EX-99.1 2 a13-7864_1ex99d1.htm EX-99.1

Exhibit 99.1

 

 



 

 



 

Barrick’s strategy is focused on maximizing risk-adjusted returns and free cash flow to position the company to return more capital to shareholders over time.

 

 

 

2012

 

2011

 

2010

 

 

 

 

 

 

 

 

 

(In millions of US dollars, except per share data)

 

 

 

 

 

 

 

(Based on IFRS)

 

 

 

 

 

 

 

Revenues

 

$

14,547

 

$

14,236

 

$

10,970

 

Net earnings (loss)

 

(665

)

4,484

 

3,582

 

per share

 

(0.66

)

4.49

 

3.63

 

Adjusted net earnings1

 

3,827

 

4,666

 

3,517

 

per share1

 

3.82

 

4.67

 

3.56

 

Operating cash flow

 

5,439

 

5,315

 

4,585

 

Adjusted operating cash flow1

 

5,156

 

5,680

 

5,241

 

Adjusted EBITDA1

 

7,457

 

8,611

 

6,448

 

Cash and equivalents

 

2,093

 

2,745

 

3,968

 

Dividends paid per share

 

0.75

 

0.51

 

0.44

 

Annualized dividend per share2

 

0.80

 

0.60

 

0.48

 

 

 

 

 

 

 

 

 

Gold production (000s oz)

 

7,421

 

7,676

 

7,765

 

Average realized gold price per ounce1

 

$

1,669

 

$

1,578

 

$

1,228

 

All-in sustaining cash costs per ounce1

 

$

945

 

$

752

 

$

649

 

Total cash costs per ounce1

 

$

584

 

$

460

 

$

409

 

 

 

 

 

 

 

 

 

 

 

 

Copper production (M lbs)

 

468

 

451

 

368

 

Average realized copper price per pound1

 

$

3.57

 

$

3.82

 

$

3.41

 

C1 cash costs per pound1

 

$

2.17

 

$

1.71

 

$

1.08

 

C3 fully allocated costs per pound1

 

$

2.97

 

$

2.30

 

$

1.40

 

 


(1) Non-GAAP financial measure – see pages 79–87 of the 2012 Financial Report.

(2) Calculation based on annualizing the last dividend paid in the respective year.

(3) See pages 163–170 of the 2012 Annual Report for additional information on Barrick’s reserves and resources.

 



 

 



 

 



 

Fellow Shareholders,

 

2012 was a year of both successes and disappointments for Barrick and our shareholders, as the company transitioned to new leadership and adopted an entirely new approach to managing the business.

 

We recorded adjusted net earnings of $3.8 billion, along with the company’s highest ever operating cash flows of $5.4 billion.

 

 

This reflects the quality and potential of our global portfolio to generate earnings and cash flow on an unprecedented scale and allowed us to increase our quarterly dividend by 33 percent last year. Although this is merely the beginning of our new and redoubled commitment to maximize the return of capital to shareholders, it is a start which we expect to accelerate once our major, new projects are completed.

 

In 2012, we also poured first gold at Pueblo Viejo in the Dominican Republic on schedule, and completed it — with a construction cost of nearly $4 billion — within capital guidance. This is a truly exceptional operation that will be part of a rare, elite class of mines producing in excess of one million ounces of gold annually and with a mine life of more than 25 years. Also, once again, we replaced our gold reserves, which remain by far the largest in our industry in absolute terms. Significantly, we continued to grow our major Goldrush discovery in Nevada, which has the potential to become one of the world’s largest new gold deposits. Importantly, it is also located in one of the world’s best jurisdictions for mining, and next door to the huge, existing facilities and infrastructure at our world-class Cortez mine. This discovery, like others to come in Nevada, will benefit from billions of dollars of investment in mining infrastructure in the state, all of which is fully operational and available to us today.

 

Meanwhile, the price of gold remains near historically high levels and the secular outlook for the metal remains strong. Despite periodic short-term optimism, the fundamental and structural causes for fear and uncertainty over the world economy remain, and will continue to weigh on the long-term macroeconomic environment. At the same time, gold supply from mines will remain constrained due to a variety of factors, including significantly higher capital costs and ever-longer lead times to permit and build new mines, along with increasingly complex regulatory requirements in nearly every jurisdiction.

 

Despite a supportive gold price environment and our achievements in 2012, we faced a number of serious challenges last year. We suffered a significant delay and a major cost overrun at our flagship Pascua-Lama project on the border of

 

Barrick Gold Corporation | Annual Report 2012

 

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MESSAGE FROM THE FOUNDER AND CHAIRMAN

 

Chile and Argentina. Since that fact surfaced — so unexpectedly — the main focus of our company, at every level, has been directed at ensuring that this project will meet its new cost and schedule estimate. At the same time, we made identifying the root causes of this major setback a priority, so that we can apply those lessons in the future. Our other major disappointment in 2012 was related to the Lumwana copper mine in Zambia, where we have taken a $3.8 billion after-tax impairment charge, resulting primarily from our inability to realize the potential we saw in this asset in the short term. We are determined to do what it takes to extract the maximum value we can from Lumwana, which holds exceptional future potential with its dominant holdings on one of the world’s major copper belts. These negative surprises disappointed our investors, and understandably so. In some ways, Barrick’s setbacks mirrored similar challenges across the broader mining industry, and while that in no way excuses our shortfalls, it does point to the need for some fundamental changes in corporate behavior and strategy.

 

Our dismal share performance last year clearly reflected these setbacks, yet there are other new realities in our industry that also played a significant role. In the years leading up to the global financial crisis, rising gold prices and booming equity markets created a mood of euphoria among investors, rewarding gold producers that delivered aggressive production growth, no matter what the cost. The industry as a whole, and Barrick in particular, delivered. In fact, between 1986 and 2006, as Barrick expanded its operations around the world, our shares increased in value by approximately 4,000 percent, or about 20 percent compounded annually. In order to sustain that kind of growth, gold mining companies and others began to make ever-larger, unprecedented capital investments in new projects to deliver more ounces. Many came from lower-grade ore bodies, erroneously justified by expectations of higher gold prices, and yielded ever more expensive ounces, at ever-growing capital costs. These growing capital commitments virtually eliminated free cash flow generation. Yet that was what investors expected to be available to them — in direct proportion to increased gold prices. It didn’t happen — and the disappointment of investors was severe.

 

As a result, investor confidence was roiled and wealth managers began to shun gold shares. At the same time, most investors looking for full participation in the rise of gold prices moved vast sums of money from gold equities, where they perceived risks but little return, to gold ETFs. These — of course — offered full participation in gold price movements, without any operational risks. The numbers tell the story: since the creation of the gold ETFs some eight years ago, their value has reached an incredible $140 billion! Meanwhile, gold mining company multiples have suffered an unprecedented contraction, particularly when measured against the performance of their sole product, gold itself.

 

Recognizing the above facts, it is clear that a new approach — indeed a whole paradigm shift — is required so that an investment in Barrick becomes desirable, rewarding and viable — a demonstrably superior alternative to investing in gold itself. This major shift requires a continuation of asset rationalization, the exploring and realizing of available operational and administrative synergies, a rigorous application of capital discipline, and other measures enhancing our ability to increase payouts to our shareholders. These are all clearly options available to Barrick — with its size and scale — and will make our shares a realistic alternative to ETFs.

 

Accordingly, Barrick is leading the change from a focus on growth, in favor of maximizing free cash flow and growing rates of return: a significant paradigm shift for our industry. In June of last year, following Jamie Sokalsky’s appointment as CEO, I was proud that his first message to shareholders was a commitment that has become nearly universally accepted throughout the industry: “Returns will drive production, production will not drive returns.” Each and every CEO has phrased it differently, but the end result is the same.

 

We believe this is the right approach for us and the only one that will deliver results and rekindle shareholder interest in Barrick and the industry at large. Yet we must also realize that repositioning Barrick — a company of considerable size and operational diversity — to deliver against this paradigm cannot happen overnight. Large ships take longer to turn around. I can assure our shareholders that at all levels within Barrick — be it at our Board or at the executive management level — we are united in our commitment to effect the significant change needed and which our investors clearly demand.

 

We have already made good progress. Last year alone we cut or deferred over $4 billion in capital spending plans and reduced our long-term production targets to focus on only the most

 

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profitable ounces. At the same time, we are adding about 1.5 million ounces of annual production from Pueblo Viejo and Pascua Lama at costs significantly below the company’s current average. Also, as part of the new paradigm, we put on hold all plans to build any new mines. In the future, before we approve any projects and allocate capital, they must meet the new standards of our disciplined capital allocation framework and a threshold of exceptional free cash flow returns. In the same vein, and as part of this new paradigm shift, we are also actively pursuing a variety of asset disposals — those that do not support our objectives in terms of operating performance, reserve life, free cash flow generation, or that are otherwise non-core for the company.

 

 

Barrick Gold Corporation’s Founder and Chairman

Peter Munk and Co-Chairman John L. Thornton.

 

These actions are all aimed at positioning Barrick with an improved and growing capacity for free cash flow generation from a balanced portfolio of world-class assets (even if a reduced number), and the ability to return more value to shareholders through growing dividends and capital appreciation.

 

And as always, we are committed to strengthening our corporate social responsibility practices. This is not about paying lip service, but about doing what’s right, reducing our business risks and maintaining our license to operate around the world.

 

As we reposition the company to deliver against these objectives, it is also appropriate that we consider a path to new leadership at our Board level. I have taken great pride in my role over more than a quarter century as the Founder and Chairman of Barrick, focused throughout on the various stages of our company’s development with the primary aim of creating value for our investors. This approach worked in building the company from a penny stock to an industry leading position. Yet while we have achieved much, equally there is much more to be done. Accordingly, standing still and perpetuating the status quo is not an option. A vital prerequisite for the future is a new generation of qualified and developed leadership.

 

I, together with my colleagues on the Board, have been searching for someone with the drive, the ambition, the ability, the global experience and the contacts to lead our Board. Most importantly, I have been looking for someone to share my optimism about the unlimited opportunities available to Barrick as we chart our path forward. In 2011, John Thornton joined our International Advisory Board, and was subsequently appointed Co-Chairman of our main Board in 2012. It is indeed our great fortune that John has reached a point in his spectacular career at the same time when our need for someone of his exceptional qualifications, credentials and experience also reached a decision point.

 

Over the past year, John and I have been working in lock-step with the entire Board and our management team, focused on the singular and exclusive goal of setting the stage for Barrick’s long-term success. We remain convinced that Barrick is on the cusp of a new era, poised to deliver the shareholder returns that will again define us — in every aspect of our global activities — as a highly successful and respected public company.

 

Finally, on behalf of the Board of Directors, I would like to extend my sincere gratitude to Nathaniel Rothschild, who has recently resigned from our Board. We are grateful for his many contributions to the company. And most importantly, I would like to thank Barrick’s committed workforce of more than 25,000 employees around the world who are putting our plans to create shareholder value into action daily. They are the heart of the company, and without them, we could not succeed.

 

Sincerely,

 

/s/ Peter Munk

 

Peter Munk, Founder and Chairman

 

 

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Over the past decade, our industry has been focused on increasing gold production, often without regard for the cost. In essence, this was growth for growth’s sake, without a focus on rates of return. Today, we find ourselves in a very different environment, a new paradigm for the gold industry.

 

 

Jamie C. Sokalsky

President and

Chief Executive Officer

 

 

Rising capital and operating costs, longer lead times for projects, increasing resource nationalism and a lack of large new discoveries have altered investor perceptions of gold equity risk. In addition, the industry’s track record on capital allocation has been poor. As a result, gold mining shares have continued to under-perform gold itself, and equity multiples across the sector have compressed significantly. At the same time, exchange traded funds continue to offer a popular alternative for those seeking exposure to gold.

 

While we believe the fundamental factors supporting the price of gold remain firmly in place, and our outlook remains bullish, we cannot simply rely on an ever-rising gold price to generate higher returns. The message from investors has been clear: something has to change. It’s a message we have embraced at Barrick. The past year marked a significant turning point for the company. We began to reposition Barrick around a new paradigm of disciplined capital allocation, one that prioritizes shareholder value creation through a focus on maximizing free cash flow and risk-adjusted rates of return. My overriding objective, and that of everyone at Barrick today, is to translate our company’s strengths and results into higher shareholder returns.

 

We are driving this change guided by a simple mantra: returns will drive production, production will not drive returns. This represents a fundamental shift for our company and our industry, but we are fully committed to this approach and have already implemented significant changes. All capital allocation options, including returns to shareholders, organic investment, acquisitions and other expenditures, will be ranked and prioritized against each other. Our framework includes the following key objectives:

 

·   Returns Driving Production: Production decisions to be made based on generating appropriate risk-adjusted rates of return and free cash flow.

·   Returns to Shareholders: A commitment to pass through the benefits of this model to shareholders.

·   Aggressive Cost Management: Reducing costs and an ongoing review of our cost structure is an integral part of the management of our business.

·   Portfolio Optimization: Divesting assets that do not meet specific criteria, including return thresholds, free cash flow generation, operating performance and reserve life, and investing in assets that do meet these criteria.

·   Reduction of Geopolitical Risk: Focusing on high return, low-cost assets in less risky geopolitical jurisdictions through portfolio optimization.

 

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We made considerable progress on the implementation of this framework in the second half of 2012. After evaluating our production profile with the objective of maximizing returns and free cash flow, we cut or deferred approximately $4 billion in previously budgeted capital spending. As a result, we recalibrated our long-term gold production forecast to a higher quality, more profitable base of eight million ounces by 2016 and copper production levels to 600 million pounds by 2015. We also announced that in today’s challenging environment, we have no plans to build any new mines. The company has a number of world-class ore bodies with significant economic potential, but which do not currently meet our investment criteria. We will spend the minimum amount of capital required to maintain their economic potential but we will continue to advance our opportunities in Nevada, particularly Goldrush.

 

 

Additionally, as part of our broad approach to cost control, we have cut budgeted overhead for 2013, and expect to make further reductions as a result of an ongoing company-wide review. We have also begun reporting costs using an all-in sustaining cash cost measure that better represents the total cost of producing gold and is consistent with our goal of generating higher returns and free cash flow.

 

Ultimately, the implementation of this framework is a dynamic and continuous process that will guide every decision we make going forward.

 

In 2012, the company performed well against its key operating objectives. We met our gold production guidance for the tenth consecutive year, producing 7.4 million ounces at all-in sustaining cash costs of $945 per ounce and total cash costs of $584 per ounce. The company also produced 468 million pounds of copper at C1 cash costs of $2.17 per pound and C3 fully allocated costs of $2.97 per pound.

 

Adjusted net earnings for the year were the second highest in Barrick’s history at $3.83 billion and the company reported record operating cash flow of $5.44 billion. Our robust financial results allowed us to increase our quarterly dividend by 33 percent in 2012.

 

Once again, Barrick successfully replaced gold reserves, which now stand at 140 million ounces, with an additional 83 million ounces in measured and indicated gold resources. Barrick also has one billion ounces of silver contained within gold reserves and 14 billion pounds of copper reserves.

 

Our exploration focus for 2012 was in Nevada, where we doubled and upgraded the resource base at our world-class Goldrush discovery near our Cortez mine. The project is advancing through prefeasibility and we expect to further expand the resource base in this highly prospective area.

 

We poured first gold at our world-class, 60 percent-owned Pueblo Viejo mine in the Dominican Republic in August, on schedule and within capital guidance. This long-life, low-cost operation achieved commercial production in January 2013 and is expected to ramp up to full capacity in the second half of the year. Pueblo Viejo is expected to contribute an average of 625,000 — 675,000 ounces of gold per year to Barrick in its first full five years of production at all-in sustaining cash costs of $500 — $600 per ounce. With an estimated mine life of more

 

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than 25 years, Pueblo Viejo will be a significant contributor to Barrick’s earnings and cash flow.

 

During 2012, we experienced some significant challenges at Pascua-Lama, our other large development project under construction on the border of Chile and Argentina. These challenges led to a significant increase in capital costs, which are now expected to be $8.0 — $8.5 billion, with first gold targeted for the second half of 2014. This was a highly disappointing outcome for the company and our shareholders, and since being appointed CEO, I have made the successful completion of Pascua-Lama among my top personal priorities.

 

In late July, we recognized that the complexity of this project exceeded the capabilities of the in-house construction team. We immediately initiated a comprehensive schedule and cost review, and subsequently transferred construction management responsibilities to Fluor, a world leader in engineering, procurement and construction management.

 

Although we were disappointed by the increased capital costs and extended schedule, Pascua-Lama will be one of the world’s truly great gold mines with an anticipated mine life of 25 years. Once in production, it will be a significant free cash flow generator, with average annual production of 800,000 — 850,000 ounces of gold in its first full five years of operation, at all-in sustaining cash costs of $50 — $200 per ounce.

 

Once at full capacity, Pueblo Viejo and Pascua-Lama together are expected to contribute about 1.5 million low-cost ounces of gold to Barrick’s production profile, underpinning our high-quality, profitable production base for the long term.

