Barrick Gold Corp (ABX)
Q2 2008 Earnings Call Transcript
July 31, 2008 9:30 a.m. ET

Executives

Deni Nicoski - VP, Investor Relations
Peter Munk – Chairman and Interim Chief Executive Officer
Peter Kinver - VP and Chief Operating Officer
Alex Davidson - EVP, Exploration and Corporate Development
Patrick Garver - EVP and General Counsel
Jamie Sokalsky - EVP and Chief Financial Officer

Analysts

Kerry Smith – Hayward Securities
John Hill – Citigroup
Brendan Barnicle -- Pacific Crest Securities
Victor Flores – HSBC
John Tumazos - John Tumazos Independent Research
Terence Ortslan – TSO Associates
Steven Butler – Canaccord Adams
Michael Jalonen -- Merrill Lynch
Heather Douglas -- Thomas Weisel Partners
Tanya Jakusconek - National Bank Financial

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Barrick Gold Corporation Second Quarter 2008 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) At that time if you have a question, please press the ‘1’ followed by the ‘4’ on your telephone, if at any time during the conference, you need to reach an operator, please press “*0”. As a reminder, this conference is being recorded Thursday, July 31st, 2008.

It is now my pleasure to turn the conference over to Mr. Deni Nicoski, Vice President Investor Relations at Barrick gold. Please go ahead, sir.

Deni Nicoski – Vice President, Investor Relations

Thank you, operator and good morning everyone and thank you for joining the Barrick Gold second quarter conference call. I''m here today with Peter Munk, Peter Kinver, Alex Davidson and Patrick Garver and Jamie Sokalsky.

Before we begin, I''ll bring to your attention 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 statements, please refer to our year-end report or our most recent AIF filing. With that, I will hand it over to Peter Munk, Chairman and Interim CEO of Barrick.

Peter Munk – Chairman and Interim CEO

Good morning ladies and gentlemen. I guess it’s the call to discuss and to highlight some of the connection with our quarterly announcements this morning. Clearly the quarter was a satisfactory one from a financial point of view. Cash flow earnings are near record high. But then again, that’s what you should expect in a commodity general market particularly for gold and I’m somewhat pleased about the results and the fact that while the remaining challenges and the bigger challenges facing all of us not just Barrick but the industry are at the cost escalations and the very same factors that have driven gold prices up and of course that’s the factor that is giving us the increased profits, the increased cash flows and the increased margins. It is pleasing to know as Jamie will highlight to you, that while every cost item has been rising, the margins that Barrick has been able to produce has disproportionately increased and that’s the result of Barrick’s high leverage to gold. This is not the end that we all set out to achieve as a leading gold company. Having said all that, the main challenges that faces Barrick and I think I may also speak for the industry at large, are the cost factors. They are relentlessly moving upwards and while we can employ measures and I think that I must congratulate our people in finding very creative measures like the recently announced acquisition of oil producing Cadence that has posed tax advantages to us and of course hedges a significant portion of our energy-driven cost increases. These are small measures not big drastic measures that are needed if you want to reduce costs across the Board particularly for a multi mining company like Barrick.

As Jamie will highlight to you, depending on how you use the accounting of bye products we are quite happy about where we stand across the Board in terms of cash costs. But the ultimate drastic or dramatic reductions that we are all aiming for can only come from the opening of new larger scale mines that have fundamental different cost structures, fundamentally and I must say and I must here congratulate my colleague Ed Rubins that Barrick has a pipeline of unprecedented depth, not just in reserves and you can look at figures as you can see how much healthy they are in actual reserves but in the pipelines, and the fact that we can bring on stream a large number of these producing mines with a totally different cost structure, not only because they are new, not only because they have bye products but because they are different kind of mines and I think that you will find over the next period that Barrick will be making a full fledged attempt to bring these on stream and that will ensure us over the next few years to be able to gradually decrease the fundamental driving forces that are keeping the mine costs higher and higher.

Now, let me finish by quantifying this. I’m sure management will make a note of this here but I can tell you that the fact we have this pipeline depth, the fact that we have the projects ready to go and the fact that these are coupled with the financial strength of this company and the track record of the company in today’s credit markets and in today’s costs of these large mines, puts Barrick into a position of its own. Credit markets are not as friend as they were and the costs of opening new mines are no more in the $200 million or $500 million bracket but they are in the billions and that’s a track record, that’s when balance sheet strength, that’s when financial strength really count. I think that with that I would like to conclude my remarks and I’d like to hand it over to Jamie and Peter can give you much more details and of course all of us will be standing by to answer your questions. So, it is over to you Jamie.

Jamie Sokalsky – Executive VP and Chief Financial Officer

Thank you Peter and good morning everyone. I’d like to start with the highlights of another solid financial quarter for Barrick. We continue to enjoy the strong gold price environment. Our year-over-year average spot price for the quarter was some 34% higher at $896 per ounce. We are continuing to deliver on the gold price leverage and return that has driven strong gold cash margins which increased almost 70% from the prior year period as the higher gold prices continue to help ease any increases in cash costs and this has resulted in a sharp increase on year-on-year earnings which I’ll talk a little bit more about shortly, and our copper business continues to generate strong earnings and cash flow as well with the second quarter margins as a percentage of sales at 70% and an average realized price of $3.65 per pound and we continue to make significant progress at our three most advanced development projects. Both the Buzwagi project in Tanzania, and the Cortez Hill project in Nevada continue to remain on schedule and are tracking within the respective capital budgets. Also site work at Pueblo Viejo in the Dominican Republic and advanced procurement plan is under way which Peter Kinver will take you through shortly and as you’ve seen subsequent to quarter end we made an all cash offer to acquire Cadence Energy an oil and gas producer in Western Canada which is expected to provide a long-term economic head of about one quarter of our annual direct oil consumption and form part of a strategy to economically hedge oil exposure at lower rates than currently available in the forward markets and when we combine this with our track to field hedges in the forward markets, we are in an excellent position to protect ourselves from the impact of these high fuel prices.

Also this morning, we announced our agreement to sell a portfolio of non-core royalties to Royal Gold for $150 million in cash and considerable royalty reduction on the Crossroads deposit which is contiguous to our 100% own Cortez property in Nevada.

Now, turning to the operating and financial results of the quarter in a little more detail, gold production for the quarter was 1.86 million ounces at cash cost of $417 per ounce. Our copper production came in at 87 million pounds at a $1.08 per pound. Net income rose 22% to $485 million or $0.56 per share from the prior year period. I think it is worth highlighting that Barrick has earned $1 billion in net income in the first half of this year alone which is a reflection of the excellent earnings generating capability of the company. Operating cash flow rose almost 60% to $531 million or $0.61 per share. This increase was partially offset by higher inventory at a few mines as well as the timing of some income tax payment from installments which tend to be higher in the first and second quarters. I believe that perhaps a better metrics of the underlying cash flow generation of the company is the EBITDA, taking into consideration some of the other working capital, taking out of consideration some of the working capital items. That reveals an even stronger picture. EBITDA increased 20% to $886 million from a year ago and for the first half of the year, Barrick’s EBITDA approached $2 billion.