Barrick Gold Corporation (ABR.DE) Q4 2010 Earnings Call Transcript
Published at 2011-02-17 17:00:00
Ladies and gentlemen, thank you for standing by, and welcome to Barrick Gold Year End 2010 Results Conference Call. [Operator Instructions] And now, I have the pleasure to turn the call over to Mr. Deni Nicoski, Vice President, Investor Relations. Please go ahead, sir.
Thank you, operator, and good morning, everyone. Before we begin, I will bring to your attention the fact that we will be making forward-looking statements during the course of this presentation. For a complete discussion of the risks, uncertainties and factors which may lead to our actual financial results and performance being different from the estimates contained in our forward-looking statements, please refer to our year-end report or our most recent AIF filing. With that, I will hand it over to Aaron Regent, President and CEO of Barrick.
Great. Thanks, Deni, and good morning, and thank you for joining our conference call. I'm joined here today by Jamie Sokalsky, Peter Kinver and Kelvin Dushnisky, and there are members of our senior team here as well, who will also be available to answer your questions later. I'll start by covering some of the highlights of the year and the quarter, and then provide an update on our reserves and projects. And then I'll turn the call over to Jamie to take you through our financial results, our financial position and our views an the outlook for gold and a bit more detail, after which we'd be happy to take any questions that you might have. Overall, 2010 was a successful year for Barrick. We achieved our operating and cost targets for the year, marking the eighth straight year we've been able to do so, and delivered higher gold production at lower cash costs compared to 2009. Gold production increased to 7.8 million ounces at total cash cost of $457 per ounce or $341 per ounce on a net cash cost basis. Costs were in line with original guidance despite higher royalties and taxes associated with the higher gold price. And I think our consistent performance really reflects the benefit of having a high-quality geographically diversified portfolio. Combined with the increase in the gold price, this translated into record financial results and good returns on shareholder equity. Net income for the year was a record $3.27 billion, while cash flow from operations was also a record at $4.13 billion. On an adjusted basis, net income was $3.28 billion, up 81% from 2009 and operating cash flow was $4.8 billion or 65% higher than the previous year. These translated into an increased return on equity to 19%, up from 12% in 2009. And in addition, we were able to increase the capital return to our shareholders through a 20% increase in the common share dividend. We continue to advance our project pipeline. Cortez Hills was completed on schedule and budget early in the year and the ramp up of this operation exceeded our original targets. We also made significant progress in advancing the construction of Pueblo Viejo and Pascua-Lama. However, the capital costs of these projects are under pressure, and I'll elaborate a bit more as to the reasons why later in my remarks. Looking at our reserves and resources. We were successful again in 2010 in replacing our reserves. This is the fifth year in a row that we've been able to do that, and we also grew our measured and indicated resources by 24% and inferred resources by 18%. And so today, we now have a total of mineral inventory of more than 250 million ounces. A greater emphasis on internal value creation also surfaced some significant organic opportunities within our portfolio. And this has positioned us to increase our production targets to 9 million ounces within the next five years. We're also evaluating some significant longer-term projects such as the potential to transform the Turquoise Ridge joint venture in Nevada from a small underground mine into a large open-pit operation, which could conceptually quadruple production and reserves from current levels. We enter 2011 in a solid financial position with strong operating cash flows, $4 billion in cash and an A-rated balance sheet. We have maintained the financial strength to support our operations and projects and the flexibility to pursue other high-return value-creation opportunities. With respect to our license to operate, we remained committed to achieving the highest social response to these standards and enhancing and improving our performance. We are not perfect, and there is room for improvement, but our efforts have been recognized. In 2010, we were listed for the third year in a row of the Dow Jones Sustainability World Index, and we were also named to the NASDAQ Global Sustainability Index of the top 100 companies worldwide. We also were the first Canadian mining company to join the voluntary principles of security and human rights. So I think 2002 is a year where we can look back and say we've made progress on many fronts. Turning to the fourth quarter, gold production of 1.7 million ounces at a cash cost of $486 per ounce was in line with