 

The Lumwana copper mine in Zambia represented our other significant challenge in 2012. During the year, we completed an updated life-of-mine plan which reflects new data from the drilling program that was completed late in 2012. Unfortunately, the new mine plan indicates mining costs will be higher than we anticipated, and as a result, we recorded an after-tax asset and goodwill impairment charge of $3.8 billion in 2012. This was clearly an unfortunate result. Our 2013 guidance reflects realistic expectations for an improvement over 2012; however, we need to implement a significant change in the mine’s future performance to realize its potential. Long-term, Lumwana has an enormous mineral inventory and tremendous leverage to higher copper prices. As copper becomes more difficult to find and demand increases, we stand to benefit substantially from having this asset in our portfolio.

 

Maintaining and strengthening our commitment to corporate responsibility is another critical component of our strategy to deliver superior returns to our shareholders. It is also one of my personal commitments as CEO and one shared by our entire management team. We must earn support for our activities by living up to our commitments on safety and the environment, while ensuring that communities and society at large see mutual, long-term benefits from our operations. Improving our social and environmental performance is a continuous process, and one we remain fully committed to.

 

Looking ahead to 2013, we remain focused on delivering against a number of key priorities to drive shareholder value. First and foremost, we must meet our production and cost guidance. With respect to projects, we are focused on ramping up Pueblo Viejo to full capacity, advancing Pascua-Lama in line with our cost and schedule estimates, and advancing our Goldrush discovery in Nevada. Improving Lumwana’s performance is another key goal for the year, and one that our new copper leadership team is pursuing aggressively. During 2013, we will also be actively pursuing opportunities to optimize our portfolio, along with seeking further cost reductions across the company. And as always, further strengthening our corporate social responsibility performance is a top priority.

 

In conclusion, I would like to express my gratitude to our Founder and Chairman Peter Munk, Co-Chairman John Thornton and the rest of the Board of Directors for entrusting me with the role of Chief Executive Officer at this critical juncture in Barrick’s history. I would also like to thank Peter Kinver and Igor Gonzales for their many years of service with the company.

 

Delivering returns for our shareholders is my number one objective, and it’s something I intend to keep in laser-sharp focus as we move forward. Through our disciplined and rigorous approach to capital allocation, I believe we have the industry’s best platform to deliver profitable production while positioning Barrick as a significant generator of free cash flow. This should enable us to return more capital to shareholders, and ultimately drive superior shareholder returns over the long term.

 

/s/ Jamie C. Sokalsky

 

Jamie C. Sokalsky, President and Chief Executive Officer

 

 

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As the gold price recorded its 12th straight year of increases, Barrick reported record operating cash flow of $5.44 billion and the second highest adjusted net earnings in its history of $3.83 billion or $3.82 per share. Barrick continues to demonstrate exceptional leverage to the gold price on a per share basis. Since the launch of the gold exchange traded fund in 2004, the company’s adjusted net earnings and adjusted operating cash flow per share have increased about 700 percent1 and 450 percent1, respectively, compared to a 280 percent1 rise in the gold price over the same period. The 2012 net loss of $0.7 billion primarily reflects after-tax impairment charges of $3.8 billion for Lumwana. While we increased reserves and defined significant new mineralization at Lumwana in 2012, the mining costs in the new life-of-mine plan were higher than anticipated. Lumwana has tremendous leverage to higher copper prices, but our focus is on reducing mining costs to unlock its potential.

 

TRACK RECORD OF DIVIDEND GROWTH

 

Our robust cash flow generation and positive gold price outlook enabled the company to raise the quarterly dividend in 2012 by 33 percent to

 


(1) 2004–2012. All EPS are adjusted except 2004 is on a US GAAP basis and all CFPS are on a US GAAP basis except 2009–2012 are adjusted. 2004–2009 are on a US GAAP basis and 2010–2012 are on an IFRS basis.

 

8



 

 

“We can’t rely on stronger gold prices to deliver higher returns and free cash flow. We are managing our costs on an all-in sustaining cash cost basis and have significantly reduced budgeted company-wide overhead costs.”

 

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

 

$0.20 per share, or $0.80 per share on an annualized basis. Over the last six years, Barrick has had a consistent track record of returning more capital to shareholders, increasing its dividend by approximately 260 percent2 during this period, or a 24 percent compound annual growth rate.

 

DISCIPLINED APPROACH TO COST CONTROL

 

Costs are a key driver of Barrick’s financial performance and an integral part of our disciplined capital allocation strategy. Barrick continues to utilize risk management strategies, including currency and commodity hedging, to help manage our cost exposures. The company has also adopted a new cost measure — all-in sustaining cash costs per ounce — that is a more meaningful metric and better reflects the total costs of producing gold. This measure also reflects how we manage our business and is consistent with our goal of generating higher returns and increased free cash flow. While our expected 2013 all-in sustaining cash costs of $1,000 — $1,100 per ounce3 are competitive, we continue to evaluate a broad spectrum of ways to meaningfully reduce them.

 

ANNUALIZED DIVIDEND

 

US cents per share

 

 

 

In 2012, we initiated a review of company-wide overhead costs and an ongoing portfolio review that ranked our assets on their ability to meet our two primary investment metrics — free cash flow and risk-adjusted returns. As a result of these steps, we have reduced budgeted 2013 company-wide overhead by more than $100 million and we also identified approximately $4 billion of previously planned capital expenditures that do not meet our investment criteria. This capital was cut or deferred from our future plans.

 

Although we can’t rely on higher gold prices to deliver free cash flow growth, supportive supply/demand fundamentals appear to be in place for the foreseeable future. We expect gold to remain attractive as a de facto currency and a store of value as many developed nations continue to struggle with elevated debt levels and respond with accommodative monetary policies.

 

Central banks continue to purchase gold to diversify their portfolios, and recorded net purchases for the third year in a row. The growing middle class in emerging economies such as China and India is providing a further backstop to gold prices, and is also anticipated to benefit copper prices through infrastructure and consumer demand. Mine supply for both gold and copper is expected to be limited by the scarcity of new discoveries, which should positively impact prices.

 


(2) Calculation based on converting the 2006 semi-annual dividend of $0.11 per share to a quarterly dividend.

(3) Non-GAAP financial measure, see pages 79–87 of the 2012 Financial Report.

 

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GLOBAL PORTFOLIO OF PREMIER ASSETS

 

Barrick’s portfolio of 27 operating mines, advanced exploration and development projects and extensive land positions on five continents around the globe includes some of the world’s premier gold assets. Once Pueblo Viejo is at full capacity, Barrick will operate three of the world’s six mines that are one million ounce or more per year producers. Our top four mines — Cortez, Goldstrike, Lagunas Norte and Veladero — together produced 4.1 million ounces in 2012 at an average total cash cost of $406 per ounce.

 

These mines, plus Pueblo Viejo and Pascua-Lama, form an unmatched core group of six high quality assets with long lives and low costs, that alone would be the world’s largest gold producer. The goal of our ongoing portfolio review process, launched in mid-2012, is to further optimize the quality of our entire portfolio. Assets that do not generate acceptable risk-adjusted returns or free cash flow will be deferred, shelved or divested.

 

Barrick met its gold production guidance in 2012 for the tenth year in a row with an industry-leading

 

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7.4 million ounces of gold. All-in sustaining cash costs were $945 per ounce and total cash costs of $584 per ounce were the lowest among the senior gold producers. These strong results reflect the high quality of our assets. Going forward, Barrick’s cost structure is expected to benefit from combined average annual production of about 1.5 million1 new ounces from Pueblo Viejo and Pascua-Lama at average all-in sustaining cash costs of $250 — $350 per ounce2 and average total cash costs of $100 — $200 per ounce2.

 

GOLD BUSINESS

 

Our North America unit is the company’s largest producing region and generated 3.5 million ounces, or 47 percent of total 2012 production, at total cash costs of $500 per ounce. Nevada is home to seven of the region’s nine mines and contributed 3.1 million ounces or 42 percent of total production in 2012. Cortez remains our lowest cost mine and exceeded expectations for the third straight year with production of 1.37 million ounces at total cash costs of $282 per ounce. Significant exploration

 


(1) About 1.5 million ounces is based on the estimated cumulative annual average production in the first full five years once both mines are at full capacity.

(2) Based on first full five year averages once both mines are at full capacity.

 

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WORLD CLASS ASSETS

 

 

success at the nearby Goldrush discovery has further demonstrated the potential of this truly world-class district.

 

At Goldstrike, construction advanced on the thiosulfate project to enable continued production from the autoclaves, which were originally expected to cease operations in 2012. Modifications to the autoclave circuit will accelerate about 3.5 million ounces in the mine plan and contribute an average of about 350,000 — 400,000 ounces annually in the first full five years. First gold production is expected in mid-2014. The North America region contains a number of excellent prospects for future production, including Goldrush and the Lower Zone underground expansion at Cortez.

 

 

The Cortez mine in Nevada exceeded expectations for the third straight year. The processing facilities are shown in the foreground.

 

The three mines in South America produced 1.6 million ounces, or 22 percent of the company’s total 2012 production, at total cash costs of $467 per ounce. The Lagunas Norte mine had another strong year, contributing 754,000 ounces at low total cash costs of $318 per ounce, while Veladero produced 766,000 ounces at total cash costs of $510 per ounce. Both mines have significantly exceeded feasibility study expectations for production since they began operations in 2005. Lagunas Norte has outperformed original estimates for the last seven years and, on a cumulative basis, has produced more than 50 percent above expectations. Veladero has outpaced feasibility estimates for the last four years and cumulatively has produced about 20 percent more than anticipated.

 

Australia Pacific’s eight mines produced 1.8 million ounces in 2012, or 25 percent of total production, at total cash costs of $803 per ounce. The Porgera mine in Papua New Guinea continued to lead production in the region with production of 436,000 ounces at total cash costs of $955 per ounce.

 

Barrick’s 73.9 percent share of production from the four mines within African Barrick Gold Plc (ABG) was 0.5 million ounces, or 6 percent of total production, at total cash costs of $949 per ounce.

 

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INVESTING IN HIGH RETURN PROJECTS

 

Barrick added another world-class operation to its portfolio in 2012 with the successful completion of its 60 percent-owned Pueblo Viejo mine in the Dominican Republic. Pueblo Viejo is one of only a handful of mines globally that will produce more than one million ounces of gold per year and its state-of-the-art processing facility houses four of the largest autoclaves in the world. Based on reserves of 25.0 million ounces3 (100 percent basis), this mine is anticipated to be a major contributor of low-cost production to Barrick for many years to come. Completed at a capital cost of $3.7 billion, Pueblo Viejo is expected to provide 1,900 jobs and 10,000 indirect jobs over its anticipated 25+ year mine life.

 

Pueblo Viejo poured its first gold in August 2012 and is scheduled to ramp up to full capacity in the second half of 2013 with expected production of 500,000 — 650,000 ounces4 in 2013. In the first

 


(3) See pages 163–170 of the 2012 Annual Report for additional information on reserves and resources.

(4) Actual production may vary depending on the progress of the ramp-up.

Pueblo Viejo’s state-of-the-art processing facility houses four of the largest autoclaves in the world.

 

 

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full five years of operation, Barrick’s share of annual production is anticipated to be 625,000 — 675,000 ounces at all-in sustaining cash costs of $500 — $600 per ounce5 and total cash costs of $300 — $350 per ounce5.

 

The Pascua-Lama project on the border of Chile and Argentina is expected to be one of the world’s lowest operating cost gold mines and will generate significant free cash flow for Barrick once it ramps up to full production. First production is targeted for the second half of 2014 and mine construction capital is estimated at $8.0 — $8.5 billion. The project is expected to generate 1,600 direct jobs and 4,000 indirect jobs over its 25 year mine life and Barrick is providing skills training programs, opportunities for local businesses and investing in

 

Assembly of the grinding building at Pascua-Lama is well advanced; the covered ore stockpile building is shown in the background.

 

 

14



 

 

communities around the project. The project hosts a large gold reserve of nearly 18 million ounces and 676 million ounces of silver contained within the gold reserves.

 

In its first full five years of operation, Pascua-Lama is expected to produce an annual average of 800,000 —850,000 ounces of gold at all-in sustaining cash costs of $50 — $200 per ounce6 and total cash costs of $0 to negative $150 per ounce6. The mine will also be one of the world’s top silver producers, with average annual production of about 35 million ounces over the same period. At the end of 2012, construction was approximately 40 percent complete.

 

COPPER BUSINESS UNIT

 

Barrick strengthened the management of its Global Copper Business Unit (CBU) in 2012 to exclusively focus on optimizing this business, which includes the Zaldívar mine in Chile, the Lumwana mine in Zambia, and the Jabal Sayid project in Saudi Arabia.

 

Total 2012 copper production was 468 million pounds at C1 cash costs of $2.17 per pound and C3 fully allocated costs of $2.97 per pound. The Zaldívar mine produced 289 million pounds at C1 cash costs of $1.62 per pound and Lumwana contributed 179 million pounds at C1 cash costs of $3.07 per pound.

 

Our focus at Lumwana is on significant cost reduction in order to realize its potential. With an enhanced understanding based on drilling completed in 2012 and an updated mine plan, the company is in a better position to identify necessary changes that will improve free cash flow over the life of the mine. Higher utilization and productivity of the mining fleet and a full transition to owner maintenance have been identified as major opportunities to improve value.

 

 

The leach pad at Zaldívar is refreshed with ore in a constant cycle of delivery and reclaim.

 

At Jabal Sayid, production is expected to commence in 2014 once the mine is compliant with Saudi Arabia standards for safety and security. Average annual production from Jabal Sayid is anticipated to be 100 — 130 million pounds at C1 cash costs of $1.50 — $1.70 per pound7 in its first full five years of operation.

 


(5) Based on first full five year averages and gold and oil price assumptions of $1,700/oz and $90/bbl, respectively. Does not include escalation for future inflation.

(6) Based on first full five year averages and gold, silver and oil price assumptions of $1,700/oz, $30/oz and $90/bbl, respectively, and assuming a Chilean peso f/x rate of 475:1. Does not include escalation for future inflation.

(7) Does not include escalation for future inflation.

 

15



 

 

Barrick replaced proven and probable gold reserves in 2012 for the seventh year in a row, ending the year with an industry-leading 140 million ounces. In addition, the company has measured and indicated resources of 83 million ounces and inferred resources of 36 million ounces.

 

The company has an excellent track record of finding new gold reserves dating back nearly to its inception. Since 1990, we have spent about $2.9 billion on exploration1 with an overall finding cost of about $18 per ounce. During that time, we have mined 127 million ounces of gold, acquired 110 million ounces and found 157 million ounces of gold through exploration.

 

Copper reserves grew by 1.2 million pounds to 13.9 million pounds in 2012 following the completion of an extensive 18-month drill program at Lumwana. The company also had measured and indicated copper resources of 10.3 million pounds at the end of 2012.

 


(1) Barrick’s exploration programs are designed and conducted under the supervision of Robert Krcmarov, Senior Vice President, Global Exploration of Barrick. For information on the geology, exploration activities generally, and drilling and analysis procedures on Barrick’s material properties, see Barrick’s most recent Annual Information Form/Form 40-F.

 

16



 

 

The 2012 exploration program was focused largely in Nevada, which received about 40 percent of the exploration budget. Extensive drill programs were conducted at Goldrush to upgrade resources and test the limits and regional potential of this large discovery near the Cortez mine.

 

Infill drilling joined the Red Hill and Goldrush deposits (renamed Goldrush), doubled and upgraded the resource base and more than doubled the footprint of the mineralized corridor to over seven kilometers in length. Measured and indicated resources grew by more than 500 percent from 2011 to 8.4 million ounces. In addition, there are 5.7 million ounces in the inferred category. Goldrush remains open in multiple directions to the north, east and south.

 

Stepping out from Goldrush, the greater Cortez camp contains a wealth of long-term, district-scale exploration opportunities. The purchase of the Mill Canyon property in 2012 brought the entire Cortez camp under Barrick management and will permit

 

17



 

 

CORTEZ DISTRICT POTENTIAL

 

The Cortez district contains substantial exploration opportunities, including a new parallel trend west of Goldrush.

 

 

a systematic exploration of high quality targets that will be drill tested. These include a parallel trend identified to the west of Goldrush, and the northern, eastern and southern extensions of the Goldrush system. A scoping study has been completed, and a prefeasibility study is underway in parallel with continuing exploration work and technical studies. A number of development options are being considered, including open pit mining, underground mining, or a combination of both.

 

At the 75 percent-owned Turquoise Ridge mine, drilling in 2012 added 0.7 million ounces to reserves, 2.6 million ounces to measured and indicated resources and 1.9 million ounces to inferred resources (all 100 percent basis).

 

The 2013 exploration budget of $400 — $440 million will focus on quality priority projects aligned with our objective of “returns driving production.”

 

About half of the 2013 budget is allocated to North America, primarily Nevada, while Australia Pacific will receive about 18 percent of the budget, copper will be allocated about 16 percent and South America about 14 percent, with the balance being for African Barrick Gold.

