紐蒙特黃金公司 (NEM) 2014 Q2 法說會逐字稿

Good morning and welcome to the Newmont Mining second-quarter earnings conference call.

(Operator Instructions)

Today's conference is being recorded. If anyone has any objections, please disconnect at this time. I'd now like to turn the call over to Meredith Bandy, Vice President of Investor Relations. You may begin.

Thank you, and good morning, everyone. Welcome to Newmont's second-quarter 2014 earnings conference call.

Joining on the call today are Gary Goldberg, President and Chief Executive Officer, and Laurie Brlas, Chief Financial Officer. They and other members of our Executive team will be available to answer questions at the end of the call.

Turning to slide 2, I would like to refer you to our cautionary statement. We will be discussing a number of forward-looking information, which is subject to a number of risks. More information is included in our SEC filings, which can be found on our website, Newmont.com. And now, I'll turn it over to Gary.

Thank you all for joining us this morning. I'll start by introducing Meredith Bandy, our new Vice President of Investor Relations.

Meredith joins us from BMO, where she was an equity research analyst covering metals and mining. Many of you know Meredith from her past life, and I'm sure the rest of you will get to know and appreciate Meredith.

I welcome this opportunity to highlight our strong second-quarter results. We continue to exceed our cost and efficiency improvement targets, while maintaining planned gold production.

We also made strides in optimizing our portfolio, and have generated nearly $800 million in non-core asset divestitures. Finally, we announced that we will develop the Merian mine in Suriname, the first in our optimized organic project pipeline to get to the green light.

Efficiency and safety go hand in hand, and we also continued to improve our safety performance. Turning to slide 4, we've achieved seven straight quarters of keeping our total injury rates at or below 0.5 for 200,000 hours worked.

In the second quarter, we brought those rates down to an all-time low of 0.32. This represents industry-leading performance. More importantly, it represents 30,000 people taking accountability for working safely, day in and day out.

While we're heading in the right direction, our performance was marred by the loss of [George Ayama], a contract security guard at Ahafo. We continue to keep George and his family in our thoughts as we renew our commitment to working safely and looking out for each other.

This photo shows our team at the Yanacocha Truck Shop who recently reached one year working without injury. One shift is coming up on four years working safely, proving that zero harm is possible.

Our focus on improving every aspect of our business continues to pay off. Turning to slide 5, our work to improve costs and efficiency helped us achieve a 17% per ounce reduction in gold all-in sustaining costs and costs applicable to sales, compared to the prior-year quarter.

While some of that was related to fewer inventory write-downs this year than last, 10% of our all-in sustaining cost improvements were a direct result of operating more efficiently. At the same time, we were able to increase gold production by 5% compared to the second quarter of 2013. Based on this positive trajectory, we've updated our 2014 outlook to reflect a 3% improvement in costs, and a 2% improvement in production for the year.

As we continue to optimize our project pipeline, we are pleased to announce that we are developing Merian in Suriname, a profitable new mine that offers lower cost production and establishing a foothold in a prospective new gold district. I'll cover more on Merian in a few minutes.

Building on our record of delivering projects like Akyem and Phoenix Copper Leach on time and on budget, we are also progressing Turf Vent Shaft project in Nevada on time and on budget this year. We also completed the sale of Jundee for $94 million on July 1, which is up slightly from the previously announced $91 million due to working capital adjustments. This brings our total proceeds from the sale of non-core assets to nearly $800 million.

Finally, we made progress on improving or financial flexibility. During the second quarter, we generated $124 million in free cash flow, and reduced capital expenditure by 58% over the prior-year quarter.

Let's turn to more specifics on slide 6. In the second quarter, we generated $359 million in cash savings on our gold all-in sustaining costs, bringing our year-to-date savings to $442 million. This puts us well ahead of schedule to achieve savings of approximately $600 million to $700 million by 2016.

Quarter-on-quarter, we reduced all-in sustaining costs from $1,283 to $1,063 per ounce, and increased attributable gold production from 1.17 million ounces to 1.22 million ounces. We also increased attributable copper production by 4% quarter- on-quarter, primarily through the added production at our Phoenix Copper Leach operation.

