know, we did a silver streaming deal with Silver Wheaton at Pascua-Lama a number of years ago. So any types of transactions like that, we are continually thinking about them, have had discussions in the past and if those types of things make sense for us in the future we will definitely look at doing something’s to ultimately potentially bring in additional money and hopefully then increase the risk adjusted rate of return.

So perhaps nothing concrete at this stage but the door is definitely open.

The door is definitely open.

Thank you. (Operator Instructions). The next question is from Greg Barnes from TD Securities. Please go ahead.

Jamie, you've termed this a temporary shutdown at Pascua-Lama. Ideally how do you see this evolving in terms of the timeframe?

I use the term temporary Greg because ultimately we do feel that this will be one of the great gold and silver mines at some point in the future. You know by demobilizing and suspending and talking about the stages that we go through before we make a critical decision to move on to the next stage, there are some reasonable time horizons in between those stages. But it also doesn't mean we can't get a certain level of confidence where we can do some things in parallel, while we are going through things like achieving the permitting and dealing with the regulatory authorities. If we get a certain higher level of confidence then we can determine at that time when those next stages start. But ultimately, we've seen the gold price being low. We've got some number of risks and uncertainties ahead of us. And I can see going through 2014 before we get the high level of certainty that we require to move on to the next stages. But it's still very uncertain, because so many things can change and happen including commodity prices that it's a bit of a moving target

Sure. Just quickly, how do you and Ammar see the balance sheet evolving then? Where do you want it to go over the next couple of years?

Well Greg, again, we've been clear on that. We think that a strong balance sheet is a strategic advantage for Barrick and so we are determined to continue the progress we have made to improving our financial strength and our balance sheet.

The next question is from Alec Kodatsky from CIBC. Please go ahead.

Just have two quick, if I could, just curious if you could sort of clarify I mean you have identified high degree of uncertainty with the permitting status at Pascua. What is the process going forward just for you to essentially secure that status?

It's Kelvin here. I think it's important to point out it's not a matter of a delay within the system itself particularly in Chili the system works well it's predictable. But we are at a point where there is a number of new items that need to approved that weren't approved in the original RCA. So, there were two phases. First phase, (indiscernible) which is a three-month program that we're almost completed now back to size that’s how we operate, the water system and then the second phase is the larger construction of the North Channel and other things we discussed in the past and that has to go through additional review. We'll be starting that process in November. There's a likelihood we could we have decisions on that in Q1, Q2 of 2014, could go a little longer. So that's one area where we can't say specifically today how long it will take, but that gives you kind of a sense of the timing.

So it's really the regulatory review of work being done and then I guess their judgment on that as far as whether it’s acceptable or not?

Yes. And these are features that are, have been either expanded or are new relative to the original approval. So we just have to work to the design phase and the approval of them.

Okay, great. And just quickly to Lumwana, I am just sort of curious now where does in terms of ore sourcing, how much are you taking at a chimney at this point versus (indiscernible)?

Chimney, still quite, this is Gary, Alex. The current ratio is still on the order about 80% out of (indiscernible) and over next year we will be running to a higher level obviously if that’s…

The other way around.

The other way around? Sorry, the chimney pit will be running to a higher level of that overall production and by the middle of next year we will be phasing out of the (indiscernible) pit.

Okay, that makes sense. I just wanted to sort of gauge where that was at. Thanks for the answers.

You are welcome.

Thank you. The next question is from Patrick Chidley from HSBC. Please go ahead.

Good morning everybody. Just my question I am afraid back to Pascua, just I wanted to ask if you could outline more detail on what’s been done to-date and what’s the work is left to do? And can you face the sort of longer time horizon lower cost work can you keep doing that in a volume suspended?

Well, currently we are at about 50% constructed across the project. On the Lama side, the infrastructure is in place for the buildings, etcetera. On the Pascua side, it was suspended as you previously. So we haven’t started construction, let’s say, on the crusher and truck shop. During the suspension, there will be no construction. The sense is to go into just environmental management and through the permitting process and sustainable construction across both Pascua and Lama.

Okay, so no anticipated work to be done while you have got time to sort of get some of that long lead time type work done?

No, other than compliance to the environmental requirements and a little bit of work around the water management system all other construction that will be suspended.

Okay. So there is no chance that you are going to be in production anytime in 2016, so it’s going to be beyond that, is that right?

Yes, that’s correct.

Thanks.

Operator, maybe we could take one more call and then sign off.

Absolutely. The next question and last question is from Andrew Quail from Goldman Sachs. Please go ahead.

Hi guys. Congratulations on a great quarter operationally. I am actually switching gears away from Pascua. Do you guys expect something, I don’t know you are spending sort of 40% of your exploration budget at Goldrush and Cortez, is that going to sort of move ahead now, maybe you have Pascua and you are sort of planning to come or can you elaborate on when we expect to receive the pre-fees on something like Goldrush?

Well, we certainly are continuing to make further investments and do exploration at Goldrush. It’s a project that as we know has 14 million ounces of resources as of the end of 2012. We are looking to complete pre-feasibility by about mid-2015. It is advancing to pre-fees and a number of development options are being considered like open pit mining or underground or maybe even a combination of both. And the drilling that we are doing there is really focused on establishing confidence in the continuity of the high-grade portions of the deposit, right now in support of the underground development option. And once we do these straight off studies that will give us a better understanding of the potential of the deposit and the economic drivers and then that will form the basis of the pre-fees study which remains on track for mid-2015.

Correct. And just one more, just kind of on Pascua-Lama please, so you are saying is it – if you had to do a completion test on the project now, you would say it’s 50%?

That's correct. Yeah. I mean, we measure quantity installed on a weekly basis. And across the project we're at 50% constructed.

Thank you Andrew. Okay, well we've had the call going now for an hour. And I'd like to thank everyone who participated on the call and for your questions. And we look forward to speaking with you again soon and continuing to update you on our progress. Thank you very much again.

Thank you. The conference call has now ended. Please disconnect your lines at this time. We thank you for your participation.