our expectations, and enabled us to meet our original production guidance for the year. On a net basis, cash costs for the quarter were about $160 lower at $326 per ounce. Copper production was 82 million pounds at a total cash cost of $1.12 per pound, and that does reflect the sale of the Osborne mine in the third quarter. Our realized gold price for the quarter was a record $1,360 per ounce, which was 22% higher than the prior year period, and our copper realized price of $3.99 per pound was 16% higher than a year ago. Quarter four adjusted net income rose 57% to $947 million or $0.95 per share, and that compares to $604 million or $0.61 per share in the fourth quarter of last year, and that reflects higher gold sales volumes and higher realized prices for both gold and copper. Adjusted operating cash flow, which excludes the impact of payments to eliminate the remaining settlement obligation associated with the closure of our gold sales contracts in 2009, rose 56% to a record $1.44 billion from $921 million in the prior year. Turning to the regional breakdown of our operating results. North America had a strong quarter, producing about 700,000 ounces at total cash cost of $486 per ounce. The expanded Cortez mine performed as expected, producing 205,000 ounces at total cash cost of $329 per ounce. Full-year production of 1.14 million ounces at Cortez and total cash costs of $312 per ounce exceeded our original guidance on higher-than-anticipated grades and recoveries from the Cortez Hills open pit and underground. The Goldstrike operation performed strongly, contributing 288,000 ounces at cash cost of $490 per ounce, and that was on better-than-expected grades from the open pit, and a higher roaster throughput. Our South America mines performed as expected, contributing 377,000 ounces at cash costs of $297 per ounce. Lagunas Norte Mine contributed 105,000 ounces in the quarter at total cash costs of $294 per ounce. And based on previously disclosed changes to the mine plan, production was lower in the fourth quarter, but is anticipated to increase again in the first quarter of this year. The Veladero mine produced 235,000 ounces at total cash costs of $252 per ounce. Full year production at Veladero was 1.12 million ounces at cash costs of $256 per ounce, and that reflects the access to higher grades and the increased throughput from the crusher expansion that we completed in the third quarter of 2009. The Australia Pacific region produced 485,000 ounces at a cash cost of $639 per ounce, and that includes 141,000 ounces from Porgera, which is produced at a cash cost of $470 per ounce. And then the attributable production from African Barrick Gold was 133,000 ounces at a cash cost of $679 per ounce. Just turning to the next slide, want to make a comment about our reserves and resources. In this area, Barrick does have a strong history of finding new ounces to replenish and grow our reserves and resources. And I'm glad to say that, that tradition was continued again in 2010, where we replaced our reserves, which keeps us in a reserve position of 140 million ounces. And that's despite the fact that we lost some of the reserves as a result of the partial sale of our interest in African Barrick. In addition to proven and probable reserves, we reported M&I resources of 76 million ounces, and inferred resources of 47 million ounces. Those were up 24% and 18%, respectively. And so overall, we now have a gold inventory of more than 250 million ounces. I should note, we also have a large inventory of copper and silver, including about 6.5 billion pounds of copper reserves, 13 billion pounds of M&I copper resources, and a further 9 billion pounds in the inferred category. Silver contained with our gold reserves, which are permanent Pascua-Lama total about 1.1 billion ounces. We've had a lot of success on the exploration front in 2010. And as a result, we have increased our 2011 exploration budget by over 50% to around $320 million to $340 million. The budget continues to be weighted towards resource additions and conversion at our existing mines, while still providing support for early stage exploration in our operating districts, which is about 80% with a balance of about 20% directed at generative efforts to explore for large deposits in highly endowed and unexplored areas such as Papua New Guinea and the El Indio Belt. About 43% of the total budget is expected to be spent in North America, the majority of which is targeted for Nevada, primarily to upgrade resources at Turquoise Ridge and to outline additional resources at Cortez. About 24% of the total will be allocated to Australia Pacific, including Papua New Guinea, which is expected to provide further growth opportunities. Around 15% is targeted for South American region with a balance of 18% divided between Africa and other emerging areas. Our exploration programs continue to add significant value to the company, and I look forward to reporting back to you on our progress in the coming months. Turning to our projects. As I mentioned, the expanded Cortez operation, which produced 1.1 million