I'll take you through our regional performance now, starting with production, on slide 7. In North America, production dipped slightly from the prior-year quarter due to planned lower grades at Twin Creeks, the sale of Midas, and permitting issues at La Herradura, which have since been resolved.

Production in South America was lower over the prior-year quarter due to a planned stripping campaign. We expect production to increase in the second half of 2014, as we reach higher grades at Yanacocha.

Our Australia/New Zealand operations delivered a 12% increase production, quarter-on-quarter. This performance was led by our teams at Tanami and Waihi, who increased production by 53% and 64% respectively, through a combination of higher grades and increased mining and throughput.

In Africa, gold production rose more than 70% quarter-on-quarter, with the addition of Akyem, which is running well. Akyem produced 113,000 ounces of gold at $396 per ounce, the lowest cost in our portfolio.

Costs are down across the Business, turning to slide 8. We reduced our gold all-in sustaining costs by $220 per ounce, compared to the prior-year quarter. Year-to-date, this puts us below the low end of our 2014 guidance of $1,075 to $1,175 per ounce. These savings are sustainable, and I'll talk about the components, starting with lower capital spending on slide 9.

We reduced capital spending by $356 million, or approximately 58% compared to the second quarter of 2013. About 75% of this reduction reflects lower development spending, as we completed Akyem and Phoenix Copper Leach on time, and on budget in 2013. In Africa, we delivered Akyem $93 million below our budget.

Our current development expenditure is focused on completing the Turf Vent Shaft, where we spent approximately $22 million in the second quarter. Shaft sinking has advanced past the half-way mark, and we are on target to begin operation by late 2015.

Remaining capital reductions are largely the result of improved asset management, which drove sustaining capital expenditure down by $78 million quarter-on-quarter. Capital is one part of the story; we have also improved productivity across the business. I'll now take you to slide 10.

About one-half of our savings show up in the reduced costs applicable to sales. These savings represent successful efforts to improve efficiency across our operations, with a focus on commitment utilization, mine planning, and mill recovery.

For example, at Boddington, we've achieved a 15% increase in shovel utilization, and a 30% reduction in haul truck idle time in the mine. In the mill, we've improved utilization rates by 13% year-to-date, by improving conveyor reliability and consolidating maintenance shut-downs. In Nevada, we improved our management controls and scheduled downtime to deliver a 10% improvement in Mill 6 utilization.

Sustaining capital has been reduced across the board. As I mentioned, improving asset management has played an important role. To give you another example, we reconfigured our Ahafo plan to balance mining rates, with milling capacity, reducing stripping and related equipment costs, while achieving healthier returns.

We continue to optimize our exploration and project portfolio, so that we are focused on our highest value opportunities. I'll talk more about our project and exploration pipeline later in this call. To sum it up, our cost performance is about steadily and relentlessly improving every aspect of our portfolio, from today's mines to tomorrow's growth prospects.

Before I turn it over to Laurie, I would like to address the current situation in Indonesia, turning to slide 11. Despite PTNNT's best efforts to resolve the export issue, a satisfactory outcome has yet to be achieved. Indonesia's new export restrictions and duties are in conflict with PTNNT's existing contract of work.

The team was forced to halt operations on June 5 due to their inability to export copper concentrate. Realistically, we cannot continue to produce indefinitely without revenues. Logistically, there is simply no room left to store additional concentrate.

We are pursuing two parallel paths to resolve this issue as quickly as possible. First, we are continuing our efforts to engage with the government, which we hope will lead to a resolution outside of the arbitration. At the same time, we have filed for international arbitration to insure PTNNT's rights and assets are protected for the benefit of its stakeholders.

The request for arbitration means that we will seek interim injunctive relief to get our people back to work and resume exports. In the meantime, PTNNT continues to ship copper concentrate produced to date to PT Smelting, [their] gresik smelter in Indonesia.

The outcome of arbitration is obviously difficult to predict, but we estimate it could take at least several months to obtain a ruling on interim relief, and at least several weeks to ramp back up to full production, if relief is granted. In the meantime, we have adjusted our guidance. For illustrative purposes, a revised outlook reflects receipt of an export permit by January 1, 2015.

I'll end by reiterating our support for the people of Indonesia, deriving full value from their natural resources. Our local economic contribution includes 9,000 direct and indirect jobs; we have paid more than $3 billion in taxes and royalties to the government to date; and we've demonstrated our commitment to supplying PT Smelting and other companies that intend to build copper smelters in Indonesia. We'll keep you posted on our progress, and I'll now hand it over to Laurie.