 

18


 


 

 

HISTORY OF GOLD RESERVE | RESOURCE GROWTH

Ounces Added Since Discovery or Acquisition (millions)

 

 

Reserves and Resources Summary

 

at December 31, 2012

 

Proven and

 

Measured and

 

Inferred

 

(Barrick’s equity share)

 

Probable Reserves

 

Indicated Resources

 

Resources

 

Gold (000s oz)

 

140,248

 

83,008

 

35,591

 

North America

 

59,478

 

59,139

 

19,064

 

South America

 

51,689

 

10,338

 

6,447

 

Australia Pacific

 

16,609

 

6,150

 

6,772

 

Africa

 

12,271

 

7,379

 

3,291

 

Other

 

201

 

2

 

17

 

Other Metals

 

 

 

 

 

 

 

Copper (M lbs)

 

13,881

 

10,308

 

506

 

Nickel (M lbs)

 

 

1,080

 

596

 

 

Other Metals Contained in:

 

 

 

Proven and Probable

 

Measured and Indicated

 

Inferred

 

 

 

Gold Reserves

 

Gold Resources

 

Gold Resources

 

Silver (000s oz)

 

1,051,680

 

255,633

 

60,162

 

Copper (M lbs)

 

5,761

 

1,335

 

1,639

 

 

19



 

 

We believe our commitment to responsible mining is the right way to operate and vital to achieving our business objectives. Our priority is to deliver superior returns to our shareholders and at the same time create value for the communities and countries where we operate.

 

Around the world, the economic, social and political context of the mining industry continues to evolve at a rapid pace, bringing with it changing risks and heightened expectations. Barrick’s approach to corporate responsibility helps us identify and manage emerging risks to ensure we can continue to create value for our investors and stakeholders.

 

We do this by conducting our activities to high operational, social, environmental and safety standards and by developing respectful and collabor-ative relationships with communities, governments, civil society and others, wherever we operate.

 

We recognize that our ongoing success is tied to the success and stability of our host communities, and to our reputation as a responsible partner in resource development. In all locations, we work diligently to manage the impacts of our operations, provide a safe workplace for our employees, and ensure that communities and society derive long-term benefits from our mining activities.

 

20



 

 

This approach helps us sustain broad support for our operations. As a result, we are able to develop a quality portfolio of assets that generates strong returns for our shareholders.

 

ECONOMIC AND COMMUNITY DEVELOPMENT

 

Barrick’s operations are a powerful engine of economic development and can drive positive social change. Our operations contribute billions of dollars annually to local and national economies in the form of wages, taxes and royalties, procurement of goods and services and community investments. In 2011 alone (the most recent year for which figures are available) these contributions totaled approximately $13 billion. Through local hiring and purchasing, we seek to maximize the benefits of our operations in ways that are good for the community and good for our business.

 

The issues facing our host communities are diverse and often complex. In developing countries, where many new deposits are located, poverty, limited infrastructure and services, and a lack of educational opportunities are a reality. To help our host communities address these challenges, we work with them to invest in the right development initiatives that reflect local priorities. These initiatives

 

21



 

 

help to foster longer-term socio-economic development and contribute to greater stability where we operate.

 

Investing in Communities

 

Barrick invests in every community where we operate. Some examples of the numerous initiatives we are supporting are highlighted below:

 

IN CHILE | Barrick helped 125 families move into new homes as part of an initiative aimed at alleviating poverty in Chile’s Atacama Region. Barrick’s partners in the program were “A Roof for Chile,” a non-governmental organization (NGO) dedicated to eradi-cating slums, and the Chilean Ministry of Housing.

 

 

Barrick partnered with A Roof for Chile and the Chilean government to enable 125 Chilean families living in poverty to become homeowners. Pictured above, the families outside their new homes.

 

IN THE DOMINICAN REPUBLIC | The company has invested in numerous community projects around the Pueblo Viejo mine to improve health care, housing, infrastructure and literacy. Additional funding has been allocated to conduct the clean-up of a former mining operation and remediate its impacts outside the current Pueblo Viejo mine site, helping to improve the local living environment.

 

IN ZAMBIA | Barrick invested in a wide range of sustainable development initiatives in 2012. These included funding for infrastructure, such as schools and health centers, literacy and agricultural programs, community sports and recreation, and an initiative to provide microcredit and small business loans to women.

 

IN ARGENTINA | At the end of 2012, Barrick’s operations in Argentina generated employment for a total of 15,800 people, including direct employees and third-party contractors. The company is providing skills training programs, purchasing from local suppliers and investing in host communities. These investments in agribusinesses, health, tourism, and internet connectivity further leverage the positive socio-economic impact of our business.

 

IN THE UNITED STATES | A long-time supporter of education at all levels in Nevada, Barrick recently signed a four-year sponsorship agreement with the NGO Communities in Schools that is helping at-risk students at two Nevada middle schools stay in school and succeed academically.

 

22



 

 

Relationship-Building

 

Our goal is to build strong relationships with a broad range of stakeholders, including governments, NGOs, civil society and others. By working together, we are better able to address the issues facing our host communities and countries and achieve more sustainable outcomes, while continuously improving our performance. Some examples of our efforts in 2012 are provided below.

 

CSR ADVISORY BOARD: Barrick established an external CSR Advisory Board in 2012 to provide advice and guidance to the company’s senior leadership team on our social and environmental performance. The inaugural Board met twice over the course of the year and included five highly distinguished individuals — Aron Cramer, Elizabeth Dowdeswell, Robert Fowler, Edward Liebow, and Gare Smith — as well as Professor John Ruggie, who served as a Special Consultant to the Advisory Board. This third-party feedback and counsel is one of the many ways we are working to improve our performance and deliver on our commitment to mining responsibly.

 

COMMUNITIES: In 2012, Barrick began implementing its Community Relations Management System (CRMS) at all of its mines worldwide. The CRMS sets minimum performance requirements that are aligned with international best practice to ensure community relations activities are carried out in a systematic and professional manner. Grievance mechanisms were one of the priorities for implementation in 2012, which provide local stakeholders with an accessible, transparent mechanism to voice their concerns to the company.

 

 

In 2012, Barrick’s inaugural CSR Advisory Board included, from left to right, Ed Liebow, Gare Smith, Aron Cramer, Elizabeth Dowdeswell, John Ruggie (Special Consultant to the Advisory Board) and Robert Fowler.

 

NGOs: Barrick unveiled the Alto Chicama Commitment, an initiative involving NGOs and governments working together with Barrick on sustainable development projects in northern Peru. This collaborative model, which follows on the success of the Atacama Commitment in Chile, features alliances with such respected NGOs as CARE and World Vision.

 

Government Relations

 

Barrick’s government relations program is critical to achieving our business goals and is a significant strength for the company in managing our operations and the political risk inherent in complex jurisdictions. We ensure that we are trusted partners with all levels of government where we have

 

23



 

 

projects and operations. We build and maintain productive relationships with regulators and public policy makers that underscore our role as a responsible operator. We conduct our activities in a transparent way and commit to rigorous implementtation of the standards set out by our home and host countries. Our collaborative approach to working with governments helps us to secure necessary approvals and stability agreements, negotiate permit requirements and supports project financing.

 

As a Canadian multinational company, we endeavor to ensure our investments are protected through multilateral and bilateral investment and free trade agreements and advocate for the creation of such where none exists. Finally, we work closely with our international and domestic peers through the World Gold Council, the International Council on Mining and Metals, the Mining Association of Canada, the National Mining Association of the United States, and other national associations in countries where we operate. Through these associations, we advocate for best practices, participate in the creation of industry standards, communicate and document the economic and social benefits of resource development to host countries, and collaborate on managing collective risks.

 

 

The First Lady of Zambia, Dr. Christine Kaseba (center), celebrates International Women’s Day at the Lumwana mine.

 

ENVIRONMENTAL RESPONSIBILITY

 

In the mining industry today, there is a stronger focus on environmental responsibility than ever before. From exploration to reclamation, we are working to identify, control and mitigate the impacts of our activities on land, air and water. Our programs that lead to energy savings and reduce water consumption and emissions keep us competitive and protect our ability to operate.

 

In 2012, Barrick completed implementation of its Environmental Management System (EMS) at all operations, which is designed to improve environmental performance across the company. Barrick’s EMS is aligned with high international standards, including ISO 14001 and the International Council on Mining and Metals Framework for Sustainable Development. All North American operations and business units and South American operations are now ISO 14001 certified, with further certifications achieved or underway in

 

24



 

 

Australia Pacific. Our most recent operation to achieve certification is the Porgera Joint Venture in Papua New Guinea.

 

We recognize the risk that climate change poses to society and to our long-term success. To mitigate these risks, we set energy efficiency and greenhouse gas emissions targets that lead to improvements against business as usual. Our focus is to improve processes across the organization — at mine sites and in office settings. Barrick is also continuing its efforts to use more renewable energy, building on the success of our Punta Colorada wind farm in Chile and our solar farm in Nevada. All Barrick mines reuse water, and we continually seek new ways to reduce the amount of water used for mining activities.

 

MEETING OUR RESPONSIBILITY TO OUR EMPLOYEES

 

Barrick’s reputation as a safe operator reflects our values and makes us an employer of choice. Our Safety and Health Policy outlines the company’s goal of a zero-incident work environment to achieve our safety vision, which is “Every person going home safe and healthy every day.” The Barrick Safety and Health Management System is our framework to reach that objective.

 

During 2012, Barrick reduced its Total Reportable Injury Frequency Rate to 0.76, an 18 percent reduction from 0.92 achieved in 2011. Across the company, more diligent implementation of safety standards is making a difference on the front line. Ongoing installation of in-vehicle driver mentoring systems is helping us coach drivers and reduce light vehicle incidents. Barrick has also developed a management standard to prevent fatigue-related incidents, which is now being piloted at several sites.

 

Barrick will continue to increase management presence in the field, focusing on compliance with standards related to critical risks. In addition, the company has implemented a rigorous approach to investigate “near miss” incidents, engaging in specialized training and analysis. The involvement of leaders in these processes promotes quality investigations and leads to better corrective actions and more diligent follow up. Through these actions, we continue to create a safety culture at Barrick that is fundamental to how we work every day.

 

 

Barrick maintains emergency response teams at all its sites around the world. These highly trained professionals are the first responders to any mine emergency, and often assist communities in times of need.

 

25



 

 

Our company is built on a foundation of doing the right thing in every situation. We guide our conduct by the highest standards of honesty, integrity, and ethical behavior. Nothing is more important to our success as a company than these values, which are vital to securing and maintaining respect from our employees, the communities and governments where we operate, and our shareholders.

 

We have several global policies and processes in place to guide our employees and help ensure compliance with our core values. These values, policies and processes, combined with our commitment to comply with all applicable national and international laws, help guide our day-to-day work as a responsible and honest company.

 

CODE OF BUSINESS CONDUCT AND ETHICS

 

Barrick’s Code of Business Conduct and Ethics embodies our commitment to conduct our business in accordance with all applicable laws, rules and regulations and to the highest ethical standards throughout our worldwide organization. Adopted by Barrick’s Board of Directors, the Code of Conduct applies to every Barrick employee. We ensure that all employees are aware of and follow the obligations contained in the Code through training, certifications, communications, and other methods. We also maintain an anonymous hotline where

 

26



 

 

concerns about adherence to the Code can be reported and we investigate all reports that are made.

 

HUMAN RIGHTS

 

Barrick recognizes the equality and dignity of all people, and respects human rights in every location in which we operate. We believe that responsible resource development can and should improve human rights. In 2012, we continued to implement a global cross-functional human rights compliance program aligned with the UN Guiding Principles on Business and Human Rights. As part of that program, in 2012 we provided human rights training in some capacity to more than 10,000 employees. We began conducting human rights risk and impact assessments at key sites and projects. We strengthened human rights due diligence in our hiring practices and instituted human rights requirements in agreements with third parties.

 

We also initiated a human rights remediation framework at the Porgera Joint Venture in Papua New Guinea to address claims of sexual violence committed by employees. In late 2012, after 18 months of designing the remedy framework, including consultations with leading human rights experts, experts in violence against women, and prominent local stakeholders, the program — which is administered independently of the company — began to accept claims. In 2012, Barrick also assisted its affiliate African Barrick Gold in seeking to remediate past human rights violations at the North Mara mine in Tanzania.

 

Barrick also engages broadly in human rights initiatives and partnerships. We serve on the Board of Directors of the Voluntary Principles on Security and Human Rights and, in 2012, entered into new partnerships with leading human rights organizations, including:

 

· A two-year partnership with the Danish Institute for Human Rights to develop human rights tools for business and further enhance Barrick’s human rights performance globally.

 

· Assisted in founding a Human Rights Working Group with Business for Social Responsibility, which now involves some two dozen leading companies.

 

· Helping to lead the effort to establish a UN Global Compact Network within Canada, serving as one of the network’s core member companies.

 

ANTI-CORRUPTION AND FRAUD

 

As part of ensuring we operate ethically at all times, Barrick maintains a cross-functional global anticorruption compliance program. In 2012, we continued to enhance this program, which includes training and due diligence on prospective employees and third-party contractors. Barrick also seeks to engage with leading entities and experts and promote global anticorruption efforts. Barrick is a member of Transparency International and the Extractive Industries Transparency Initiative. In 2012, we became a member of the World Economic Forum’s Partnership Against Corruption Initiative and became a lead member of Trace International Inc.’s TRAC program, a global supply chain due diligence and transparency tool.

 

COMPLIANCE

 

Maintaining Barrick’s license to operate requires adherence to consistent standards and policies that are applied on a global basis. We actively seek to ensure that our policies and procedures are followed through training, communication, reporting, investigations, and other means. We conduct regular audits to ensure our operations are adequately identifying social, safety, security, environmental and other risks and have appropriate plans in place to address them. These assessments ensure appropriate compliance with our requirements and identify areas where our processes can be strengthened.

 

27



 

Financial Report

 

Management’s Discussion and Analysis

29

Financial Statements

93

Notes to Consolidated Financial Statements

98

Mineral Reserves and Mineral Resources

163

Corporate Governance and Committees of the Board

171

Shareholder Information

172

Board of Directors and Senior Officers

174

 



 

Management’s Discussion and Analysis (“MD&A”)

 

Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand Barrick Gold Corporation (“Barrick”, “we”, “our” or the “Company”), our operations, financial performance and present and future business environment. This MD&A, which has been prepared as of February 13, 2013, should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2012. Unless otherwise indicated, all amounts are presented in US dollars.

 

For the purposes of preparing our MD&A, we consider the materiality of information. Information is considered material if: (i) such information results in, or would reasonably be expected to result in, a significant change in the market price or value of our shares; or (ii) there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision; or (iii) it would significantly alter the total mix of information available to investors. We evaluate materiality with reference to all relevant circumstances, including potential market sensitivity.

 

Continuous disclosure materials, including our most recent Form 40-F/Annual Information Form, annual MD&A, audited consolidated financial statements, and Notice of Annual Meeting of Shareholders and Proxy Circular will be available on our website at www.barrick.com, on SEDAR at www.sedar.com and on EDGAR at www.sec.gov. For an explanation of terminology unique to the mining industry, readers should refer to the glossary on page 88.

 

Cautionary Statement on Forward-Looking Information

 

Certain information contained or incorporated by reference in this MD&A, including any information as to our strategy, projects, plans or future financial or operating performance, constitutes “forward-looking statements”. All statements, other than statements of historical fact, are forward-looking statements. The words “believe”, “expect”, “anticipate”, “contemplate”, “target”, “plan”, “intend”, “continue”, “budget”, “estimate”, “may”, “will”, “schedule” and similar expressions identify forward-looking statements. Forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by the Company, are inherently subject to significant business, economic and competitive uncertainties and contingencies. Known and unknown factors could cause actual results to differ materially from those projected in the forward-looking statements. Such factors include, but are not limited to: fluctuations in the spot and forward price of gold and copper or certain other commodities (such as silver, diesel fuel and electricity); diminishing quantities or grades of reserves; the impact of inflation; changes in national and local government legislation, taxation, controls, regulations, expropriation or nationalization of property and political or economic developments in Canada, the United States, Dominican Republic, Australia, Papua New Guinea, Chile, Peru, Argentina, Tanzania, Zambia, Saudi Arabia, United Kingdom, Pakistan or Barbados or other countries in which we do or may carry on business in the future; the impact of global liquidity and credit availability on the timing of cash flows and the values of assets and liabilities based on projected future cash flows; increased costs, delays and technical challenges associated with the construction of capital projects; fluctuations in the currency markets (such as Canadian and Australian dollars, Chilean and Argentinean peso, British pound, Peruvian sol, Zambian kwacha, South African rand, Tanzanian shilling, and Papua New Guinean kina versus the US dollar); changes in US dollar interest rates that could impact the mark-to-market value of outstanding derivative instruments and ongoing payments/receipts under interest rate swaps and variable rate debt

 

29



 

obligations; risks arising from holding derivative instruments (such as credit risk, market liquidity risk and mark-to-market risk); risk of loss due to acts of war, terrorism, sabotage and civil disturbances; business opportunities that may be presented to, or pursued by, the Company; our ability to successfully integrate acquisitions or complete divestitures; operating or technical difficulties in connection with mining or development activities; employee relations; availability and increased costs associated with mining inputs and labor; litigation; the speculative nature of mineral exploration and development, including the risks of obtaining necessary licenses and permits; adverse changes in our credit rating; contests over title to properties, particularly title to undeveloped properties; and the organization of our previously held African gold operations and properties under a separate listed company. In addition, there are risks and hazards associated with the business of mineral exploration, development and mining, including environmental hazards, industrial accidents, unusual or unexpected formations, pressures, cave-ins, flooding and gold bullio or copper cathode losses (and the risk of inadequate insurance, or inability to obtain insurance, to cover these risks). Many of these uncertainties and contingencies can affect our actual results and could cause actual results to differ materially from those expressed or implied in any forward-looking statements made by, or on behalf of, us. Readers are cautioned that forward-looking statements are not guarantees of future performance. All of the forward-looking statements made in this MD&A are qualified by these cautionary statements. Specific reference is made to the most recent Form 40-F/Annual Information Form on file with the SEC and Canadian provincial securities regulatory authorities for a discussion of some of the factors underlying forward-looking statements. We disclaim any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required by applicable law.