ounces this year, was completed on time and on budget early in the first quarter. And the ramp up exceeded our original guidance and our original targets. We expect Cortez to continue to perform strongly, and anticipate production this year of around 1.3 to 1.45 million ounces at a cash cost of $235 to $265 per ounce. So you can see, given today's gold price, that Cortez is going to generate significant cash flow for the company. Cortez continues to operate currently under the terms of the tailored injunction that was issued last year, but the Bureau of Land Management has now completed a Supplemental Environmental Impact Study, and the public comment period is now over, and so we are expecting the record of decision to be issued imminently. Before I comment on the specifics of the status of our other projects, I'd like to make a few general observations of some of the recent trends we are seeing in the industry. With the strong commodity pricing environment that we are in, there has been an impact on the demand and cost profile of inputs into capital projects. Inflationary pressures have become more pronounced, whether it be for labor, freight, commodities or contractor services. Projects are being advanced, which is increasing the competition for resources, and this gets further compounded in a country like Chile, which is also rebuilding as a result of the earthquake last year. Given these trends, we recently completed a thorough line-by-line review of our capital estimates for Pueblo Viejo and Pascua-Lama, and as a result of that review came to the conclusion that the capital costs would be higher. Now I should say the flip side is that the higher commodity prices are also significantly improving the economics of our projects, and that is certainly the case with Pueblo Viejo and Pascua-Lama. So while the capital cost have increased somewhat, the economics and returns on invested capital continues to be very, very good. Now turning to Pueblo Viejo, which is located in the Dominican Republic. Significant progress has continued to be made on this project, and we continue to anticipate commissioning in the fourth quarter of this year, with first production anticipated in the first quarter of 2012. The project is expected to gradually ramp up over a 12 to 18 month period. Today, construction is around 50% complete. In December, the Environmental Impact Assessment for the 240 kV power transmission line was approved, allowing the associated construction activities to commence. In the interim, alternative temporary power sources are being secured in order to allow for project commissioning in the fourth quarter. All four of the autoclaves and the oxygen plant have been installed. About 80% of the plant concrete been poured, 55% of the steel has been erected and more than 600,000 tons of ore have been stockpiled. So work continues towards achieving key milestones, including the connection of power to the site. As I said though, the capital costs of Pueblo Viejo have been impacted, specifically impacted by higher labor costs, freight, steel product-related costs and an increase in power supply cost, and were also impacted by general inflation, particularly in the DR. As a result, pre-production capital is expected to increase by about 10% to 15% to $3.3 billion to $3.5 billion. Barrick's share of annual gold production, just as a reminder, in the first five years of operation is expected to average around 625,000 to 675,000 ounces at a total cash cost of $275 to $300 per ounce. At Pascua-Lama, detailed engineering and procurement is more than 90% complete, and about 60% of the earthworks for the process plant and mining support facilities have been moved. Construction of the power transmission line has commenced, and new access road is about 75% complete. Development of the tunnel that will connect the mine in Chile with the process plant in Argentina is advancing on both sides. And occupancy of the construction camps in Chile and Argentina continues to ramp up, with more than 2,000 people now housed on site. As a result of the stronger Chilean peso, labor costs, commodity and other input costs as well, which we're experiencing in both Chile and in Argentina, and a higher inflation, particularly in Argentina, pre-production capital is expected to increase by about 10% to 20% to $3.3 billion to $3.6 billion. Initial production is expected in the first half of 2013, with average gold production in the first full five years of operation expected to be around 750,000 to 800,000 ounces at a total cash cost of $20 to $50 per ounce based on a silver price of $16 per ounce. I should highlight that Pascua-Lama will also be one of the world's largest silver producers, with average annual production in the first five years of about 35 million ounces. For every $1 per ounce increase in the silver price, total cash costs are expected to decrease by about $35 per ounce over this period. Turning to our next generation of projects. At our 75% owned Cerro Casale project in Chile, the review of additional preliminary requirements before considering a construction