Thanks, Gary, and thanks to everyone for joining us. As Gary described, our results indicate that our focus on lower costs resulted in a strong operating and financial performance for the quarter. With this focus, we reduced costs, increased volume, delivered positive free cash flow, and improved guidance.

Turning to slide 13, and comparing this Q2 to the prior-year quarter, as you can see, we experienced a 7% drop in gold price and a 13% drop in revenue over the prior-year quarter. While our production was up, we did experience a decline in sales volume, primarily due to the export issues in Indonesia.

Our GAAP net income from continuing operations was $182 million, including a tax benefit due to a settlement with the IRS. Our full-year tax rate guidance remains 37% to 40%. However, we expect to continue to see quarter-to-quarter swings in our tax rate; for example, including the sale of Jundee, our effective Q3 tax rate will be above our full-year expectations.

We reported adjusted net income of $101 million, or $0.20 per share, compared to a loss of $90 million in the prior-year quarter, or $0.18 per share. Cash provided from continuing operations was very strong at $378 million, up 27% from the year-ago quarter, reflecting our commitment to reducing costs and improving efficiencies.

We continue to be focused on generating free cash flow, and we achieved $124 million in positive free cash flow from continuing operations for the quarter. Also during the quarter, we paid our previously announced dividend, and as we announced this week, our Board approved a dividend of the same amount, payable September 26. This dividend is based on our gold-linked dividend policy and the average London PM Fix during the first quarter, which was $1,288 per ounce.

Turning to slide 14, we compare adjusted net income for the quarter to the prior-year quarter. Lower sales volume and commodity prices compared to the prior-year quarter were essentially offset by lower CAS this year, as we focused on controlling what we could control. Improvements to CAS are a direct result of the productivity and efficiency gains that Gary discussed previously.

Stock pile revaluations had a significant negative impact on income last year, driven by the sharp drop in commodity prices in Q2 of 2013. With our continued cost savings efforts and reprioritization of projects, we saw a decrease in year-over-year advanced project and exploration expense.

As I previously discussed, we recognized a tax benefits this quarter; however, this was a lower tax benefit than we recognized in Q2 of 2013. After considering all of that, we reported adjusted net income of $101 million, or $0.20 per share for the quarter.

Turning to slide 15, we reported gold CAS for the quarter of $744, down 17% versus the prior year, and at the lower end of our guidance for the year of $740 to $790. This the continues to demonstrate focus and cost control, as you also see in our improved 2014 guidance.

The stockpile adjustments we experienced last year were a factor in the improved CAS, but we also saw significantly lower direct spend for all the reasons Gary mentioned. This lower direct spend was enough to more than offset the impact of the lower volume I mentioned earlier, and the effective hedging due to the change in the Aussie dollar.

Turning to slide 16 and our capital priorities, we continue to be guided by our capital allocations strategy. First, improving financial flexibility; second, enhancing our portfolio to focus on assets with the great risk/reward profile; and third, returning cash to our shareholders. We ended the quarter in a strong financial position, with $1.7 billion in cash and no borrowings on our $3 billion revolver.

We generated cash from continuing operations of $378 million, which includes free cash flow of $124 million. Since the quarter end, we completed the closure of the $575 million term loan and pay-off of the convertible debt in July as planned.

Our portfolio was strengthened with the decision to invest in the Merian project. We estimate that at current gold prices, Merian can be financed out of cash flow, available cash balances, and asset sales, including the recently closed divestiture of our Jundee operations.

Over the last 12 months, we have generated nearly $800 million from divestitures and reported over $100 million in free cash flow, which positions us well to move forward with the investment in Merian. We have also returned $89 million to our shareholders so far this year. Now I'll turn the call back over to Gary to discuss our improved 2014 outlook.

Thank you, Laurie. The second quarter was another strong quarter and we are updating 2014 outlook accordingly. Turning to slide 18, first, we have reduced guidance for gold cost applicable to sales by 3% to between $720 and $760 per ounce. Four of our regions have reduced their gold all-in sustaining cost outlook, as well.