 

Changes in Presentation of Non-GAAP Financial Performance Measures

 

We use certain non-GAAP financial performance measures in our MD&A. These new measures are intended to provide additional information only and do not have any standardized meaning prescribed by IFRS and should not be considered in isolation or as substitutes for measures of performance prepared in accordance with IFRS. Other companies may calculate these measures differently. For a detailed description of each of the non-GAAP measures used in this MD&A, please see the discussion under “Non-GAAP Financial Performance Measures” beginning on page 79 of our MD&A. In 2012, we added or made changes to the following non-GAAP performance measures:

 

Total Cash Costs per pound, C1 Cash Costs per pound and C3 Fully Allocated Costs per pound

 

In 2012, we replaced the non-GAAP measure “total cash costs per pound” for our copper business with “C1 cash costs per pound”. We believe that this change will enable investors to better understand the performance of our global copper segment in comparison to other copper producers who present results on a similar basis. As part of this change, we also introduced “C3 fully allocated costs per pound”. The primary difference between total cash costs and C1 cash costs is that royalties and non-routine charges are excluded from C1 cash costs as they are not direct production costs. C3 fully allocated costs per pound include C1 cash costs, depreciation, royalties, exploration and evaluation expense, administration expense and non-routine charges.

 

Adjusted Operating Cash Flow

 

In 2012, we have adjusted our operating cash flow to remove the effect of the “settlement of currency contracts”. This settlement activity is not reflective of the underlying capacity of our operations to generate operating cash flow on a recurring basis, and therefore this adjustment will result in a more meaningful operating cash flow measure for investors and analysts to evaluate our performance in the period and assess our future operating cash flow generating capability.

 

Adjusted EBITDA

 

Starting in this MD&A, we are introducing “Adjusted EBITDA” as a non-GAAP measure. We have adjusted our EBITDA to remove the effect of “impairment charges”. These charges are not reflective of our ability to generate liquidity by producing operating cash flow and therefore this adjustment will result in a more meaningful valuation measure for investors and analysts to evaluate our performance in the period and assess our future ability to generate liquidity.

 

All-in Sustaining Cash Costs per ounce

 

Beginning in 2013, we are adopting an all-in sustaining cash costs measure. The Company believes that current operating measures commonly used in the gold industry do not capture all of the sustaining expenditures incurred

 

30



 

in order to produce gold, and therefore they do not present a complete picture of a company’s operating performance or its ability to generate free cash flow from its current operations. Similarly, they do not reflect all of the expenditures that would be included in the valuation of a gold mining company. For these reasons, the Company is working with the members of the World Gold Council (“WGC”) to define an all-in sustaining cash costs measure that better represents the total costs associated with producing gold. We believe this measure will better meet the needs of analysts, investors and other stakeholders of the Company in assessing its operating performance, its ability to generate free cash flow from current operations and its overall value.

 

The WGC project to define all-in sustaining cash costs is ongoing and a final standard is expected in the middle of 2013. We expect to conform our disclosure of all-in sustaining cash costs to the measure that is ultimately approved by the WGC. Our current definition of all-in sustaining cash costs commences with total cash costs and then adds sustaining capital expenditures, corporate general and administrative costs, mine site exploration and evaluation costs and environmental rehabilitation costs. This measure seeks to represent the total costs of producing gold from current operations, and therefore it does not include capital expenditures attributable to projects or mine expansions, exploration and evaluation costs attributable to growth projects, income tax payments, interest costs or dividend payments. Consequently, this measure is not representative of all of the Company’s cash expenditures. In addition, our calculation of all-in sustaining cash costs does not include depreciation expense as it does not reflect the impact of expenditures incurred in prior periods. Therefore, it is not indicative of the Company’s overall profitability. All-in sustaining cash costs for 2012 are outlined in the table below:

 

($ per ounce)

 

 

 

For the year ended December 31

 

2012

 

Total cash costs

 

$

584

 

Minesite sustaining capital expenditures

 

155

 

Mine development expenditures

 

114

 

Corporate administration applicable to gold segments

 

51

 

Exploration and evaluation

 

21

 

Environmental rehabilitation costs

 

20

 

All-in sustaining cash costs

 

$

945

 

 

Please refer to pages 81 to 84 of this MD&A for a detailed reconciliation of all-in sustaining cash costs.

 

Index

 

32

 

Overview

 

 

32

Our Business and Strategy

 

 

34

Review of 2012 Results

 

 

36

Key Business Developments

 

 

39

Outlook for 2013

 

 

43

Exploration and Mineral Reserves and Mineral Resources Update

 

 

45

Enterprise Risk Management Approach

 

 

45

Market Overview

52

 

Review of Annual Financial Results

 

 

52

Revenues

 

 

52

Production Costs

 

 

53

Corporate Administration

 

 

53

Other Expense/Other Income

 

 

53

Exploration and Evaluation

 

 

53

Capital Expenditures

 

 

54

Finance Cost/Finance Income

 

 

54

Impairment Charges

 

 

54

Income Tax

 

 

56

Operational Overview

 

 

57

Review of Operating Segments Performance

63

 

Financial Condition Review

 

 

63

Balance Sheet Review

 

 

64

Financial Position and Liquidity

 

 

67

Financial Instruments

 

 

69

Commitments and Contingencies

70

 

Review of Quarterly Results

71

 

IFRS Critical Accounting Policies and Estimates

79

 

Non-GAAP Financial Performance Measures

88

 

Glossary of Technical Terms

 

31



 

Overview

 

Our Business and Strategy

 

Our Business

Barrick’s vision is to be the world’s best gold mining company by operating in a safe, profitable and responsible manner. We sell our production in the world market through the following distribution channels: gold bullion is sold in the gold spot market; gold and copper concentrate is sold to independent smelting companies; and copper cathode is sold to various manufacturers and traders.

 

Barrick’s market capitalization, annual gold production and gold reserves are the largest in the industry. We also produce significant amounts of copper and have significant silver reserves contained within our gold reserves at our Pascua-Lama project. Our large mineral inventory provides significant optionality to metal prices, which supports mine life extension and expansion investment opportunities where the risk-adjusted returns are appropriate.

 

MARKET CAPITALIZATION as at December 31, 2012

(USD billions)

 

 

2012 GOLD PRODUCTION1

(millions of ounces)

 

 


(1) Based on fiscal 2012 results publicly available as of February 13, 2013.

 

We manage our business through seven primary business units: four regional gold businesses, a global copper business, an oil & gas business and a Capital Projects business. This structure enables each business unit to customize corporate strategies to meet the unique conditions in which they operate.

 

For gold, we manage our operations using a geographical business unit approach, with producing mines concentrated in three regional business units (“RBUs”): North America, South America and Australia Pacific, each of which is led by its own Regional President. We also hold a 73.9% equity interest in African Barrick Gold plc (“ABG”), a publicly traded company, which includes our previously held African gold mines and exploration properties.

 

Our Global Copper business unit manages our copper business with a view towards maximizing the value of our copper and non-gold assets. The global copper business unit manages the Zaldívar and Lumwana mines and Jabal Sayid project.

 

32



 

Our oil & gas business, managed by Barrick Energy, provides an economic hedge against our exposure to oil prices and also provides support for energy-saving initiatives undertaken by our other business units. In January 2013, we confirmed that we have commenced a process to potentially divest Barrick Energy as part of our ongoing global portfolio optimization in accordance with our disciplined capital allocation framework.

 

Our Capital Projects business, distinct from our other business units, focuses on managing feasibility studies and construction of our major capital projects, while our operating business units manage feasibility studies and construction of mine expansion projects at existing operating mines.

 

Our business unit structure adds value by enabling the realization of operational efficiencies, allocating resources to individual mines/projects more effectively and understanding and better managing the local business environment, including labor, consumable costs and supply and government and community relations.

 

We have operating mines or projects in Canada, the United States, the Dominican Republic, Australia, Papua New Guinea, Peru, Chile, Argentina, Zambia, Saudi Arabia, Pakistan and Tanzania. The geographic split of gold production for the year ended December 31, 2012 was as follows:

 

GOLD PRODUCTION BY REGION IN 2012

 

 

Our Strategy

 

Our actions are driven by our core values reflecting the guiding principles used to run the Company and these values provide the foundation for our strategy. Our core values are:

 

· Integrity

· Respect and open communication

· Responsibility and accountability

· Teamwork

· Create shareholder value

 

In 2012, we renewed our focus on maximizing shareholder value and reemphasized our commitment to a disciplined capital allocation framework to guide our decision making. Under this approach, all capital allocation options, which include organic investment in exploration and projects, and acquisitions or divestitures to improve the quality of our portfolio, will be assessed on the basis of maximizing risk-adjusted returns. Our increased emphasis on free cash flow should 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. We will seek to optimize the overall returns from our portfolio of assets and projects. Consequently, investments in existing assets that do not generate target returns or long-term free cash flow will be deferred, shelved or divested to improve the overall quality of our portfolio. Our strategy and approach to capital allocation has been summed up as follows:

 

RETURNS WILL DRIVE PRODUCTION;

 

PRODUCTION WILL NOT DRIVE RETURNS.

 

33



 

Review of 2012 Results

 

2012 Fourth Quarter and Year-End Results

 

 

 

For the three months ended

 

For the years ended

 

 

 

December 31

 

December 31

 

($ millions, except where indicated)

 

2012

 

2011

 

2012

 

2011

 

Financial Data

 

 

 

 

 

 

 

 

 

Revenue

 

$

4,189

 

$

3,761

 

$

14,547

 

$

14,236

 

Net earnings/(loss)1

 

(3,062

)

959

 

(665

)

4,484

 

Per share (“EPS”)2

 

(3.06

)

0.96

 

(0.66

)

4.49

 

Adjusted net earnings3

 

1,108

 

1,166

 

3,827

 

4,666

 

Per share (“adjusted EPS”)2,3

 

1.11

 

1.17

 

3.82

 

4.67

 

EBITDA3

 

(4,023

)

1,998

 

987

 

8,376

 

Adjusted EBITDA3

 

2,173

 

2,210

 

7,457

 

8,611

 

Total consolidated project capital expenditures

 

697

 

663

 

2,616

 

2,275

 

Total capital expenditures — expansion, sustaining and mine development

 

1,000

 

652

 

3,206

 

2,316

 

Operating cash flow

 

1,672

 

1,224

 

5,439

 

5,315

 

Adjusted operating cash flow3

 

1,752

 

1,299

 

5,156

 

5,680

 

Adjusted operating cash flow before working capital changes3

 

1,696

 

1,405

 

5,392

 

5,819

 

Free cash flow3

 

$

(66

)

$

68

 

$

(838

)

$

1,082

 

Adjusted return on equity3

 

19

%

20

%

17

%

22

%

 

 

 

 

 

 

 

 

 

 

Operating Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gold

 

 

 

 

 

 

 

 

 

Gold produced (000s ounces)4

 

2,019

 

1,814

 

7,421

 

7,676

 

Gold sold (000s ounces)

 

2,027

 

1,865

 

7,292

 

7,550

 

Realized price ($ per ounce)3

 

$

1,714

 

$

1,664

 

$

1,669

 

$

1,578

 

Total cash costs ($ per ounce)3

 

$

584

 

$

505

 

$

584

 

$

460

 

All-in sustaining cash costs ($ per ounce)3

 

$

972

 

$

826

 

$

945

 

$

752

 

 

 

 

 

 

 

 

 

 

 

Copper

 

 

 

 

 

 

 

 

 

Copper produced (millions of pounds)

 

130

 

143

 

468

 

451

 

Copper sold (millions of pounds)

 

154

 

135

 

472

 

444

 

Realized price ($ per pound)3

 

$

3.54

 

$

3.69

 

$

3.57

 

$

3.82

 

C1 cash costs ($ per pound)3

 

$

2.07

 

$

1.96

 

$

2.17

 

$

1.71

 

 


(1)    Net earnings represent net income attributable to the equity holders of the Company.

(2)    Calculated using weighted average number of shares outstanding under the basic method.

(3)    Adjusted net earnings, adjusted EPS, EBITDA, adjusted EBITDA, adjusted operating cash flow, adjusted operating cash flow before working capital changes, free cash flow, adjusted return on equity, realized price, total cash costs, all-in sustaining cash costs and C1 cash costs are non-GAAP financial performance measures with no standardized definition under IFRS. For further information and a detailed reconciliation, please see pages 79—87 of this MD&A.

(4)    We sold our 20.4% investment in Highland Gold with an effective date of April 26, 2012. Production includes our equity share of gold production at Highland Gold up to that date.

 

Key Highlights:

 

·       Net losses for 2012 were $665 million, compared to net earnings in the prior year of $4.5 billion. The decrease reflects the impact of impairment charges of $4.4 billion (net of tax effects), which includes $3.8 billion in after-tax impairment charges attributable to our copper business, primarily due to asset impairment charges at Lumwana, higher gold and copper cost of sales, lower gold sales volumes and lower realized copper prices, partially offset by higher realized gold prices and higher copper sales volumes as well as lower income tax expense. Adjusted net earnings for 2012 were $3,827 million, down 18% over the prior year. The decrease primarily reflects higher gold and copper cost of sales, lower gold sales volumes and lower realized copper prices, partially offset by higher realized gold prices, higher copper sales volumes and lower income tax expense.

 

34



 

·       Gold production for 2012 was 7.4 million ounces, down slightly from the prior year, due to lower production in South America, Australia Pacific and ABG, partially offset by increased production in North America. Total cash costs for 2012 were $584 per ounce, up 27% over the prior year. The increase reflects higher direct mining costs, particularly higher labor, energy, maintenance and consumable costs, as well as the impact of lower production levels in South America, our lowest cost producer, which resulted in higher consolidated unit production costs.

 

·       Copper production for 2012 was 468 million pounds, up 4% over the prior year, primarily due to the inclusion of a full year production from Lumwana, compared to only seven months in the comparable prior year period, partially offset by lower production at Zaldívar. Copper C1 cash costs for 2012 were $2.17 per pound, up 27% over the prior year. The increase reflects higher unit production costs at Lumwana.

 

·       Significant adjusting items (net of tax effects) in 2012 include: impairment charges of $4.4 billion, which includes $3.8 billion in after-tax impairment charges attributable to our copper business, primarily due to asset impairment charges at Lumwana — refer to discussion about Lumwana in the Key Business Developments section of this MD&A on page 36 for further details; asset impairment charges on various properties in our oil & gas business unit ($155 million); asset impairment charges on an exploration property in Papua New Guinea ($141 million); write-down of our investment in Reko Diq ($120 million — refer to the discussion regarding Reko Diq on page 38 of this MD&A for more information); and a write-down of our investment in Highland Gold ($84 million), partially offset by $83 million in tax adjustments not related to current period earnings and $37 million in unrealized gains on non-hedge derivative instruments.

 

·       Operating cash flow for 2012 was $5,439 million, up 2% over the prior year. The increase in operating cash flow primarily reflects a decrease in income tax payments of $509 million, $385 million in net proceeds related to the settlement of a portion of our Australian dollar hedge positions and a decrease in net working capital outflows, partially offset by lower net earnings. Adjusted operating cash flow for 2012 was $5,156 million, down 9% over the prior year. Adjusted operating cash flow was affected by the same factors as operating cash flow and removes the impact of the Australian dollar hedge settlement and non-recurring tax payments of $52 million.

 

·       Capital expenditures were $6,369 million, up 28% over the prior year. Capital expenditures attributable to Barrick for 2012 were $5,994 million, up 30% over the prior year. The increase reflects higher project capital expenditures and an increase in minesite expansion and mine development expenditures.

 

·       Free cash flow for 2012 decreased by $1,920 million over the prior year, primarily reflecting lower adjusted operating cash flow and higher capital expenditures.

 

·       In first quarter 2012, our Board of Directors authorized a quarterly dividend of 20 cents per share, which equates to 80 cents per share on an annualized basis and represents a 33% increase from the previous quarterly dividend of 15 cents per share. Over the last six years, Barrick has had a consistent track record of returning capital to shareholders, increasing its dividends by more than 260%. The amount and timing of any dividends is within the discretion of our Board of Directors. The Board of Directors reviews the dividend policy quarterly based on our current and projected liquidity profile.