decision is progressing, alongside discussions with the government and meetings with local communities and indigenous groups. Given the trends we're seeing in Chile, combined with our experience at Pascua-Lama, we have initiated a review of the project to re-estimate the capital costs. Early indications suggest the capital may be higher by about 20% to 25% from the previous estimate of $4.2 billion. And this reflects the potential impacts of a stronger Chilean peso, higher labor, commodity and other input costs. And we expect to have this review completed by the end of the second quarter. At Donlin Creek, our 50% owned project in Alaska, gold resources are now around 39 million ounces on 100% basis. We expect the feasibility study on the gas pipeline option to be completed in third quarter of this year. At the 37.5% owned Reko Diq copper gold project in Pakistan, the initial mine development, feasibility study and the Environmental and Social Impact Assessments are both complete, and the project company, Tethyan Copper, has made an application for a mining lease on February 15. And on our 50% owned Kabanga Nickel Project in Tanzania, a feasibility study and Environmental and Social Impact Assessment is expected to be submitted in the first half of 2011. At Turquoise Ridge, we are continuing to further define this opportunity to complement the underground operation with a large open pit to mine the lower grade mineralization surrounding this ore body. We continue to be very encouraged by the potential of this project. An open-pit operation could conceptually increase total production to up to 800,000 ounces per year compared to current production of 150,000 to 200,000 ounces per year based on a potential deposit of over 20 million ounces. Next steps will be to complete scoping work in the first half of this year, and continue drilling to support the model, followed by a pre-feasibility study in 2012. So that concludes my comments. I'll now turn the call over to Jamie to discuss our results and financial position in more detail. Jamie?
Thanks, Aaron. As Aaron mentioned, 2010 was an excellent year for Barrick, with both higher production and lower costs than the previous year. Our gold production of 7.8 million ounces for the year was 5% higher than a year ago, and our cash margins continue to benefit from the higher gold prices. On a total cash cost basis, our cash margins increased 48% to $771 per ounce versus gold's 26% rise. While on a net cash cost basis, margins were 42% higher at $887 per ounce. These expanding margins translated into record earnings and cash flow for the company. Adjusted net income of $3.3 billion for the year was 81% higher than the prior year, while adjusted operating cash flow rose 65% to $4.8 billion. When we eliminated the hedge book in late 2009, there remained a settlement obligation to our counterparties, which wasn't tied to the gold price of just over $650 million, which was essentially an interest-bearing liability. We had left this outstanding at the time, since it provided additional long-term bank financing at attractive terms. However, with our strong cash and operating cash flow positions, we decided to repay the liability, and that was required to go through operating cash flow on our financial statements with no impact on earnings, of course. So the difference between reported operating cash flow of $4.1 billion and our adjusted cash flow of $4.8 billion is the payment to eliminate this liability in the fourth quarter of 2010. And I think it's also important to note that we generated free cash flow of about $1.5 billion in 2010 even after significant investment in our development projects. The company has shown significant margin expansion in the past several years as we continue to benefit from the rising gold prices. Our total cash margins increased by 48% to the $771 per ounce shown on this chart or 63% of sales in 2010 compared to the $521 per ounce or 53% of sales in the previous year. And as you can see, we held the line on cash costs in 2010 despite the fact that there were increased royalties and taxes associated with the higher gold prices, which went through our cash cost line. On a net cash cost basis, margin expansion is even more significant, rising to almost $900 per ounce or 72% of sales for 2010, and expanding to 76% of sales or $1,042 per ounce in the fourth quarter based on net cash costs of $326 per ounce. For 2011, assuming our net cost cash cost guidance of $340 to $380 per ounce and gold prices over $1,300 per ounce, combined with the strong copper prices, our net cash margins would continue to be well over $900 per ounce. Turning to our production and cost profile for 2011. We expect production levels to be similar to 2010 at between 7.6 million and 8 million ounces of gold. Total cash costs are anticipated to be between $450 and $480 per ounce on an IFRS basis or net cash costs of between $340 and $380 per ounce, which is based on an expected realized copper price of $3.75 per pound. The higher expected gold cash costs for 2011 primarily reflect lower grades due to