Second, we have increased guidance for attributable gold production by 2% to between 4.7 million and 5 million ounces. This increase reflects higher production in Africa and Australia, more than offsetting the impact of the Jundee divestiture and declaration of force majeure at Batu Hijau.

Our revised 2015 to 2016 guidance excludes Jundee, and while we have yet to resolve export issues in Indonesia, we remain committed to doing so. As I mentioned earlier, for illustrative purposes, we have presented guidance to reflect receipt of an export permit for Batu Hijau by January 1, 2015. Finally, we have updated our guidance to include Merian, with first production expected in late 2016.

Turning to slide 19, I am pleased to announce that we're moving ahead with our project in Suriname. Our team has been on the ground for 10 years shaping Merian into a profitable operation and securing a position in the prospective Guiana Shield. During Merian's first five years of operation, we are forecasting average annual production of between 400,000 and 500,000 ounces of gold at all-in sustaining costs of between $750 and $850 per ounce.

Total capital to bring Merian into commercial production is estimated at between $900 million and $1 billion on a 100% basis. The government of Suriname has the right to acquire a 25% fully funded interest, including all project capital, operating expense, and an earn-in contribution, which could reduce Newmont's share of project capital to $650 million.

Reserves at Merian are reported at 4.2 million ounces, with a projected mine life of 11 years. As Laurie mentioned, we anticipate funding Merian through cash flow and available cash balances and will begin construction as soon as the government grants us our right of exploitation.

Merian is one of several projects in our organic growth pipeline. Let's turn to slide 20 for an update on the others. Our team has spent considerable time over the past 18 months optimizing our project portfolio so that when the time is right, we can move forward with developing projects that generate good value.

This year, we are completing feasibility studies at Long Canyon in Nevada. We are taking a phased approach to developing this world-class asset, and the first phase is expected to deliver about 150,000 ounces of production per year, at competitive costs. We anticipate reaching a decision to proceed in early 2015.

We are also advancing two expansion projects in Ghana. First, the Ahafo Mill expansion, which would increase throughput and help counter the impact of lower grade ore. This investment is expected to add about 200,000 ounces of production, and will reach a decision to proceed in 2015.

Second, developing the Subika Underground mine, which should improve ore grade and add another 200,000 ounces of production in Ghana. We will reach a decision to proceed with this project in late 2015 or early 2016.

In New Zealand, we are in the final definition stages of our Correnso mine and expect to make a funding decision in the near future. This roughly $32 million development extends the life of Waihi.

The exploration drive development was completed in May and drilling is nearly done. We are working closely with the community to ensure successful development of this new underground mine.

Finally, in South America, we recently completed a review of our Conga project to assess alternative development options. At this point, there is no obvious smaller approach and we continue to review alternatives to reducing development capital, especially with Earthworks. All told, our short-term project pipeline represents more than 1 million ounces of production at competitive costs.

We also have some exciting exploration prospects. A few examples of exceptionally high-grade finds in our own backyard include Exodus and Bull Moose, which are near our existing Carlin underground operations in Nevada, and Federation, which is adjacent to our Tanami operations. These prospects are expected to add higher-grade material to our inventory in 2014; it is still early days and we'll keep you informed about our progress.

Summing up our performance and prospects, I'll leave you with a view of where we're taking the Business, turning to slide 21. As we demonstrated in the second quarter, we continue to strengthen our ability to create value for our shareholders in three main areas.

First, through continuous cost and efficiency improvements, which we are achieving by operating more efficiently, not just delaying our spend. Second, through continuous portfolio improvement, which we are delivering by optimizing our projects and divesting non-core assets. Third, by maintaining a strong balance sheet.

We are on track to maximize value in the short term and to capture the benefits of economic recovery and demand growth in the longer term. Our ultimate goal is to lead the gold sector in creating value for our shareholders. As always, I welcome your questions as we work towards that goal. Thank you for your time, and now over to your questions.

(Operator Instructions)

Our first question comes Andrew Quail, Goldman Sachs. Your line is open.

Good morning, Gary and Laurie and team. Thanks for taking my question and congratulations on a strong Q2. Just on Indonesia, if we don't see those export permits received by January 1, 2015, do you think that will affect the construction decision or timeline at Merian?