 

35



 

FACTORS AFFECTING ADJUSTED OPERATING CASH FLOW

 

 

FACTORS AFFECTING ADJUSTED NET EARNINGS

 

 

Key Business Developments

 

Lumwana

 

We have prepared a new life-of-mine (LOM) plan for Lumwana, which reflects information obtained from the exploration and infill drilling program that was completed late in the fourth quarter of 2012. The purpose of the drilling program was to better define the limits of mineralization and develop an updated, more comprehensive block model of the ore body for mine planning purposes. After this drilling was completed, the ore body did not meet our economic expectations. While the drilling increased reserves and defined significant additional mineralization, some at higher grades, much of it was deep and would require a significant amount of waste stripping, which makes it uneconomic based on our expected operating costs and current market copper prices. At higher copper prices, however, much of this copper will be economic and come into reserves and resources.

 

The new LOM plan also reflects revised operating and sustaining capital costs after results of the drill program were incorporated into a new block model for the life-of-mine plan. The revised LOM cost estimates — under present copper price assumptions — reduced expected copper production and, in turn, profitability over the mine life. As a result, we have recorded an after-tax asset impairment charge of $3.0 billion for Lumwana in the fourth quarter. We also recorded a goodwill impairment of $0.8 billion for the copper business unit for a total charge of $3.8 billion. We continue to progress a number of key initiatives to lower costs, including improvements to operating systems and processes, and a full transition to an owner maintained operation. A focus on higher utilization and productivity of the mining fleet has also been identified as one of the major opportunities to improve value. Until we can improve mining costs, and/or copper prices increase, the expansion opportunity to increase the throughput capacity of the processing plant does not meet our investment criteria. The Company will only invest capital if it generates acceptable rates of return suitable to the size of the capital investment. We will not invest capital simply to increase production.

 

Pascua-Lama

 

Pascua-Lama is a world-class resource with nearly 18 million ounces of proven and probable gold reserves, 676 million ounces of silver contained within the gold reserves, and a mine life of 25 years. It is expected to produce an average of 800,000 — 850,000 ounces of gold and 35 million ounces of silver in its first full five years of operation at all-in sustaining cash costs of $50 — $200 per ounce1 and total cash costs of $0 to negative $150 per ounce1. Including depreciation of mine construction capital, costs are expected to be $550 — $700 per ounce2.

 


(1)    Based on first full five year average gold, silver and WTI oil price assumptions of $1,700/oz, $30/oz and $90/bbl, respectively, and assuming a Chilean peso assumption of 475:1. Does not include escalation for future inflation.

(2)    Based on first full five year average and includes mine construction capital of $8 — $8.5 billion.

 

36



 

During the fourth quarter, the cost estimate and schedule for the project was finalized. Expected total mine construction capital remains unchanged in the range of $8.0 to $8.5 billion, and includes a contingency of 15 — 20 percent of remaining capital. First gold production continues to be targeted for the second half of 2014. Incentives for both Fluor and Techint, our Engineering, Procurement, and Construction Management (“EPCM”) partners, are based on the completion of the project in line with this estimate and schedule.

 

As of December 31, 2012, approximately $4.2 billion had been spent and construction was approximately 40 percent complete, largely in line with plan. The four kilometer long tunnel which conveys the ore from Chile to Argentina was approximately 70 percent complete. Construction of the primary crusher in Chile commenced in January 2013 and in Argentina, construction of the process plant facility advanced with approximately 60 percent of structural steel erected.

 

In September and October 2012, two constitutional rights protection actions were filed in Chile by representatives of an indigenous community and certain other individuals, seeking the suspension of construction of the Chilean portion of the Pascua-Lama project due to alleged non-compliance with the requirements of the project’s Chilean environmental approval. Both cases have been admitted for review by the Court, with the first action proceeding towards a hearing. We intend to vigorously defend these actions.

 

During the fourth quarter of 2012, considerably stronger than normal winds contributed to increased dust in the open pit area. We immediately voluntarily halted pre-stripping activities in order to implement additional dust mitigation and control measures. Subsequently, regulatory authorities in Chile issued an order to suspend pre-stripping until such dust-related concerns are addressed. The project is strengthening dust mitigation and control measures, including enhanced tunnel ventilation, revised blasting fragmentation, use of more robust protective equipment and a dust monitoring system. Restrictions may also be placed on the project due to the need to repair and improve certain aspects of the water management system in Chile.

 

Pre-stripping is unlikely to recommence until matters related to dust and water management are resolved. To date, the suspension of pre-stripping has not altered our target of first production in the second half of 2014. However, the outcomes of the regulatory processes, and of constitutional rights protection actions, are uncertain. We will continue to assess the potential for impacts on the timing of first gold production.

 

Pueblo Viejo

 

In the fourth quarter, pre-commercial production from the new Pueblo Viejo mine was 65,000 ounces (Barrick’s 60 percent share), while plant commissioning advanced. In January 2013, the mine achieved commercial production. Modifications to one of the four autoclaves were carried out in December 2012 to implement design improvements and allow for higher throughputs, and are expected to be completed on the remaining three autoclaves in the first half of 2013. For 2013, Barrick’s share of production from Pueblo Viejo is anticipated to be 500,000 — 650,000 ounces at all-in sustaining cash costs of $525 — $575 per ounce3 and total cash cost of $375 — $425 per ounce3. The mine is expected to ramp up to full capacity in the second half of the year. Barrick’s share of average annual gold production in the first full five years of operation is anticipated to be 625,000 — 675,000 ounces at all-in sustaining cash costs of $500 — $600 per ounce4, total cash costs of $300 — $350 per ounce3. Including depreciation of mine construction capital, costs are expected to be $650 — $750 per ounce5. A 215 MW dual fuel power plant at an estimated cost of approximately $180 million (Barrick’s 60 percent share) is expected to commence operations in 2013 utilizing heavy fuel oil, but has the ability to subsequently transition to lower cost liquid natural gas.

 

Certain members of the Dominican Republic (“DR”) congress, including the President of the Chamber of Deputies have expressed a desire to amend the Special Lease Agreement (“SLA”) to accelerate and increase the benefits that the DR will derive from the Pueblo Viejo mine. The SLA, which provides for substantial benefits to the DR, including royalties and taxes, in addition to the other benefits such as employment and purchasing of goods and services, was approved by Congress in 2009 and cannot be unilaterally altered. However, the

 


(3)    Actual results will vary depending on how the ramp-up progresses.

(4)    Based on first full five year average and gold and WTI oil price assumptions of $1,700/oz and $90/bbl, respectively. Does not include escalation for future inflation.

(5)    Based on first full five year average and includes mine construction capital of $3.7 billion.

 

37



 

Company, while reserving its rights under the SLA, has engaged in dialogue with representatives of the government with a view to achieving a mutually acceptable outcome. At this time, the outcome of the dialogue is uncertain, but any amendments to the SLA could impact the overall economics.

 

Jabal Sayid

 

Construction of the processing infrastructure for the Jabal Sayid copper mine in Saudi Arabia was completed in third quarter 2012, but commissioning was delayed when the company received notification from the HCIS ministry that the mine site was not in compliance with the recently introduced safety and security standards. Following receipt of the notification, all explosives were removed from the site and a dedicated EPCM team has been working towards, and making progress towards, achieving full compliance with these standards in a process that is expected to take until 2014 and cost approximately $100 million. In the meantime, the number of employees at site has been reduced to minimize holding costs and management is using 2013 to complete a hauling/hoisting optimization study with the goal of improving LOM cash flow from the mine when it comes into production in 2014.

 

Once Jabal Sayid comes into production, the average annual copper output in concentrate is expected to be 100 — 130 million pounds at C1 cash costs of $1.50 — $1.70 per pound6 in its first full five years of operation.

 

Since the Company acquired its interest in the Jabal Sayid project through its acquisition of Equinox Minerals in 2011, the Deputy Ministry for Mineral Resources (DMMR), which oversees the mining license, has questioned whether such change in the indirect ownership of the project, as well as previous changes in ownership, required the prior consent of DMMR. In December 2012, DMMR required the project to cease commissioning of the plant using stockpiled ore, citing alleged noncompliances with the mining investment law and the mining license, and in January 2013 required related companies to cease exploration activities, citing noncompliance with the law and the exploration licenses related to the ownership changes. The Company does not believe that such consent was required as a matter of law, but has responded to requests of DMMR, including through the provision of additional guarantees and undertakings, and stated its firm desire to fully satisfy any related requirements of DMMR.

 

Reko Diq

 

In fourth quarter 2012, we recorded a write-down of $120 million related to our investment in Tethyan Copper Company (“TCC”), which holds our interest in the Reko Diq project, due to political, legal, and regulatory uncertainties, particularly in regard to Pakistan and the Province of Balochistan. This write-down has been taken without prejudice to the legal remedies that may be obtained through the ongoing arbitration proceedings brought by TCC against the Government of Pakistan with the International Centre for Settlement of Investment Disputes asserting breaches of the Bilateral Investment Treaty between Australia (where TCC is incorporated) and Pakistan, and another against the Province of Balochistan with the International Chamber of Commerce asserting breaches of the joint venture agreement between TCC and Balochistan.

 

Other developments

 

In January 2013, we confirmed that we have commenced a process to potentially divest Barrick Energy as part of our ongoing global portfolio optimization in accordance with our disciplined capital allocation framework.

 

In January 2013, we also announced that we are no longer in discussions with China National Gold regarding the possible sale of our 73.9% equity interest in ABG.

 


(6)    Does not include escalation for future inflation.

 

38



 

Outlook for 2013

 

2013 Guidance Summary

 

 

 

2012

 

2013

 

 

 

Actual

 

Guidance

 

Gold production and costs

 

 

 

 

 

Production (millions of ounces)1

 

7.4

 

7.0 — 7.4

 

Cost of sales2

 

6,210

 

6,700 — 7,000

 

Gold unit production costs

 

 

 

 

 

All-in sustaining cash costs ($ per ounce)3

 

945

 

1,000 — 1,100

 

Total cash costs ($ per ounce)4

 

584

 

610 — 660

 

Depreciation ($ per ounce)5

 

191

 

210 — 220

 

Copper production and costs

 

 

 

 

 

Production (millions of pounds)

 

468

 

480 — 540

 

Cost of sales6

 

1,279

 

1,200 — 1,400

 

Copper unit production costs

 

 

 

 

 

C1 cash costs ($ per pound)

 

2.17

 

2.10 — 2.30

 

Depreciation ($ per pound)

 

0.46

 

0.30 — 0.40

 

C3 fully allocated costs ($ per pound)

 

2.97

 

2.60 — 2.85

 

Exploration and evaluation expense

 

429

 

280 — 300

 

Exploration

 

293

 

220 — 230

 

Evaluation

 

136

 

60 — 70

 

Corporate administration

 

195

 

160 — 180

 

Other Expense7

 

633

 

420 — 440

 

Finance costs

 

177

 

425 — 450

 

Capitalized interest

 

547

 

380 — 400

 

Capital expenditures:

 

 

 

 

 

Minesite sustaining

 

1,281

 

1,000 — 1,100

 

Mine development

 

1,071

 

1,200 — 1,300

 

Minesite expansion

 

612

 

800 — 900

 

Projects — initial capital

 

2,353

 

2,400 — 2,600

 

Projects — infrastructure

 

130

 

300 — 400

 

Total capital expenditures

 

5,447

 

5,700 — 6,300

 

Effective income tax rate

 

32

%

30

%

Key Assumptions

 

 

 

 

 

Gold Price ($/ounce)

 

 

 

$

1,700

 

Copper Price ($/pound)

 

 

 

$

3.50

 

Silver Price ($/ounce)

 

 

 

$

32

 

Oil Price ($/barrel)

 

 

 

$

90

 

AUD Exchange Rate

 

 

 

$

1.00

 

CLP Exchange Rate

 

 

 

475

 

 


(1)    Guidance for gold production reflects Barrick’s equity share of production from ABG (73.9%) and Pueblo Viejo (60%).

(2)    Cost of sales applicable to gold includes depreciation expense and cost of sales applicable to the non-controlling equity interests in ABG and Pueblo Viejo. Cost of sales guidance does not include proceeds from by-product metal sales or the net contribution from Barrick Energy, whereas guidance for total cash costs does reflect these items.

(3)    Beginning in 2013, we are adopting an all-in sustaining cash costs measure that better reflects the full cost of producing gold from our current operations (see page 81 of this MD&A for further details).

(4)    2013E total cash costs reflects an amendment to our accounting policy on production phase stripping costs as a result of the implementation of IFRIC 20 (see page 72 of this MD&A for further details.) The implementation of IFRIC 20 will result in an increase in the amount of stripping costs that are capitalized (as mine development) and a corresponding decrease in total cash costs. Our 2012 total cash costs, restated for the change in accounting policy, are estimated to be about $560 per ounce and mine development expenditures were higher by about $430 million. Total cash costs includes expected proceeds of approximately $306 million (2012: $140 million) from the sale of by-product metals and the net contribution of approximately $105 million from Barrick Energy (2012: $90 million).

(5)    Includes depreciation expense related to Barrick Energy.

(6)    Cost of sales applicable to copper includes depreciation expense.

(7)    Other expense includes RBU segment administration costs of $180 — $200 million (2012: $222 million). Other expense is expected to be lower in 2013 as 2012 costs include adjusted items of approximately $118 million in adjusting items that we excluded from our definition of adjusted net earnings, primarily due to amounts attributable to foreign currency translation losses on working capital balances and the effect of discount rate changes on environmental provisions at closed sites.

 

39



 

2013 Guidance Analysis

 

Production

 

We prepare estimates of future production based on mine plans that reflect the expected method by which we will mine reserves at each site. Actual gold and copper production may vary from these estimates due to a number of operational factors, including whether the volume and/or grade of ore mined differs from estimates, which could occur because of changing mining rates, ore dilution, varying metallurgical and other ore characteristics, and/or short-term mining conditions that require different sequential development of ore bodies or mining in different areas of the mine. Certain non-operating factors may also cause actual production to vary from guidance, including litigation, regulatory and political risk, the regulatory environment and the impact of global economic conditions. Mining rates are also impacted by various risks and hazards inherent at each operation, including natural phenomena, such as inclement weather conditions, floods and earthquakes, geotechnical and unexpected civil disturbances, labor shortages or strikes.

 

We expect 2013 gold production to be about 7.0 to 7.4 million ounces. Our gold production mix is expected to change as a result of higher production in North America, which is offset by lower production in South America. The production mix within North America is also expected to change due to the ramp-up of Pueblo Viejo to full production in the second half of 2013, partially offset by reduced production from Goldstrike and Cortez. At Goldstrike, lower production is attributable to lower grade and lower tons processed, primarily due to reduced autoclave capacity due to construction activity related to the thiosulfate project (refer to page 57 for further details regarding this project). At Cortez, lower production is expected due to lower average head grades and a change in the mix of ore processed to more heap leach tons, which have lower recovery rates.

 

South American production is expected to be lower than 2012 levels, primarily due to lower production at Veladero and Lagunas Norte. At Veladero, lower production is a result of mining less ore tons at lower average grades and an increase in waste tons mined as a result of a higher stripping ratio in 2013. At Lagunas Norte, lower production is due to lower average ore grades and lower expected recovery rates as a result of the mining of a higher percentage of sulfide ore. Production at Australia Pacific is expected to be consistent with 2012 levels and production at ABG is expected to be slightly lower than 2012, primarily due to lower than expected ore tons mined at Bulyanhulu combined with the expected closure of Tulawaka in the second quarter.

 

Copper production is expected to increase from 468 million pounds in 2012 to about 480 to 540 million pounds in 2013, due to higher production from Lumwana. Higher production at Lumwana is expected as a result of the processing of more tons at higher average ore grades. The increase in tons processed reflects higher plant throughput in 2013 as a result of a larger fleet and improved utilization and availability of equipment. Production at Zaldívar is expected to remain at levels similar to 2012.

 

Revenues

 

Revenues include consolidated sales of gold, copper, oil and metal by-products. Revenues from oil and metal by-products are reflected in our guidance for total cash costs. Revenues from gold and copper reported in 2013 will reflect the sale of production at market gold and copper prices and the impact of our copper collar contracts, where we have put in place floor protection on approximately 50% of our expected copper production in 2013 at an average floor price of $3.50 per pound. In addition, we have sold an equal amount of call options at an average price of $4.25 per pound. Barrick does not provide guidance on 2013 gold and copper prices, but we have assumed a gold price of $1,700 per ounce and a copper price of $3.50 per pound for the purpose of preparing our internal plans.

 

Cost of Sales, Total Cash Costs and All-in Sustaining Cash Costs

 

We prepare estimates of cost of sales, total cash costs and all-in sustaining cash costs based on expected costs associated with mine plans that reflect the expected method by which we will mine reserves at each site. Cost of sales, total cash costs and all-in sustaining cash costs per ounce/pound are also affected by ore metallurgy that impacts gold and copper recovery rates, labor costs, the cost of mining supplies and services, foreign currency exchange rates and stripping costs incurred during the production phase of the mine. In the normal course of our operations, we attempt to manage each of these risks to mitigate, where possible, the effect they have on our operating results.