mine sequencing and the impact of higher gold prices, as well as the higher labor costs in South America and Australia, although we do expect to benefit from our Australian dollar currency hedges, which are significantly below current rates. We've hedged over 90% of our Australian operating and capital expenditures for 2011 at an average rate of $0.79. That's about 20% below the current Australian dollar rate of about $1. And we're also 84% covered for 2012 of an even lower average rate of $0.75, and we also have substantial coverage for the following two years at rates at or below $0.75 or 25% below the current rate. And through our fuel hedges, we have very little exposure to changes in the oil price. In fact, the $10 change in WTI crude oil prices is also only expected to impact our cash cost by well under $1 per ounce. And within the next five years, production is anticipated to climb to our targeted annual production of 9 million ounces, when the contributions from Pueblo Viejo and Pascua-Lama and our other organic opportunities come onstream, with Pueblo Viejo and Pascua-Lama being at cash costs well under our current cash costs. As we highlighted in our third quarter report and conference call, we're switching to IFRS in 2011. So our 2011 guidance has been done under IFRS, and our first financial report under IFRS will be the first quarter of this year. This will put us on a more level playing field with the global mining industry and in particular, a number of senior gold producers currently reporting under IFRS or Canadian GAAP, which is actually more similar to IFRS in many ways than U.S. GAAP is. I'll mention two of the more significant policy differences between IFRS and U.S. GAAP, which include the accounting for production waste stripping and exploration and evaluation costs. Under IFRS, production waste stripping costs with a future economic benefit are capitalized, whereas under U.S. GAAP, they are expensed and included in cash costs. Under U.S. GAAP, exploration and evaluation expenditures can only be capitalized once proven and probable reserves are established under SEC rules, which are more restrictive. Under IFRS, these costs, which have a probable future benefit, are eligible for capitalization. We are presently close to finalizing calculations of the impact of IFRS on our 2010 results, and we've included preliminary information in our year-end release to allow for a comparison between the two standards. Under IFRS, approximately $330 million in production waste stripping and $90 million in exploration and evaluation costs would have been capitalized in 2010. And hence, we would have reported about $420 million of higher operating cash flow and capital expenditures, but lower cash costs. So taking a look at our capital expenditure outlook for the year, in 2011, CapEx is expected to range from $4.2 billion to $4.65 billion, which really reflects the continued intensity of construction activities at Pueblo Viejo and Pascua-Lama. In addition, the open pit and underground development guidance of $750 million to $850 million includes waste stripping costs, which are capitalized under IFRS as I have mentioned. The waste stripping costs are particularly high this year due to large waste stripping phases at both Cortez and Goldstrike, which are expected to be substantially completed by the end of the year. Mine site expansion capital is anticipated to range from $450 million to $500 million as we pursue projects at a number of sites, including Lagunas Norte, Goldstrike, Bald Mountain, Cortez and Turquoise Ridge, all of which are expected to increase returns at those properties. The guidance for open pit and underground mine development and mine site expansion contains about $110 million to $120 million in exploration costs that are expected to be capitalized at properties such as Turquoise Ridge, North Mara and Cortez on the basis that they are expected to have a probable future benefit under IFRS. Finally, our sustaining capital is expected to be in the range of $900 million to $1 billion. And our strong balance sheet positions us very well to continue funding our current operations and the projects and the CapEx program, while also affording us the flexibility to pursue other high-return value creation opportunities. We continue to maintain the gold industry's only A credit rating and at the end of 2010, this was supported by a cash balance of about $4 billion, an undrawn credit facility of $1.5 billion, and very strong operating cash flow generation, as well as low net debt of only $2.5 billion. And we've paid a dividend continuously for 23 straight years. And I think it's important to reiterate that as gold prices have strengthened over the past few years, we've been able to increase our dividend a number of times, resulting in an increase of almost 120% since 2006, including the 20% increase that Aaron mentioned last year. Like to make a few comments about the gold price, and some investors have asked us whether gold is in a bubble similar to what occurred with the tech stocks in 2000 or that spike that occurred in the