No, good morning, Andrew, and thanks for your question. No, at this stage, and as we looked at our future cash flows and there are a variety of gold price scenarios, we're comfortable that -- and we've separated those two in terms of our financing concerns -- we believe we can still cover it with our existing cash flow from our operations, and as Laurie mentioned, potentially some additional asset sales, but really feel comfortable without having the two linked.

And I realize there's a complex situation there, but is there any dates that you guys could give or anything -- visible catalysts on the international arbitration case? Or is it just too hard to speculate?

No, the ranges I gave in terms of the filing, there's a process that goes through, in nominating the different arbitrators that will represent folks, and we're going through that process now, and as I mentioned, several months before we get to a point of considering injunctive relief. But more importantly, it's a dual-track process, and from our standpoint, we would rather reach an agreement with the government directly, rather than go through the arbitration process, but reached a point where we felt we needed to file that to get some certainty around the process.

Yes. And one on copper guidance. It goes up in 2016; is that a function of mine sequencing or is there something else going on there?

By delaying basically six months of production in Batu Hijau in the forecast, that he pushed some of the production that we would have received at the very end of 2014 into 2015, and it also slips some of 2015 into 2016, so it's bumped 2016 up.

And last one, just on CapEx, in other South America, you guys have got are guiding for about $225 million to $270 million and you're planning on about, say, $210 million for Merian. Obviously, is the rest Conga or do you see -- I would say, delaying some Conga that you've guided to in 2014 to further [ease out]?

Yes, that's basically -- Merian is the majority of it, and we've got Conga with our water first approach going there.

Okay. Thanks very much, Gary.

Thank you.

Our next question from John Bridges, JPMorgan. Your line is open.

Sorry to be repetitive, but just wondered with Batu Hijau, is there any case law around reopening a mine in arbitration process? Do you have -- how much confidence do you have in that scenario?

From our standpoint, in terms of case law, I'm not sure there's a lot of examples that would mimic our exact case that's going on, but that's why we want to continue down both arbitration path, but more importantly to continue with dialogue with the government to try to reach a resolution. We're -- a lot has happened here in the last week or two in Indonesia, and it's currently this week, there's religious holidays going on, so we'll see how the dialogue goes starting again next week.

Okay. In your write up of Merian, you talk about a new innovative development plan there. What have you changed? The capital number is relatively low?

Basically what we've done, we've slightly increased the size of the mill, but more importantly, over the last couple of years, because we've had time to do additional infill drilling, we've confirmed the amount of saprolite that's there, which allows us to be able to give the higher and increased production rates.

Is there a plan to increase the scale of the mill when you get into the hard rock to maintain throughput?

At this point, we would be looking to add some additional crushing capacity, once you get into that further down. The other piece, getting back to what we're looking at with Merian, is we're looking at self-performing. We will be working with G Mining and people who have had expertise in developing projects in Suriname, rather than bringing in a large EPCM contractor to do the work.

That [clay] can be tricky, right?

Yes.

New Zealand, just finally, it's a bit surprising, there's been talk about that asset being up for sale. Any thoughts about the longer-term strategy with that?

It continues to be a good performing asset. We see good extension possibilities with the life, as I mentioned, with Correnso, and we'll continue to work down the path of developing all our assets to their fullest capability, but always be open to consideration if others should come along and value the asset more than we do.

Okay, great. Thanks, guys. Well done on the numbers.

Great. Thanks, John.

Next question, David Haughton, BMO. Your line is open.

Thank you for reintroducing that pipeline. It gives us a good idea as to where your projects are situated. The first one off the block is Merian. You mentioned there that there is potential for the government to participate 25% in this project. What's the timing and the kind of payments that they'd have to come up with to be able to do that?

The time frame they have, basically, once the right of exploitation has been issued, they've got 105 days in which to fund their up to 25% investment. The amount that they would fund is based on a multiple of the historic costs and they're actually -- they go through a process of auditing what has been spent to come up with what the historic costs are and then would fund that amount. And then would just carry -- if they did exercise the 25%, they would pay for basically their 25% share going forward and we'd cover our 75%.

Okay. And the [posturing] for the government that you can read, they are open to that kind of investment?

Yes and the discussions we've had, and we need to let them do their process and speak for themselves, but they appear very interested in pursuing their 25% interest.