 

40



 

Cost of sales applicable to gold is expected to be in the range of $6.7 to $7.0 billion, compared to $6.2 billion in 2012. The increase is primarily due to the commencement of operations at Pueblo Viejo, combined with higher direct mining costs, particularly higher labor, power, energy, maintenance and consumable costs, due to an increase in total tons mined and processed in 2013 compared to the prior year.

 

Total cash costs are expected to be in the range of $610 to $660 per ounce, up from $584 per ounce in 2012. The increase in total cash costs is primarily due to the impact of an increase in tons mined and processed in order to offset the impact of lower ore grades on production levels, particularly in North America and South America. Higher tonnage production in 2013 requires increased amounts of labor, power, energy and maintenance and consumables compared to the prior year. Other cost pressures include the increase in our effective Australian dollar hedge rates from 2012 to 2013.

 

Beginning in 2013, we are adopting an all-in sustaining cash costs measure that better reflects the full cost of producing gold from our current operations. All-in sustaining cash costs are expected to be in the range of $1,000 — $1,100 per ounce for gold, up from $945 per ounce in 2012. The increase principally reflects the increase in total cash costs per ounce sold from $584 per ounce to our expected range of $610 — $660 per ounce. For comparison purposes, we have provided our all-in sustaining cash costs figure for 2012 in the table below:

 

($ per ounce)

 

 

 

For the year ended December 31

 

2012

 

Total cash costs

 

$

584

 

Minesite sustaining capital expenditures

 

155

 

Mine development expenditures

 

114

 

Corporate administration applicable to gold segments

 

51

 

Exploration and evaluation

 

21

 

Environmental rehabilitation costs

 

20

 

All-in sustaining cash costs

 

$

945

 

 

Cost of sales applicable to copper is expected to be in the range of $1,200 to $1,400 million, compared to $1,279 million in the prior year. The increase primarily reflects the increase in expected production levels. C1 cash costs are expected to be in the range of $2.10 to $2.30 per pound for copper, as compared to C1 cash costs of $2.17 per pound in 2012. C3 cash costs are expected to be in the range of $2.60 — $2.85 as compared to C3 costs of $2.97 per pound in 2012.

 

Exploration and Evaluation

 

We expect to expense approximately $280 to $300 million of Exploration and Evaluation (E&E) expenditures in 2013. Costs primarily reflect ongoing programs at Cortez, Cerro Casale, Veladero, and Jabal Sayid.

 

Finance Costs

 

Finance costs primarily represent interest expense on long-term debt. We expect higher finance costs in 2013, primarily due to lower capitalized interest at Pueblo Viejo following commencement of commercial production in 2013, and at Lumwana as a result of the deferral of the expansion plan.

 

Capital Expenditures

 

Total capital expenditures for 2013 are expected to be in the range of $5.7 to $6.3 billion, compared to $5.4 billion in 2012. The expected increase is primarily related to an amendment to our accounting policy on production phase stripping costs as a result of the implementation of IFRIC 20 in 2013. The adoption of IFRIC 20 will result in an increase in capitalized stripping costs (2012: estimated to be about $430 million). In addition, capital expenditures were about $300 million less than expected in 2012 due to timing delays with respect to the completion of certain projects and initiatives, which have resulted in a shift in the outlays into 2013. Excluding the impact of the change in accounting policy and the timing impact of the deferral of some 2012 expenditures, expected capital expenditures in 2013 are in line with our budgeted 2012 levels. Increases in project expenditures and mine expansion expenditures are expected to be offset by a decrease in sustaining expenditures, which reflects our ongoing cost reduction efforts.

 

Minesite Sustaining

 

Sustaining capital expenditures are expected to decrease from 2012 expenditure levels of $1,281 million to about $1,000 to $1,100 million, mainly due to the completion of various projects in North America in 2012 related to infrastructure and tailings facility construction, mainly at Cortez, partially offset by the inclusion of a full year of sustaining capital expenditures at Pueblo Viejo.

 

41



 

Mine development

 

Mine development capital expenditures include capitalized waste stripping costs at our open pit mines, underground mine development and exploration and evaluation expenditures that meet our criteria for capitalization. In 2013, mine development expenditures are expected to be in the range of $1,200 million to $1,300 million, up from $1,071 million in 2012. This increase is primarily due to the change in our accounting policy on production phase stripping costs. Capitalized stripping and underground development expenditures in 2013 are largely attributable to significant waste stripping activity at Bald Mountain, Cortez, Goldstrike, Porgera, Veladero and Cowal.

 

Minesite Expansion

 

The expected increase in expansion capital relates to various projects to increase production compared to current LOM levels at Goldstrike and Turquoise Ridge in North America, Lagunas Norte in South America and at ABG’s Bulyanhulu mine. Minesite expansion expenditures also include capitalized expenditures related to the Goldrush project that were expensed in 2012.

 

Project Capital Expenditures

 

 

 

2012

 

2013

 

($ millions)

 

Actual

 

Guidance

 

Projects — initial capital

 

 

 

 

 

Pascua-Lama

 

$

1,809

 

$2,200 — $2,400

 

Pueblo Viejo (60% basis)

 

367

 

~$40

 

Cerro Casale (75% basis)

 

32

 

~$20

 

Jabal Sayid

 

145

 

~$100

 

 

 

$

2,353

 

$2,400 — $2,600

 

Projects — infrastructure

 

 

 

 

 

Pascua-Lama

 

$

8

 

$250 — $325

 

Pueblo Viejo (60% basis)

 

122

 

$50 — $75

 

 

 

$

130

 

$300 — $400

 

 

Projects — Initial Capital

 

Projects — initial capital expenditures reflect capital expenditures related to the initial construction of the project. The initial capital reflects the amounts included in our estimate of initial construction costs that we provide external guidance on. It reflects all of the expenditures required to bring the project into operation and achieve commercial production levels. In 2013 we expect our share of initial capital costs on our projects to be in the range of $2,400 to $2,600 million, in line with capital costs of $2,353 million in 2012. This reflects an increase in the construction activity at Pascua-Lama, partly offset by lower project capital expenditures at Pueblo Viejo following the commencement of commercial production in early 2013.

 

Projects — Infrastructure

 

Projects — infrastructure capital expenditures reflect expenditures on mine site infrastructure that were not included in the initial construction budget of the project. These expenditures are not necessary to achieve initial commercial production but are required to support the long-term sustainability of the operation. In 2013, these expenditures include the completion of the dual fuel power plant at Pueblo Viejo, as well as expenditures at Pascua-Lama related to the second primary crusher and other site infrastructure. The Pascua-Lama expenditures were originally expected to be incurred after the start-up of commercial production, but have now been advanced in order to take advantage of construction synergies.

 

Income Taxes

 

Our underlying expected effective tax rate of 30% excludes the impact of currency translation gains/losses and changes in the recognition of deferred tax assets.

 

Based on our current outlook assumptions, cash tax payments in 2013 are expected to be consistent with 2012. Cash tax payments in 2013 are expected to be the highest in the second quarter due to the settlement of some 2012 liabilities and operating cash flow will be reduced accordingly.

 

42



 

Outlook Assumptions and Economic Sensitivity Analysis

 

 

 

2013 Guidance

 

Hypothetical

 

Impact on

 

Impact on EBITDA

 

 

 

assumption

 

change

 

total cash costs

 

(millions)

 

Gold revenue

 

$1,700/oz

1

$50/oz

 

n/a

 

$350 – $370

 

Copper revenue2

 

$3.50/lb

1

+$0.25/lb

 

n/a

 

$120 – $130

 

 

 

$3.50/lb

1

– $0.25/lb

 

n/a

 

$60 – $70

 

Gold total cash costs

 

 

 

 

 

 

 

 

 

Gold price effect on royalties

 

$1,700/oz

 

$50/oz

 

$1.30/oz

 

$10

 

WTI crude oil price3

 

$90/bbl

 

$10/bbl

 

$1.25/oz

 

$9

 

Australian dollar exchange rate3

 

1:1

 

10

%

$11/oz

 

$80

 

Copper C1 cash costs

 

 

 

 

 

 

 

 

 

WTI crude oil price3

 

$90/bbl

 

$10/bbl

 

$—

 

$1

 

Chilean peso exchange rate3

 

475:1

 

10

%

$—

 

$—

 

 


(1)    We have assumed a gold price of $1,700 per ounce and copper price of $3.50/lb, which are in line with current market prices.

(2)    Utilizing option collar strategies, the Company has protected the downside on approximately 50 percent of its expected 2013 copper production at an average price of $3.50 per pound and can participate on the same amount up to an average price of $4.25 per pound.

(3)    Due to hedging activities we are largely protected against changes in these factors.

 

Exploration and Mineral Reserves and Mineral Resources Update7

 

Exploration

 

Barrick’s exploration strategy is aligned with its business objectives. It involves having a balanced approach to increasing profitable production through acquisitions, project development and new discoveries. It employs a three-fold approach:

 

1.         Looking for the next flagship deposit — we have a measured and disciplined approach to monitoring and exploring for flagship deposits with the potential to materially grow our production profile;

2.         Replacing and adding resources at existing operations and development projects — we add value by aggressively exploring around our existing operations where we can quickly monetize the ounces we find; and

3.         Working closely with Corporate Development — to help identify the best assets with early opportunity and upside potential.

 

The 2013 exploration budget guidance is $400 to $4408 million, of which approximately 45 percent will be capitalized. While this represents a reduction from 2012, it is focused on quality, priority projects and is in line with our disciplined capital allocation approach. It is still a substantial budget and supports a strong pipeline of projects and is weighted towards near-term resource additions and conversion at our existing mines where we believe there is excellent potential to make new discoveries and to expand reserves and resources. The budget also provides support for earlier stage exploration in our operating districts and a smaller percentage of the budget is directed at emerging areas in order to generate quality projects for future years. North America will be allocated approximately 50 percent of the budget, the majority of which is targeted for Nevada. Australia Pacific will receive about 18 percent of the budget, copper will be allocated about 16 percent and South America about 14 percent, with the balance going to ABG.

 

TOTAL EXPLORATION 2013 BUDGET BY REGION

 

 

Our key exploration efforts in 2013 are focused on Goldrush and the Cortez District, which are described below in further detail.

 


(7)    For a breakdown of reserves and resources by category and additional information relating to reserves and resources, see pages 163 to 170 of this Financial Report.

(8)    Barrick’s exploration programs are designed and conducted under the supervision of Robert Krcmarov, Senior Vice President, Global Exploration of Barrick.

 

43



 

Goldrush and Cortez District

 

In Nevada, drilling in 2012 doubled and upgraded the resource base at Goldrush. The updated measured and indicated resource of 8.4 million ounces represents more than a 500 percent increase from 2011. Additionally, there are 5.7 million ounces in the inferred category. The footprint of the deposit has more than doubled to greater than seven kilometers, and the system still remains open in multiple directions. As this project advances through prefeasibility, a number of development options are being considered, including open pit mining, underground mining, or a combination of both. In addition, shallow mineralization has been encountered to the west, and high grade mineralization has been encountered to the north, which provides flexibility on mining and development options.

 

The greater Cortez area contains substantial district-scale opportunities, including a new parallel exploration trend identified to the west of Goldrush, and the northern, eastern and southern extensions of the Goldrush system. Exploration drilling programs will be focused on growing and upgrading the resource base, delineating the extent of the system and exploring the potential for extensions to the north and south. In addition, the potential of the newly identified parallel trend to the west will be assessed. A scoping study has been recently completed, and a prefeasibility study is underway parallel with continuing exploration work and technical studies. This district is a cornerstone of Barrick’s current and future success and is located in a mining area well provided with significant infrastructure and expertise.

 

Mineral Reserves and Mineral Resources Update9

 

We replaced proven and probable gold reserves for the seventh straight year to an industry-leading 140.2 million ounces10 at the end of 2012, based on a $1,50011 per ounce gold price. The increase primarily reflects reserve additions at Cortez, Granny Smith, Goldstrike, Cowal and Turquoise Ridge partially offset by a decrease in Ruby Hill, North Mara and Pierina. Contained silver within reported gold reserves is 1 billion ounces.

 

Measured and indicated gold mineral resources increased by 3% to 83.0 million ounces and inferred gold mineral resources decreased by 11% to 35.6 million ounces based on an assumed gold price of $1,650 per ounce.

 

Proven and probable copper reserves increased by 1.2 billion pounds to 13.9 billion pounds, based on a $3.00 per pound copper price. Measured and indicated copper resources decreased by 33% to 10.3 billion pounds and inferred copper resources decreased by 97% to 0.5 billion pounds based on a $3.50 per pound copper price, due to the exclusion of Reko Diq from our 2012 resources.

 

Replacing gold and copper reserves depleted by production year over year is necessary in order to maintain production levels over the long term. If depletion of reserves exceeds discoveries over the long term, then we may not be able to sustain gold and copper production levels. Reserves can be replaced by expanding known ore bodies, acquiring mines or properties or discovering new deposits. Once a site with gold or copper mineralization is discovered, it takes many years from the initial phases of drilling until production is possible, during which time the economic feasibility of production may change. Substantial expenditures are required to establish proven and probable reserves and to permit and construct mining and processing facilities.

 

GOLD RESERVES AND RESOURCES (millions of ounces)

 

 


(9)         For a breakdown of reserves and resources by category and additional information relating to reserves and resources, see pages 163 to 170 of this Financial Report.

(10)  Calculated in accordance with National Instrument 43 — 101 as required by Canadian securities regulatory authorities. For United States reporting purposes, Industry Guide 7 (under the Securities Exchange Act of 1934), as interpreted by the Staff of the SEC, applies different standards in order to classify mineralization as a reserve. Accordingly, for U.S. reporting purposes, approximately 1.98 million ounces of reserves at Pueblo Viejo (Barrick’s 60% interest) is classified as mineralized material. For a breakdown of reserves and resources by category and additional information relating to reserves and resources, see pages 163 to 170 of this Financial Report.

(11)  Reserves at Round Mountain have been calculated using a long-term average gold price of $1,200 per ounce.

 

44



 

Enterprise Risk Management Approach

 

We believe that an enterprise-wide approach to risk management allows us to efficiently and effectively consolidate risks so that they can be prioritized and addressed at the appropriate level with optimal resources. Consequently, we have established an enterprise risk management (“ERM”) process for identifying, evaluating and managing company-wide risks. While risk is an inherent component of our business, we believe that effective risk management can enhance our ability to deliver on our overall vision and meet our strategic objectives. The key objectives of our ERM program are:

 

·                  Adopt appropriate processes to identify and effectively manage risk company-wide;

·                  Ensure that leadership at all levels of the organization understand their risks;

·                  Facilitate the integration of mitigation strategies for the top priority risks into the company strategy and business plans; and

·                  Provide regular updates on the mitigation strategies for the top priority enterprise risks to the senior leadership team (“SLT”).

 

We have provided a description of some of the key risks facing the Company throughout this MD&A. For a complete discussion of the most significant risks, see “Risk Factors” in our most recent Form 40-F/Annual Information Form on file with the SEC and Canadian provincial securities regulatory authorities.

 

Market Overview

 

Gold and Copper

 

The market prices of gold and copper are the primary drivers of our profitability and our ability to generate free cash flow for our shareholders. The prices of gold and copper are subject to volatile price movements over short periods of time and are affected by numerous industry and macroeconomic factors that are beyond our control. Gold price volatility remained high in 2012, with the price ranging from $1,527 per ounce to $1,796 per ounce. The average market price for the year of $1,669 per ounce was an all-time record high and represented an increase of 6% over 2011. Gold has continued to attract investor interest through its role as a safe haven investment, store of value and alternative to fiat currency due to concerns over global economic growth, geopolitical issues, sovereign debt and deficit levels, bank stability, future inflation prospects, and continuing accommodative monetary policies put in place by many of the world’s central banks. In particular, the current monetary policies of the US Federal Reserve have a significant impact on the price of gold. In 2012, it announced that it would purchase $40 billion per month of agency mortgage-backed securities and $45 billion per month of longer-term Treasury securities in order to support a stronger economic recovery until the outlook for the labor market improves substantially. The continuing uncertain macroeconomic environment and loose monetary policies, together with the limited choice of alternative safe haven investments, is supportive of continued strong investment demand. Throughout 2012, we have continued to see increased interest in holding gold as an investment. This was evidenced by the growth in Exchange Traded Funds (“ETFs”), which increased by 10 million ounces to a total of 89 million ounces, as well as the worldwide demand for physical gold in forms such as bars and coins. Physical demand for gold for jewelry and other uses also remains a significant driver of the overall gold market. A continuation of these trends is supportive of higher gold prices.

 

AVERAGE MONTHLY SPOT GOLD PRICES

(dollars per ounce)

 

 

45



 

GOLD ETF HOLDINGS as at December 31

(millions of ounces)

 

 

Source: UBS

 

INDUSTRY GOLD PRODUCTION

(millions of ounces)

 

 

Source: Thomson Reuters GFMS

 

Gold prices also continue to be influenced by long-term trends in global gold mine production and the impact of central bank gold activities. Gold production has increased in recent years with the extension of the lives of older mines due to the rising gold price. The time requirement to bring projects to the production stage and the increasing costs and risks of building a mine, including concerns of resource nationalism and lengthened permitting processes, are expected to slow the pace of new production in future years.