gold price in 1980 during a period of hyperinflation. But if you look at this chart, which compares the current gold market since the start of 2001, which is the gold line, to the sharp rise that occurred in gold 30 years ago, the green line, and in the NASDAQ with the tech boom in the early part of this decade, the blue line, you'll note the recent gold cycle has actually been quite orderly and modest in comparison, and has not been characterized by the same kind of volatility. In inflation-adjusted terms, the 1980 high equates to approximately $2,400 per ounce today, and we're still more than $1,000 below this peak. And if you look at gold's value compared to other commodities like copper, oil, the gold price today is still below its 30-year average of 343 pounds of copper, and right on the average of 15 barrels of oil. So we're not inclined to view the gold price as being anywhere near the top. In fact, we think it has room to go considerably higher, particularly in view of the continued support of macroeconomic factors, which are driving investment demand including monetary reflation, fiscal policy, sovereign debt concerns and trade, current account and reserve holding imbalances. Also the liberalization and expansion of the gold market in China alone is very supportive of the gold price, and we've seen continued buying and flows into China. On the supply side, central banks also became net buyers for the first time in 21 years last year to address some of the excess foreign-exchange reserves, and we continue to believe that mine supply over the longer term is in a down trend in view of longer permitting timelines and the scarcity of new resources. And clearly, there's no shortage of geopolitical issues that continue where gold can again act as a safe haven. And we feel that Barrick is extremely well-positioned to remain a major beneficiary of these forces for strong gold prices. And you can see that on this chart. We've demonstrated exceptional leverage to the gold price over the years. The company's adjusted earnings and cash flow have substantially outpaced the rise in the gold price over the past five years. While gold is up just over 200% in the last six years, Barrick's cash flows per share have increased by over 400% and earnings per share are up over 600%, demonstrating our excellent leverage. With that, I'll turn it back to Aaron.
Okay. Thank you, Jamie. In closing, as Jamie highlighted, we continue to have a positive outlook for gold, and we are well-positioned to be a major beneficiary, and I think that has been reflected in the financial performance of the company. The fourth quarter was a solid quarter, and I think completes a successful year for the company. We delivered on our operating plans, and with the higher gold prices that has translated into significant margin expansion and record financial results. Cortez exceeded our expectations in 2010, and was an excellent contributor. Our other projects, in particular, PV and Pascua-Lama will have a similar impact when they are in operation within the next few years. We've made good progress in identifying opportunities within our existing asset base to support and grow our production levels in the future, and this has allowed us to establish a new production target of 9 million ounces with the next five years, and we're going to continue to work on that. And our focus on servicing value for our existing assets will remain a key priority for us. And it's clear there are benefits that can be derived; one example of this is Turquoise Ridge, which has the potential to be a world-class asset. Our CS performance has been positive, but as I mentioned, there is room for improvement, and we will continue to look for ways where we can do better and strengthen our performance. So overall, the outlook for our industry and for Barrick continues to be excellent based on today's gold and copper prices. Combined with our production and cost profile, 2011 should be another strong year for the company. That concludes our formal presentation. And at this point, we'd be happy to take your questions.
[Operator Instructions] And our first question comes from the line of John Bridges, JPMorgan.
Just a quick one on Pascua-Lama, since you did the silver streaming deal with Silver Wheaton, how is the accounting for that going to work, and how do you anticipate accounting for that in the cash cost calculations and so on?
Sure. John, what we'll see is essentially, the share of the 25% of Pascua-Lama silver that was sold to Silver Wheaton, effectively, the average rate on that equated to about a $13 per ounce, I guess revenue stream on that silver. So that will actually then form part of the byproduct credit at $13, approximately, that will be credited against the overall cash costs at Pascua-Lama. So on that 25% portion, we will see that rate. And then on the 75% that hasn't been sold, that will just be credited at whatever the spot price rate is.
Okay, so it's very simple. I was afraid that something…
Complicated would come out amount of the new accounting standards.
No, it should be very simple.