Okay. And what's the fiscal regime that you've got there with the royalty and tax?

Give me just a second here. I've got to remember the royalty rate.

At one stage, it had been suggested at 5%?

It's 6% is the royalty that we've agreed in our mineral agreement.

All right. And the income tax?

Okay, that's right, it is 36%. I need a table of all the ones from around the world because they're -- I sure don't want to make them all consistent, but.

All right. And Laurie made the point that you have the internal capacity to fund that, but would you think about project finance at all for this endeavor?

We could at some point, but at this stage, we don't see the need to do that. But at this stage, we're not considering it.

We'd rather actually delever our balance sheet, David, so I wouldn't really necessarily want to take on [additional].

Fair enough.

[That temporarily].

I did hear that. It sounded like you were at the bottom of the well, but I did hear that. Thank you, Laurie. And just finally, looking at Africa. It's outperformed expectations and the sense I wanted to get from that is, is it sustainable, and what are the key drivers for you in making it sustainable at the outperformance that we've seen?

In Africa, we've done a couple things. Clearly, bringing Akyem on and getting things settled and moving that forward has been critical. The team has done a good job, and we see good production is continuing well there.

With Ahafo, it needed a step back, much like we did at Tanami. As we stripped out some of these projects, the mill expansion and the underground, it helped to expose some opportunities to improve basically the overall plan and make sure that we matched mining rates to milling rates.

By doing that, that's reduced our stripping requirements here over the next year or two, and helped basically to improve the overall results there. Then we can look at those expansion projects in a more measured way and bring them on in stages, rather than try to bring them on all at the same time.

Same time, we're doing work at Ahafo North to continue to better understand that resource and how it may fit in and what the timing may be. And we've looked at alternatives, whether it's a standalone mill or we try to transport ore down to the existing Ahafo complex. Right now, probably looking better towards a standalone mill, but that's still out there, and you see where that sits on the pipeline.

[Proud] of you guys. Thank you for that, Gary.

Thanks, David.

Next question, Patrick Chidley, HSBC. Your line is open.

Good morning, Gary, Laurie, everybody. Just a question on Merian, back to Merian, with respect to power, I understand that you're planning to use truck HFO into the site and generate your own power. Given that they have got quite a lot of hydropower in Suriname, is there a chance that the government might come to the party with some low-cost hydro to actually help you develop make even a bigger mining future, which would be beneficial for the country, similar maybe to what Quebec does with its mines, for example, in providing low-cost power? Could that be linked to the government buy-in, for example?

Patrick, thanks for the question. At this stage, because of where we're located, we're not on the grid, so it would take putting reticulation in to connect us to the grid to be able to do that. That said, with the [gen sets] we're putting in -- and we're doing it in a staged basis, because we don't need as many to begin with -- we're expecting our power costs at current diesel prices and oil prices to run around $0.14 to $0.17 per kilowatt hour.

I wouldn't rule that out, but at this stage, it would depend on finding more ore and being able to extend our resources there to look at those sorts of alternatives. So not (multiple speakers) [note], but one that we could -- it's not part of our current discussions with the government.

Right, right. I just thought that maybe the government could help on the power side if they have trouble financing their 25%, for example. In terms of the first five years that you forecast, is that all in saprolite or when do you switch to fresh ore? And when you do switch to fresh ore, is there a change in the grade profile?

It's all in saprolite. The grade would drop just a little bit at that stage, but it actually stays fairly consistent over the mine life. We start to get into the fresh ore, the non-saprolite ore, more in years six and seven in the plan.

And in six and seven, does the grade change at all, or does it stay the same average reserve grade?

It just gets harder. It's not much of a change in grade.

Okay. All right. Thanks. And just on Yanacocha, any update on your copper heap leach pilot program there? You still [will see]--?

I was down there a couple weeks ago, and had a chance to look at the pilot plant and see how it's working. They continue to work through, as you expect, just when you're working small heaps like this, there's some of the system upsets that you get along the way.

But they are producing a good quality copper cathode. We are getting the recoveries in the time frames -- in fact, even a little bit better in some cases -- and testing what's the right size. We did this at [Rena] mine ore and different sizes of crushing to see what gets the best recovery over time and see how that then fits into a larger plan to develop that ore body. But that still remains one of several ways of developing the copper gold portions of the Yanacocha ore body, so we look at different milling and options to handle the enargite.