 

In the third year of the Central Bank Gold Agreement (“CBGA”), which ended in September 2012, the signatory members sold 6 tonnes of gold, or less than 2% of the maximum agreed amount. In addition, for the third consecutive year, global central banks were net buyers of gold in 2012, with the central banks of Turkey, Russia, the Philippines, Kazakhstan, Brazil, Mexico and South Korea, among others, adding to their gold reserves.

 

OFFICIAL SECTOR GOLD PURCHASES

(tonnes)

 

 

Source: World Gold Council and Thomson Reuters GFMS

 

The reserve gold holdings as a percentage of total reserves of emerging market countries, such as the BRIC countries (Brazil, Russia, India, and China), are significantly lower than other developed countries. The central banks of these developing economies hold a significant portion of their reserves in US dollar government assets and, as they identify a need to diversify their portfolio and reduce their exposure to the US dollar, we believe that gold will be one of the main beneficiaries. In conjunction with the very low amount of gold sold under the CBGA quota, which is expected to continue in the current year of the agreement, the net purchases of gold by global central banks provide a strong indication that gold is viewed as a reserve asset and a de facto currency.

 

46



 

OFFICIAL GOLD HOLDINGS as at December 31, 2012 (% of reserves)

 

 

Source: World Gold Council

 

During 2012, London Metals Exchange (“LME”) copper prices traded in a range of $3.27 to $3.98 per pound, averaged $3.61 per pound, and closed the year at $3.59 per pound. Copper’s strength lies mainly in strong physical demand from emerging markets, especially China, which has resulted in a physical deficit in recent years. In addition, there has been significant investor interest in base metals with strong forward-looking supply/demand fundamentals. Copper prices should continue to be influenced by demand from Asia, global economic growth, the limited availability of scrap metal and production levels of mines and smelters in the future.

 

Utilizing option collar strategies, including positions added subsequent to year end, the Company has protected the downside on approximately 50% of our expected 2013 copper production at an average floor price of $3.50 per pound and can participate on the same amount up to an average price of $4.25 per pound. Our realized price on all 2013 copper production is expected to be reduced by approximately $0.04 per pound as a result of the net premium paid on option hedging strategies. Our remaining copper production is subject to market prices.

 

AVERAGE MONTHLY SPOT COPPER PRICES (dollars per pound)

 

 

Silver

 

Silver traded in a wide range of $26.16 per ounce to $37.48 per ounce in 2012, averaged $31.15 per ounce and closed the year at $29.95 per ounce. The physical silver market is currently in surplus, but investor interest continues to be price supportive and continuing global economic growth is expected to improve industrial demand.

 

Silver prices do not significantly impact our current operating earnings, cash flows or gold total cash costs. Silver prices do have a significant impact on the estimated fair value and the overall economics (including the estimated rate of return we expect to earn on our invested capital) for our Pascua-Lama project, which is currently in the construction phase. In the first five full years of production, Pascua-Lama is expected to produce an average of 35 million ounces of silver per annum.

 

In 2009, we entered into a transaction with Silver Wheaton Corp. (“Silver Wheaton”) whereby we sold 25% of the life of mine Pascua-Lama silver production from the later of January 1, 2014 or completion of project construction, and 100% of silver production from the Lagunas Norte, Pierina and Veladero mines until that time. Silver Wheaton has made up-front payments totaling $625 million. Silver Wheaton will also make ongoing payments of $3.90 per ounce in cash (subject to a 1% annual inflation adjustment starting three years after completing construction at Pascua-Lama) for each ounce of silver delivered under the agreement.

 

47



 

Utilizing option collar strategies, we have hedge protection on a total of 65 million ounces of expected silver production from 2013 to 2018, inclusive, with an average floor price of $23 per ounce and an average ceiling price of $53 per ounce. We have paid a net premium of approximately $0.60 per ounce for these strategies.

 

AVERAGE MONTHLY SPOT SILVER PRICES (dollars per ounce)

 

 

Currency Exchange Rates

 

The results of our mining operations outside of the United States are affected by US dollar exchange rates. The largest single exposure we have is to the Australian dollar : US dollar exchange rate. We also have exposure to the Canadian dollar through a combination of Canadian mine operating costs and corporate administration costs and exposure to the Chilean peso as a result of the construction of our Pascua-Lama project and Chilean mine operating costs. In addition, we have exposure to the Papua New Guinea kina, Peruvian sol, Zambian kwacha, Tanzanian shilling and Argentinean peso through mine operating and capital costs.

 

Fluctuations in the US dollar increase the volatility of our costs reported in US dollars, subject to protection that we have put in place through our currency hedging program. Australia, Canada and Chile each continue to emerge from the global economic crisis better than many other OECD countries. As a result, the Australian dollar, Canadian dollar and Chilean peso traded at historically strong levels during the year against the currencies of larger developed economies, including the US dollar and Euro. In 2012, the Australian dollar traded in a range of $0.96 to $1.09 against the US dollar, while the US dollar against the Canadian dollar and Chilean peso yielded ranges of $0.96 to $1.04 and CLP467 to CLP523, respectively.

 

About 60% of our consolidated production costs are denominated in US dollars and are not exposed to fluctuations in US dollar exchange rates. For the remaining portion, our currency hedge position allows for more accurate forecasting of our anticipated expenditures in US dollar terms and mitigates our exposure to volatility in the US dollar. Our currency hedge position has provided benefits to us in the form of hedge gains recorded within our operating costs when contract exchange rates are compared to prevailing market exchange rates as follows: 2012 — $336 million; 2011 — $344 million; and 2010 — $145 million. As a result of the gains from our currency hedging program, total cash costs were reduced by $46 per ounce in 2012. Also for 2012, we recorded currency hedge gains in our corporate administration costs of $20 million (2011 — $24 million and 2010 — $33 million) and capitalized additional currency hedge gains of $13 million (2011 — $64 million and 2010 — $13 million).

 

Our average hedge rates vary depending on when the contracts were put in place. We have hedged AUD $340 million, CAD $424 million and CLP 356 billion in 2013 for expected Australian, Canadian and Chilean operating costs, including sustaining and eligible

 

48



 

project capital expenditures and Canadian corporate administrative costs at average rates of $0.96, $1.02 and 514, respectively. During 2012, with the Australian dollar trading at historically elevated levels against the US dollar, and based on our currency outlook, the Company opportunistically unwound approximately AUD $2.6 billion of our Australian dollar hedges at an average spot rate of 1.05. We realized net cash proceeds of approximately $0.5 billion upon the settlement of these contracts. The corresponding accounting gains are recognized in the consolidated statement of income based on the original hedge contract maturity dates, which range until 2014, with remaining locked-in gains of approximately $280 million and $109 million, positively impacting our total reported cash costs in 2013 and 2014, respectively. However, we now have greater exposure to fluctuations in the price of the Australian dollar, which will have a negative impact on our reported total cash costs should the Australian dollar strengthen and a positive impact should the Australian dollar weaken. For 2013, every $0.01 movement in the Australian dollar will have an impact of approximately $2 per ounce on our consolidated total cash costs. Assuming December 31, 2012 market exchange rate curves and year-end spot price levels of AUD $1.04 against the US dollar and $0.99 and CLP479 for the US dollar against the Canadian dollar and Chilean peso, respectively, we expect to record gains of approximately $270 million against operating costs in 2013, primarily related to previously unwound Australian dollar hedges, or about $37 per ounce based on total forecasted 2013 production. Additionally, we expect to record gains of approximately $15 million against administrative costs, $25 million against capital expenditures and a further $30 million of non-hedge gains. Beyond 2013, we have hedge protection in place for about AUD $1.5 billion at an average rate of $0.92 and about CLP 356 billion at an average rate of 510 between 2014 and 2016. Further information on our currency hedge positions is included in note 23 to the consolidated financial statements.

 

AUD Currency Contracts

 

 

 

 

 

 

 

 

 

% of

 

 

 

 

 

 

 

 

 

% of total

 

expected

 

 

 

 

 

 

 

Effective

 

expected

 

operating

 

 

 

 

 

Contracts

 

average

 

AUD

 

cost

 

Crystallized

 

 

 

(AUD

 

hedge rate

 

exposure2

 

exposure

 

OCI1 (USD

 

 

 

millions)

 

(AUDUSD)

 

hedged

 

hedged

 

millions)

 

2013

 

340

 

0.96

 

19

%

24

%

280

 

2014

 

338

 

0.92

 

18

%

23

%

109

 

2015

 

707

 

0.92

 

42

%

51

%

 

2016

 

480

 

0.90

 

30

%

37

%

 

 

CAD Currency Contracts

 

 

 

 

 

 

 

 

 

 

 

% of

 

 

 

 

 

 

 

 

 

% of total

 

expected

 

 

 

 

 

 

 

Effective

 

expected

 

operating

 

 

 

 

 

 

 

average

 

CAD

 

cost

 

 

 

 

 

Contracts

 

hedge rate

 

exposure2

 

exposure

 

 

 

 

 

(CAD millions)3

 

(USDCAD)

 

hedged

 

hedged

 

2013

 

 

 

424

 

1.02

 

89

%

100

%

2014

 

 

 

96

 

1.00

 

19

%

22

%

 

CLP Currency Contracts

 

 

 

 

 

 

 

 

 

% of

 

 

 

 

 

 

 

% of total

 

expected

 

 

 

 

 

Effective

 

expected

 

operating

 

 

 

 

 

average

 

CLP

 

cost

 

 

 

Contracts

 

hedge rate

 

exposure2

 

exposure

 

 

 

(CLP millions)4

 

(USDCLP)

 

hedged

 

hedged

 

2013

 

356,175

 

514

 

100

%

100

%

2014

 

287,016

 

509

 

84

%

100

%

2015

 

78,000

 

513

 

29

%

43

%

 


(1)    $280 million will be recognized in earnings in 2013 and $109 million in 2014.

(2)    Includes all forecasted operating, administrative, sustaining and eligible project capital expenditures.

(3)    Includes $208 million CAD contracts with a cap and floor of $1.00 and $1.08, respectively.

(4)    Includes CLP 383,558 million collar contracts that are an economic hedge of operating, administrative and capital expenditures at various South American sites and at our Pascua-Lama project with a cap and floor of 514 and 572, respectively.

 

49



 

AVERAGE MONTHLY AUD SPOT AND HEDGE RATES

 

 

AVERAGE MONTHLY CAD SPOT AND HEDGE RATES

 

 

AVERAGE MONTHLY CLP SPOT AND HEDGE RATES

 

 

Fuel

 

For 2012, the price of West Texas Intermediate (“WTI”) crude oil traded between $77 and $111 per barrel, averaged $94 per barrel and closed the year at $92 per barrel. Concerns over global economic growth, supply and transportation issues and geopolitical tensions in certain oil producing regions combined to create volatility in the price of oil during the year.

 

On average we consume approximately 5 million barrels of diesel fuel annually across all our operating mines. Diesel fuel is refined from crude oil and is therefore subject to the same price volatility affecting crude oil prices. Therefore, volatility in crude prices has a significant direct and indirect impact on our production costs. To mitigate this volatility, we employ a strategy of combining the use of financial contracts and our production from Barrick Energy to effectively hedge our exposure to oil prices. We currently have financial contracts in place totaling 4.8 million barrels over the next three years, representing approximately 30% of our total estimated direct consumption. In 2012, we recorded hedge gains in earnings of $24 million on our fuel hedge positions (2011: $48 million gain and 2010: $26 million loss). Assuming market rates at the December 31, 2012 level of $92 per barrel, we expect to realize hedge gains of approximately $20 million in 2013 from our financial fuel contracts.

 

50



 

Financial Fuel Hedge Summary

 

 

 

Barrels1

 

Average

 

% of expected

 

 

 

(thousands)

 

price

 

exposure

 

2013

 

2,354

 

$

91

 

41

%

2014

 

1,500

 

95

 

28

%

2015

 

960

 

92

 

21

%

 

 

4,814

 

$

93

 

31

%

 


(1)    Refers to contracts for a combination of WTI, BRENT and WTI-to-BRENT swaps. As a result, our average price on hedged barrels for 2013 — 2015 is $89 per barrel on a WTI-equivalent basis.

 

CRUDE OIL MARKET PRICE (WTI) (dollars per barrel)

 

 

US Dollar Interest Rates

 

Beginning in 2008, in response to the contraction of global credit markets and in an effort to spur economic activity and avoid potential deflation, the US Federal Reserve reduced its benchmark rate to between 0% and 0.25%. The benchmark was kept at this level through 2012. In December 2012, the Federal Open Market Committee of the US Federal Reserve released a statement on monetary policy noting that the current 0% to 0.25% range for the benchmark rate would remain appropriate at least as long as the US unemployment rate remains above 6.5%, projected inflation remains below 2.5% and longer-term inflation expectations continue to be well anchored. In addition, we expect the US Federal Reserve to continue to use monetary policy initiatives, such as purchases of agency-backed mortgage securities and longer-term Treasury securities, in an effort to keep long-term interest rates low and increase employment. We expect such initiatives to be followed by incremental increases to short-term rates once economic conditions and credit markets normalize.

 

At present, our interest rate exposure mainly relates to interest receipts on our cash balances ($2.1 billion at December 31, 2012); the mark-to-market value of derivative instruments; the fair value and ongoing payments under US dollar interest-rate swaps; and to the interest payments on our variable-rate debt ($2.3 billion at December 31, 2012). Currently, the amount of interest expense recorded in our consolidated statement of income is not materially impacted by changes in interest rates, because the majority of debt was issued at fixed interest rates. The relative amounts of variable-rate financial assets and liabilities may change in the future, depending on the amount of operating cash flow we generate, as well as the level of capital expenditures and our ability to borrow on favorable terms using fixed rate debt instruments.

 

US DOLLAR INTEREST RATES (%)

 

 

51



 

Review of Annual Financial Results

 

Revenue1

 

($ millions, except per ounce/pound data in dollars)

 

 

 

 

 

 

 

For the years ended December 31

 

2012

 

2011

 

2010

 

Gold

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

000s oz sold

 

7,292

 

7,550

 

7,742

 

$ millions sold2

 

$

12,564

 

$

12,255

 

$

9,722

 

Market price3

 

1,669

 

1,572

 

1,225

 

Realized price3,4

 

$

1,669

 

$

1,578

 

$

1,228

 

Copper

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

millions lbs sold

 

472

 

444

 

391

 

$ millions sold2

 

$

1,689

 

$

1,646

 

$

1,277

 

Market price3

 

3.61

 

4.00

 

3.42

 

Realized price3,4

 

3.57

 

3.82

 

3.41

 

Oil & gas sales

 

153

 

177

 

123

 

Other metal sales

 

$

141

 

$

158

 

$

135

 

 


(1)    The amounts presented in this table include the results of discontinued operations.

(2)    Represents revenues on a 100% consolidated basis.

(3)    Per ounce/pound weighted average.

(4)    Realized price is a non-GAAP financial performance measure with no standard meaning under IFRS. For further information and a detailed reconciliation, please see page 86 of this MD&A.

 

In 2012, gold and copper revenues totaled $12,564 million and $1,689 million, respectively, both up 3% compared to the prior year, primarily due to higher realized gold prices and higher copper sales volumes, partially offset by lower gold sales volumes and lower realized copper prices.

 

Realized gold prices of $1,669 per ounce in 2012 were up $91 per ounce, or 6%, compared to the prior year, reflecting the increase in market gold prices, which averaged $1,669 per ounce in 2012, compared to $1,572 per ounce in 2011. Realized copper prices were 7% lower than the prior year, primarily due a to 10% decrease in market copper prices.

 

Production Costs1

 

($ millions, except per ounce/pound data in dollars)

 

 

 

 

 

 

 

For the years ended December 31

 

2012

 

2011

 

2010

 

Cost of sales

 

 

 

 

 

 

 

Direct mining cost

 

$

5,558

 

$

4,486

 

$

3,643

 

Depreciation

 

1,722

 

1,419

 

1,212

 

Royalty expense

 

374

 

335

 

276

 

Cost of sales — gold

 

6,210

 

5,169

 

4,610

 

Total cash costs2,3

 

584

 

460

 

409

 

All-in sustaining cash costs2,3

 

945

 

752

 

649

 

Cost of sales — copper

 

1,279

 

915

 

407

 

C1 cash costs2,3

 

$

2.17

 

$

1.71

 

$

1.08

 

 


(1)    The amounts presented in this table include the results of discontinued operations.

(2)    Per ounce/pound weighted average.

(3)    Total cash costs, all-in sustaining cash costs, C1 cash costs are non-GAAP financial performance measures with no standard meaning under IFRS. For further information and a detailed reconciliation, please see pages 81–84 of this MD&A.

 

Cost of sales applicable to gold was $6.2 billion in 2012, up 20%, compared to the prior year. The increase reflects higher direct mining costs, particularly higher labor, energy, maintenance and consumable costs.