Perfect. And on the social corporate responsibility, the best of luck with that. I just wish there was a way we could highlight the positives of the industry. It just seems as if the negative seems to get in the press all the time.
We share your concern and frustration, and we have a lot of programs underway to help improve the situation. So hopefully, we'll get some traction.
And the following question, coming from the line of Patrick Chidley with HSBC.
Just a couple of questions on the reserve changes, resource changes. I note, yes, you did increase the resources quite a lot Turquoise Ridge, which is great. And I guess that is with a concept of this open pit idea that you're working on. I'm wondering if that increase, that resource there has some conceptual economics around it in terms of maybe a strip ratio for the pit?
Can I answer that, Aaron?
You're correct, that increase in resources, primarily the concept of the pit. We have put some sort of rough economics around it, but it's probably too early to actually land on an actual strip ratio. The strip ratio will be fairly high, but the grades there are pretty good, so it will pull a pit with a fairly high strip ratio, we think.
Is fairly higher a range of more than five or less than 10 or…
Probably more than five, but I wouldn't want to land on a number now.
I think you talked about increases at Cortez Hills, I guess. I know you've been doing a lot of exploration work there, and I noticed that the increase in resources at Cortez isn't really that much. I just thought maybe there'd be a bigger increase there this year?
Do you want to answer that, Rob?
Sure. At Cortez Hills, you might recall several years ago, we discovered the Cortez Hills in lower zone. We traced that zone for over a kilometer to the south, and when we basically gave up tracing, it was just getting a little bit too deep to pursue it from the surface. So we're now putting in some development and drilling it out in detail. As we've been extending our drilling away from the base of the pit, we actually have been adding both increased tons and grade as well. So that's coming along quite well, it's infilling quite well. And we're also growing a mineral inventory and in future years, I guess, we expected to grow that significantly.
Okay. So you're growing a mineral inventory there, and is that, I mean, sort of going to be a lot bigger than the current resource, you think, or what sort of dimensions?
I think it's a little bit too early to say. We're also picking up additional mineralization in new stratographic horizons, and that's really only tagged by a few drill holes. It's just too early to say.
Okay, okay. And then finally, just on that reserve table, the resource at Plutonic seemed to go down a lot, by about over a million ounces. And I'm wondering what the reason for that was?
The reason for that is mainly a reinterpretation. Plutonic's a very difficult mine geologically, and we thought it would be prudent to remove some of the reserves on a reinterpretation of some of the drilling.
Okay, so just geology there. And just actually, one more while I'm at it, Reko Diq, you've not put a reserve up there, and yet you've got a feasibility study now. When do you think we should expect some kind of reserve then?
Well, I think on Reko Diq, where we are right now, as I mentioned in my remarks, that we have applied for the mining license, and there are some legal proceedings that are taking place right now in Pakistan, which is centered around the authority of the government of Balochistan to be able to issue the mining lease. And so until we have clarity about that, and I think it'd be premature for us to include anything in our reserves.
Okay. So that's an ongoing issue and I suspect not anytime soon for resolution, is that correct?
No, I wouldn't be that pessimistic. I think that we have had a very, very good dialogue with the government of Balochistan. There's a lot of support for the project. So I would be cautiously optimistic, but I don't want to over promise anything.
And the following question comes from the line of George Topping with Stifel.
Say, could you give us an update on which mines you expect to close over the next five years?
The next closure will be Pierina, which is roughly four years, I think.
Yes, four to five years range. The others, Hemlo was in sort of closure mode, but we've had a life extension there for, I'm just looking at my notes here, of four years up to 2016. So only the next five years, Tulawaka would be probably closing, if we do not continue to find ore underground. So apart from that, I think all the others are plus five years.
And we should say that Hemlo, that there's probably potential to extend it beyond 2016 as well.
Great, great. And so that would include the Pierina, Yilgarn and Kanowna?
Kanowna, they're all plus five years.
The following question coming from the line of Kerry Smith, Haywood Securities.
Jamie, the selective royalty that you're paying now in Chile, is that something that we should just model that it's going to continue to be paid forever, or do you think it's something that as they work through the repayment of the rebuilding of the country that, that will drop away at some point in time?