Yes. Thanks. And final question, just on Ghana, you mentioned two options to increase production by 200,000 ounces each. Can you say whether you're thinking about that as replacement ounces and so steady production, or is that going to be a net increase in production, say, in 2017 onwards?

It's a combination, so I wouldn't just add [400,000] on top out there, but it wouldn't be completely replacement. Some of it will be an expansion, especially the underground, as we would go into that because of the higher grade that we get.

Right. Perfect. Thanks very much, Gary.

Thanks, Patrick.

Next question from Greg Barnes, TD Securities. Your line is open.

Thank you, just returning to Merian again, what kind of internal rate of return do you estimate on the project at current spot gold price around $1,300?

Current price, as we see it, in the high teens, rate of return.

Is that a levered IRR or just a straight project IRR?

Just a straight project IRR.

Okay and what about more technical details regarding stripping ratios and cost per tonne mining, milling, those details. Are they available?

We can get back on that through Meredith. I don't have those in front of me right now.

Okay. I'll contact Meredith. Thanks.

Anything else, Greg?

No, no, that's it.

Okay. Thank you.

Our next question, Jorge Beristain, Deutsche Bank. Your line is open.

Good morning, everybody. Just really a technical question first. On slide 15, you highlight the large drop in your cost applicable to sales of 17%, but the largest driver is stockpile revaluation. Could you walk us through how that is a cash flow impact, perhaps, Laurie?

That is really not going to be a cash flow item, because that was primary the revaluations last year. That happened when the gold price dropped so we revalued the stockpiles that we had been carrying on the balance sheet, so that would primarily be not a cash flow item.

Okay. And then just some comments that were made earlier, by you, Laurie, about the $100 million of free cash flow. Over what period was that?

The last trailing four quarters so the second half of (multiple speakers).

And then you flagged that you had paid about $89 million of dividends. So the $100 million of free cash flow, I'm assuming that's pre-dividends?

Correct.

So rough numbers, what you earned in cash flow, you paid out as dividends, and then you also did about $800 million of asset sales. So what I'm trying to understand on a go-forward basis, is how much do you view of -- you said that you can internally cover Merian with internal cash flow, but you also mentioned the possibility of further asset sales, so are you earmarking any part of that, of your $650 million CapEx, to be covered by asset sales on a go-forward basis?

No, nothing specific like that, Jorge. And just a reminder that, that $650 million is going to be over the next three years, so that expenditure covers a significant period of time here, it's not all coming in 2014, or 2015.

Okay, and then in your 2016 guidance, where Merian first starts up, could you comment, are you assuming a 100% ownership at that point, or are you assuming 75% and that the government comes in for their 25%?

No, we're assuming 100%.

Got it.

We would not assume that they're coming in. All of our numbers are at 100% at this point in time, the capital expenditure and the production, when it comes online.

Yes, Jorge, we'll go ahead and change the guidance should the government decide to exercise its right and modify that going forward. It's relatively small in 2016, so you won't see a big number change, but we would get those numbers, plus the change to capital expected.

Right. And how does the timing or the contract work for the government? Do they have an open timetable any time up until the mine is built or even after it's built to exercise that 25% option, or is it a use it or lose it thing under a certain calendar?

It's basically a use it or lose it approach is one way of looking at it. They have got 105 days from the issuance of the right of exploitation, which now that the Board has approved, and we've announced that we're ready to move forward, that happens first, and then they have got 105 days.

Thanks. And what's the time frame for when you believe they're going to issue this right of exploitation?

We believe they have all the information they need in which to be able to issue that at this stage, but need to now work closely and check in, in what their time frame is. I don't expect it to be long, but it's one we have got to work through with the government.

Thank you.

Thanks, Jorge.

Our final question comes from Brian Yu, Citi. Your line is open.

Good morning. My first question is, this looks more at longer-term Cap Ex versus balance sheet, and it wasn't that long ago where people were asking you would you do an equity issuance delevering. We're coming out of the abyss of CapEx spend and you're starting to take on more projects.

How should we think about it, as you make decisions on others like Ahafo, Subika, and others. Is the target to maintain the current debt level, net debt level. What's going to dictate your ability to spend on these new projects?