 

Total cash costs were $584 per ounce in 2012, up 27% compared to the $460 per ounce recorded in the prior year. The increase reflects the same factors impacting cost of sales applicable to gold, as well as the impact of lower production levels in South America, our lowest-cost RBU, which resulted in higher consolidated unit production costs. For the year, total cash costs per ounce were at the high end of our revised 2012 guidance range of $575 to $585 per ounce, mainly as a result of changes in our production mix.

 

Cost of sales applicable to copper was $1,279 million, including depreciation expense of $231 million in 2012, up 40% compared to the $915 million, including depreciation expense of $170 million, recorded in the prior year. The increase reflects the impact of including production from Lumwana beginning on June 1, 2011, and higher direct mining costs at Zaldívar, primarily due to higher power and sulfuric acid prices.

 

52



 

Copper C1 cash costs were $2.17 per pound in 2012, up 27% compared to $1.71 per pound in 2011 and within our most recent 2012 guidance range of $2.10 to $2.30 per pound. The increase reflects the higher direct production costs and the impact of including higher cost production from Lumwana for a full year in 2012.

 

Corporate Administration

 

($ millions)

 

 

 

 

 

 

 

For the years ended December 31

 

2012

 

2011

 

2010

 

Corporate administration expense

 

$

195

 

$

166

 

$

156

 

 

Corporate administration costs were $195 million in 2012, up 17%, compared to the prior year.

 

Other Expense/Other Income

 

($ millions)

 

 

 

 

 

 

 

For the years ended December 31

 

2012

 

2011

 

2010

 

Operating segment administration1

 

$

222

 

$

201

 

$

183

 

Corporate social responsibility

 

83

 

55

 

25

 

Changes in estimate of rehabilitation costs at closed mines

 

39

 

79

 

41

 

World Gold Council fees

 

14

 

9

 

16

 

Currency translation losses2

 

73

 

22

 

26

 

Pension and other post-retirement benefit expense

 

 

4

 

6

 

Severance and other restructuring costs

 

19

 

6

 

16

 

Equinox acquisition costs

 

 

39

 

 

Other expensed items

 

183

 

161

 

142

 

Total other expense

 

$

633

 

$

576

 

$

455

 

Total other income

 

$

69

 

$

248

 

$

116

 

 


(1)    Relates to general and administrative costs incurred at business unit offices.

(2)    Amounts attributable to currency translation losses on working capital balances.

 

Other expense was $633 million in 2012, up 10%, compared to the $576 million recorded in the prior year. The increase is primarily due to higher RBU general and administrative costs, higher corporate social responsibility costs, higher severance costs, partially offset by $39 million in acquisition-related costs for the Equinox transaction incurred in 2011.

 

Exploration and Evaluation

 

($ millions)

 

 

 

 

 

 

 

For the years ended December 31

 

2012

 

2011

 

2010

 

Exploration:

 

 

 

 

 

 

 

Minesite programs

 

$

82

 

$

72

 

$

51

 

Global programs

 

211

 

145

 

103

 

Evaluation costs

 

136

 

129

 

75

 

Exploration and evaluation expense

 

$

429

 

$

346

 

$

229

 

 

Exploration and evaluation expense was $429 million in 2012, up 24% compared to $346 million in 2011. The increase is primarily due to increased minesite and global exploration costs and an increase in evaluation expenditures. Minesite exploration expenditures increased primarily due to increased exploration activities at Cowal, Kanowna, Zaldívar and Granny Smith. Exploration expenditures for the global programs increased due to programs at Goldrush, Lumwana and Cerro Casale. The evaluation expenditures increase relates to the preparation of scoping studies at Goldrush.

 

Capital Expenditures1

 

($ millions)

 

 

 

 

 

 

 

For the years ended December 31

 

2012

 

2011

 

2010

 

Total project capital expenditures2

 

$

2,616

 

$

2,275

 

$

1,792

 

minesite expansion

 

816

 

494

 

251

 

minesite sustaining

 

1,319

 

980

 

865

 

mine development

 

1,071

 

842

 

595

 

Capitalized interest

 

547

 

382

 

275

 

Total consolidated capital expenditures

 

6,369

 

4,973

 

3,778

 

Capital expenditures attributable to non-controlling interests3

 

375

 

375

 

407

 

Total capital expenditures attributable to Barrick

 

$

5,994

 

$

4,598

 

$

3,371

 

 


(1)    These amounts are presented on a cash basis consistent with the amounts presented on the consolidated statement of cash flows.

(2)    On an accrual basis, our share of project capital expenditures is $2,885 million including capitalized interest.

(3)    Amount reflects our partner’s share of expenditures at the Pueblo Viejo and Cerro Casale project on a cash basis.

 

Capital expenditures were $6,369 million in 2012, an increase of $1,396 million or 28%, compared to 2011. The increase is primarily due to an increase in project capital expenditures at Pascua-Lama and Jabal Sayid, partially offset by lower spend at Pueblo Viejo, and an increase in minesite expansion, minesite sustaining and mine development expenditures.

 

53



 

Finance Cost/Finance Income

 

($ millions)

 

 

 

 

 

 

 

For the years ended December 31

 

2012

 

2011

 

2010

 

Interest incurred

 

$

690

 

$

555

 

$

425

 

Interest capitalized

 

(567

)

(408

)

(285

)

Finance charges1

 

 

 

19

 

Accretion

 

54

 

52

 

21

 

Finance cost

 

$

177

 

$

199

 

$

180

 

Finance income

 

$

11

 

$

13

 

$

14

 

 


(1) These amounts represent accrued financing charges on the remaining settlement obligation to close out gold sales contracts.

 

Finance costs incurred in 2012 were $177 million, compared to $199 million in the prior year. Interest costs incurred were $690 million, up 24% compared to the $555 million in the prior year. The increase in interest costs incurred primarily relates to interest incurred on debt issued and credit facilities drawn on to finance the Equinox acquisition in the second quarter 2011. Interest capitalized increased in 2012 compared to the prior year, primarily due to the increase in the carrying value of our Pueblo Viejo and Pascua-Lama projects due to ongoing construction activity. Interest capitalization at Pueblo Viejo ceased in January 2013 as the mine has achieved commercial production.

 

Impairment Charges

 

($ millions)

 

 

 

 

 

 

 

For the years ended December 31

 

2012

 

2011

 

2010

 

Lumwana

 

$

3,016

 

 

 

Copper goodwill

 

798

 

 

 

Barrick Energy

 

155

 

37

 

 

Reko Diq

 

120

 

 

 

PV power assets

 

21

 

39

 

 

Saudi exploration

 

23

 

 

 

Kainantu

 

141

 

 

 

Highland

 

84

 

 

(84

)

Available for sale investments

 

40

 

85

 

 

Miscellaneous

 

27

 

4

 

11

 

Total after-tax impairment charges

 

$

4,425

 

$

165

 

$

(73

)

Related income tax effects and NCI

 

$

2,045

 

$

70

 

 

Total impairment charges/(reversals)

 

$

6,470

 

$

235

 

$

(73

)

 

After-tax impairment charges were $4.4 billion, compared to $165 million in 2011. The amount for 2012 primarily includes asset impairment charges at Lumwana ($3.0 billion), impairment charges relating to goodwill of our global copper business unit ($798 million), asset impairment charges on various properties in our oil & gas business ($155 million), asset impairment charges on an exploration property in Papua New Guinea ($141 million), the write-down of our investment in TCC, which holds our interest in the Reko Diq project ($120 million), a write-down of our investment in Highland Gold ($84 million) and write-downs on our available-for-sale investments ($40 million). In 2011, the impairment charges related to write-downs on our available-for-sale investments ($85 million), asset impairment charges on various properties in our oil & gas business ($37 million) and a write-down on certain power-related assets at our Pueblo Viejo project ($39 million).

 

Income Tax

 

(Percentages)

 

 

 

 

 

 

 

For the years ended December 31

 

2012

 

2011

 

2010

 

Effective (tax recovery) tax expense rate on ordinary (loss) income

 

(32

)%

33

%

31

%

Impact of:

 

 

 

 

 

 

 

Net currency translation losses on deferred tax balances

 

5

%

 

 

Tax rate changes

 

(2

)%

 

 

Amendment in Australia

 

(6

)%

 

(1

)%

Foreign income tax assessment

 

(2

)%

 

 

Functional currency changes

 

2

%

 

 

Dividend withholding tax

 

 

1

%

1

%

Adjustments in respect of prior years

 

2

%

 

 

Impairments

 

7

%

 

 

Actual effective (tax recovery) tax expense rate

 

(26

)%

34

%

31

%

 

Our effective tax rate on ordinary loss or income decreased from 33% to 32% in 2012 primarily due to the impact of changes in the mix of production and in the mix of taxable income in the various tax jurisdictions where we operate. The more significant items impacting income tax expense in 2012 and 2011 include the following:

 

Currency Translation

 

Deferred tax balances are subject to remeasurement for changes in currency exchange rates each period. The most significant balances are Argentinean deferred tax liabilities with a carrying amount of approximately $300 million. In 2012, tax expense of $46 million primarily arose from translation losses due to the weakening of the Argentinean peso against the US dollar. In 2011 the appreciation of the Papua New Guinea kina against the US dollar, and the weakening of the Argentinean peso against the US dollar resulted in net translation gains totaling $32 million. These losses and gains are included within deferred tax expense/recovery.

 

54



 

Tax Rate Changes

 

In second quarter 2012, a tax rate change was enacted in the province of Ontario, Canada, resulting in a deferred tax recovery of $11 million.

 

In third quarter 2012, a tax rate change was enacted in Chile, resulting in current tax expense of $4 million and deferred tax recovery of $15 million.

 

Amendment in Australia

 

In fourth quarter 2012, amendments were made to prior year tax returns for one of our Australian consolidated tax groups, based on updated tax pool amounts from the time of the consolidation election. These amendments resulted in a current tax recovery of $44 million, and a deferred tax recovery of $14 million.

 

Foreign Income Tax Assessment

 

In second quarter 2012, a foreign income tax assessment was received which resulted in a current tax recovery of $19 million.

 

Functional Currency Changes

 

In fourth quarter 2012, we received approval to prepare certain of our Papua New Guinea tax returns using US dollar functional currency effective January 1, 2012. This approval resulted in a one-time deferred tax expense of $16 million. Going forward, the material Papua New Guinea tax return will now be filed using a US dollar functional currency.

 

In 2011, we filed an election in Australia to prepare certain of our Australian tax returns using US dollar functional currency effective January 1, 2011. This election resulted in a one-time deferred tax benefit of $4 million. Going forward, all material Australian tax returns will now be filed using a US dollar functional currency.

 

Dividend Withholding Tax

 

In 2011, we recorded an $87 million dollar dividend withholding current tax expense in respect of funds repatriated from foreign subsidiaries.

 

Peruvian Tax Court Decision

 

On September 30, 2004, the Tax Court of Peru issued a decision in our favor in the matter of our appeal of a 2002 income tax assessment for an amount of $32 million, excluding interest and penalties. The assessment mainly related to the validity of a revaluation of the Pierina mining concession, which affected its tax basis for the years 1999 and 2000. The full life of mine effect on current and deferred income tax liabilities totaling $141 million was fully recorded at December 31, 2002, as well as other related costs of about $21 million.

 

In January 2005, we received written confirmation that there would be no appeal of the September 30, 2004 Tax Court of Peru decision. In December 2004, we recorded a $141 million reduction in current and deferred income tax liabilities and a $21 million reduction in other accrued costs. The confirmation concluded the administrative and judicial appeals process with resolution in Barrick’s favor.

 

Notwithstanding the favorable Tax Court decision we received in 2004 on the 1999 to 2000 revaluation matter, in an audit concluded in 2005, The Tax Administration in Peru (“SUNAT”) reassessed us on the same issue for tax years 2001 to 2003. On October 19, 2007, SUNAT confirmed their reassessment. We filed an appeal to the Tax Court of Peru within the statutory period.

 

The Tax Court decision was rendered on August 15, 2011. The Tax Court ruled in our favor on substantially all material issues. However, based on the Tax Court decision, the timing of certain deductions would differ from the position taken on filing. As a result, we would incur interest and penalties in some years and earn refund interest income in other years. SUNAT initially assessed us $100 million for this matter. However, after appeal, on February 27, 2012 an agreed amount of $52 million was paid in respect of the 2001 and 2003 taxation years. In addition, we have claimed or will claim tax refunds for the 2006 to 2009 taxation years. Reflecting what we believe is the probable amount, we recorded a current tax expense of $39 million in 2011 in respect of this matter.

 

On November 15, 2011, we appealed the Tax Court decision to the Judicial Court with respect to the timing of certain deductions for the Pierina mining concession. SUNAT also appealed the Tax Court decision to the Judicial Court.

 

55



 

Operational Overview1

 

 

 

Gold

 

Copper

 

For the years ended December 31

 

2012

 

2011

 

% Change

 

2010

 

2012

 

2011

 

% Change

 

2010

 

Production (000s oz/millions lbs)2

 

7,421

 

7,676

 

(3

)%

7,765

 

468

 

451

 

4

%

368

 

Ore tons mined (millions)

 

163

 

151

 

8

%

155

 

63

 

50

 

26

%

48

 

Waste tons mined (millions)

 

526

 

569

 

(8

)%

539

 

139

 

90

 

54

%

24

 

Total tons mined (millions)

 

689

 

720

 

(4

)%

694

 

202

 

140

 

44

%

72

 

Ore tons processed (millions)

 

150

 

162

 

(7

)%

145

 

71

 

63

 

13

%

46

 

Average grade (ozs per ton/percent)

 

0.057

 

0.056

 

2

%

0.063

 

0.52

 

0.54

 

(4

)%

0.60

 

 


(1) The amounts presented in this table include the results of discontinued operations.

(2) Reflects our equity share of production.

 

Gold production in 2012 was slightly lower than the prior year, due to lower production in South America, Australia and ABG, partially offset by higher production in North America. Production of 7.4 million ounces was in line with our most recent guidance range of 7.3 to 7.5 million ounces, and within our original guidance range of 7.3 to 7.8 million ounces.

 

Copper production in 2012 was 4% higher than the prior year, primarily due to the inclusion of production from Lumwana which was acquired as part of the Equinox transaction on June 1, 2011. Production of 468 million pounds was above our most recent guidance of approximately 450 million pounds, primarily due to higher than expected ore grades at Lumwana in fourth quarter 2012.

 

Tons Mined and Tons Processed — Gold

 

Total tons mined decreased in 2012 by 4%, and tons processed decreased by 7%, compared to the prior year. The decreases in tons mined were primarily due to decreased mining activity at Pierina, Golden Sunlight, and Goldstrike, partially offset by increased mining activity at Pueblo Viejo, Round Mountain and Buzwagi. The decrease in ore tons processed was primarily due to decreases at Pierina, Veladero and Round Mountain, partially offset by an increase at Bald Mountain and Ruby Hill. Higher tons were mined and processed at Bald Mountain as a result of a mine expansion which was completed towards the end of 2011.

 

Average Mill Head Grades — Gold

 

Average mill head grades increased by approximately 2% in 2012 compared to the prior year, primarily due to higher ore grades from Golden Sunlight, Cortez and Turquoise Ridge, partially offset by lower grades processed at Ruby Hill, Tulawaka and Buzwagi. In general, reserve grades have been trending downwards in recent years, partly as a result of rising gold prices which make it economic to process lower grade material.

 

Tons Mined and Tons Processed — Copper

 

Total tons mined increased in 2012 by 44%, and tons processed increased by 13%, compared to the prior year. The increases are primarily due to an increase in tons mined and tons processed at Lumwana.

 

TONS MINED AND TONS PROCESSED1

 

 


(1) All amounts presented are based on equity production.

 

56



 

AVERAGE MILL HEAD GRADES1 (ounces/ton)

 

 


(1)         All amounts presented based on equity production. Average mill head grades are expressed as the number of ounces of gold contained in a ton of ore processed. Reserve grade represents expected grade over the life of the mine and is calculated based on reserves reported at the end of the immediately preceding year.

 

Review of Operating Segments Performance

 

Barrick’s business is organized into seven primary business units: four regional gold businesses, a global copper business, an oil & gas business, and a Capital Projects business. Barrick’s Chief Operating Decision Maker reviews the operating results, assesses performance and makes capital allocation decisions for each of these business operations at a business unit level. Therefore, these business units are operating segments for financial reporting purposes. Segment performance is evaluated based on a number of measures including operating income before tax, production levels and unit production costs. Our business unit structure adds value by enabling the realization of operational efficiencies, allocating resources to individual mines/projects more effectively and understanding and managing the local business environment, including labor, consumable costs and supply and government and community relations. Income tax, corporate administration, finance income and costs, impairment charges and reversals, investment write-downs and gains/losses on non-hedge derivatives are managed on a consolidated basis and are therefore not reflected in segment income.

 

North America

 

Summary of Financial and Operating Data

 

For the years ended December 31

 

2012

 

2011

 

% Change

 

2010

 

Total tons mined (millions)

 

408

 

410

 

 

396

 

Ore tons processed (millions)

 

60

 

61

 

(2

)%

44

 

Average grade (ozs/ton)

 

0.067

 

0.065

 

3

%

0.084

 

Gold produced (000s/oz)

 

3,493

 

3,382