Well, I think on the royalty, Kerry, you should continue to model that for the next while. We've elected that to pay that royalty and they've established a range that actually is flexible based on the prices. So if prices are high, then you pay a higher royalty. If the prices come back down, then it's a lower royalty. But that's going to continue and we opted in to that, agreed to that payment for an extension of the stabilization. So yes, you should continue to model that. On the taxation front, the increase in the tax rate from the 17% over the next few years, that is a temporary increase in tax, and that will come back down to the 17%, so that has a more temporary nature to it, but the royalties are longer-term, a long-term basis.
Okay. And have they said when the temporary tax increase will drop back to the old rate?
After three years, it'll come back down to the 17% rate, so goes up to 18.5%, 20%. That comes back down to 18.5%, and then 17% on a yearly basis.
Great, okay. And Peter, the higher grades that you talked about at Cortez in 2010, was that a function of the block model underestimating the grade that you actually mined? Or was that a function of mining in different areas than you originally planned to mine? And should we sort of expect that maybe the grades might be modestly better as you go forward here?
Well, I think it's early days yet. We only mine sort of the top of the ore bodies, so it's difficult to judge what's going to happen for the rest. But it's encouraging to see that the current grades are higher than the block model. And are going to continue seeing that? We'd obviously like to see it continue in the future.
Okay. And can you just remind me how much contingency you had built-in to the original CapEx estimate for Pueblo Viejo? I presume you've probably used all that now, and that's part of the reason that you've pushed the CapEx up. But what was the original contingency?
$260 million, on a 100% basis, right?
[Operator Instructions] The following question coming from the line of Greg Barnes, TD Securities.
Aaron, you've seen pretty good cost inflation on the CapEx side, but you still have held the line on the operating cost side. What's the difference?
Well, I think on the capital side, depending on which project you're looking at, and I kind of describe some of the factors that are hitting us, and some of those will also impact us on the operating side as well. But there are, depending on which project, take Pueblo Viejo, for example, there are other opportunities we have, which aren't in the numbers yet, which will positively impact our unit cost. Take PV; right now, we have assumed high-cost power is going to be supplied to the operation derived from HFO [heavy fuel oil] fuel. So we're looking longer term at using natural gas or coal, which could have a significant benefit impact on the cash cost. Pueblo Viejo, as well, we haven't factored in the economics of potentially being able to recover zinc, and that could also have a big impact on lowering our cash cost. So we think that the range that we have, we have enough flexibility within that range, plus there's some other factors, which will probably help us improve on those numbers. In Pascua-Lama, same thing that we have experienced some pressure, but using a $16 silver price, which we have increased slightly in our assumptions, that's kind of offset some of the cost increases that we would have seen. So it's, I guess, a bunch of factors like that, Greg, that give us confidence that the cost numbers are probably pretty sound.
Okay. I was actual thinking more about your 2011 guidance of $450 to $480 per ounce. We've seen the company's report lately that they're seeing their operating costs go up by anywhere up to 15% year-over-year, and you don't seem to be seeing the same pressure. Wondering why.
Yes, look, I think one of the major reasons for our increase in costs year-over-year, probably about half of that increase is due to grade. So we are mining lower grade, but we are experiencing cost pressures when it comes to things such as steel, steel products, other consumables. That being said, we do have a -- we are benefiting from the fact that we have hedges in place. So with respect to the Aussie currency, for example, we've got protection there. Oil, we've got protection as well. So that's insulating us somewhat, but the other benefit is the impact of Cortez. Cortez is going to be sub-$300, so that has a nice impact on pulling down our numbers.
[Operator Instructions] Mr. Regent, we have no more questions at this time.
Okay. Well, operator, thank you very much. And thank you, everyone, for joining our call. We appreciate your questions and if you have any other questions, please let us know. I guess I'll conclude the call at this point, and we look forward to reporting back to you at the end of the first quarter. Thanks very much, and have a great day.
Thank you. Ladies and gentlemen, that does conclude our call for today. We thank you for your participation, and ask that you please disconnect your lines.