At this stage, and that is, is the advantage we have, is these aren't all coming in at the same time, and they are not real large projects in terms of capital. In fact, Merian is the largest of the ones we talked about, other than Conga, which obviously is a bit bigger than those, so we can assess each at the time.

Our focus is still going to be looking to deliver these projects from within our own cash flow, and operating cash flow from the Business, but we can assess that at the time. But there's no intention to either issue more debt or to issue equity to do these. We're looking it do it from our existing op business.

Okay, great. And then second one, this circles back to Indonesia. I know when you guys had gone into arbitration, that was before Freeport actually struck their MOU. Looks like they are ramping up. Number one, does this changes things over the near term? And then two, if you're still continuing to proceed with the arbitration, are you guys hoping for a better deal structure than what Freeport was able to get?

The structure that they had and the things -- they have got different issues they were addressing in their changes to their contract to work. We were having similar discussions with the government around making changes to the contract to work, aligned with what both our mine characteristics are, and the differences in our contract to work. That said, we're confident in our arbitration case, otherwise we wouldn't have filed it, but we're really interested in finding a negotiated solution with the government and want to continue down this parallel path to resolve it as soon as possible.

Okay. Great, thank you.

Great. Thanks, Brian. We have a couple more questions, I'm told.

Next question from Adam Graf, Cowen. Your line is open.

Thanks. Just a quick question on Long Canyon. Could you -- I know it's still preliminary, but could you give us the timing of when you guys would be breaking ground and then starting first production on Phase 1 for Long Canyon? And perhaps then talk about how you envision transitioning to a Phase 2?

At this stage, Adam, we're still going through finalizing the engineering studies and working to get the permit this year, we bring that one forward early next year for consideration. If we were to make the decision to move forward, we're looking at capital expenditure in the $250 million to $300 million range for that production level.

That's about a five- to six-year mine life that, that would have, so it's during that phase of production that we would be looking to develop Phase 2 and be in a position to have that take on, either at the end or slightly before the end of that five- to six-year mine life. So that's all still a bit rough, and we'll get more details as we get through some of those studies and get more certainty around permitting.

Great, thank you.

Thanks, Adam. Operator, I think we have one more?

Our next question, Farooq Hamed, Barclays, your line is open.

Good morning, sorry, I was just on mute there. I just had a couple of follow-up questions really on some of the guidance that you guys put out, and maybe just some housekeeping around that. For 2015 and 2016, you're assuming that you have the Batu Hijau export permits back again. What is the production that you're expecting from Batu Hijau for 2015 and 2016?

Basically, what you see in the copper -- I'm just taking a look at the production numbers, and I don't have the exact numbers in front of me.

If I could jump in, it's always on 8-K that we issued with the file for arbitration. There's no change to those estimates. We're just pushing it out by basically six months, for the January 1.

Okay. Sorry, I missed the front part of what you were saying there. So you're saying there's no change from what you put out previously for Batu Hijau?

The July 1st 8-K, which we filed in conjunction with the announcement of the arbitration, breaks out the Batu Hijau production and that's not changed, it's just pushed back. And we can go over that offline, if you'd like.

Sure, okay. That's no problem. Maybe I'll just follow up with you offline. Then just with regards to 2014 guidance, I know on the call you said that you're a expecting better production from Yanacocha in the second half. I had missed the comment about North America. On an overall basis, are you expecting better production in the second half of the year versus the first half?

In North America, slightly better, we had -- but not a very big change, because we continue -- Mexico will help, not having Mexico in the first half versus the second half will probably be the biggest part driving that, Farooq.

Okay, so you're actually, from the Americas side, you are looking at better production, both North and South America in H2?

Yes, yes.

Okay. That's fair. I just wanted to update the numbers and actually had you guys coming down a little bit in the second half, so that's helpful. Thanks very much.

Thanks, Farooq. Thank you, and thank you, everyone, for joining us. It's very pleasing to talk about the results for the second quarter, strong results out in the operations as we continue to deliver on our commitments to the market and to our employees and the rest of our stakeholders. Very pleased to see Merian moving forward, one of several of our projects in our organic growth pipeline, and I appreciate everyone joining here this morning. Have a good day. Thank you.

This does conclude today's presentation. You may disconnect at this time. Thank you for joining.