Barrick Gold Dealt Setback At Mega Mine By Chilean Court Ruling

| About: Barrick Gold (ABX)

A Chilean court has suspended work at Barrick Gold Corporation‘s (NYSE:ABX) Pascua Lama mine after indigenous communities complained that the project is threatening their water supply and polluting glaciers. The appeals court in the northern city of Copiapo charged Barrick with environmental irregularities during construction of the mine, which straddles the Chile-Argentina border, and is the highest altitude gold and silver mine in the world. [1]

The company said that it would follow the court’s orders and suspend construction work on the Chilean side of the project while working to address environmental and other regulatory requirements to the satisfaction of the Chilean authorities. The company says that it can still continue construction activities in Argentina, where the majority of Pascua Lama’s critical infrastructure is located, including a process plant and a tailings storage facility. [2]

This ruling adds to the long list of problems that have plagued the Pascua Lama project, which is crucial to Barrick Gold’s future. There have been massive time and cost overruns at the mine already. After the latest setback, the company said that it was too early to assess the impact, if any, on the overall capital budget and schedule of the project.

Pascua Lama’s Potential

According to the latest available figures, Pascua Lama has proven and probable reserves of 17.9 million ounces of gold, 676 million ounces of silver contained within the gold reserves, and a mine life of 25 years. Once production begins, Barrick expects to produce 0.80-0.85 million ounces of gold and 35 million ounces of silver annually. In 2012, the company had a total gold production of 7.42 million ounces of gold. It aims to produce 8 million ounces by 2016, and Pascua Lama is integral to achievement of this target. [3]

Cost Profile

Once in operation, PascuaLama is expected to be one of the world’s largest low cost mines and is expected to contribute significant free cash flow to Barrick for many years to come.

In 2012, Barrick reported an all-in sustaining cash cost of $945 per ounce of gold. In contrast, the all-in sustaining cash cost at Pascua Lama is expected to be $50-200 per ounce. Including depreciation of capital expenditure incurred in mine construction, costs are not expected to exceed $550-700 per ounce. One must note that all cash cost estimates are based on gold, silver and West Texas Intermediate (WTI) oil price assumptions of $1,700 per ounce, $30 per ounce and $90 per barrel, respectively.

Barrick estimates that the all-in sustaining cash cost will increase to $1,000-1,100 per ounce in 2013. Hence, when Pascua Lama comes into operation in 2014, we expect this figure to decline.

Problems At The Project

At the end of Q2 2012, Barrick Gold announced a 50-60% increase in capital costs for the Pascua Lama gold mine from the top end of the previously announced estimate of $4.7-$5 billion, and delayed first production to mid-2014 from the earlier estimate of mid-2013.

The company attributed increased costs to a combination of high inflation in Argentina and Chile, lower-than-expected contractor productivity, schedule extension and engineering, and planning gaps. Project execution had been tardy due to the challenging physical environment at high altitudes and the company’s decision to use in-house capabilities rather than outsourcing the work to external partners. The management was put under the microscope for not having detected such serious problems earlier. (Barrick Gold Management Discusses Q2 2012 Results – Earnings Call Transcript, SeekingAlpha)

At the end of Q3 2012, Barrick once again increased the capital expenditure planned for the project by nearly $1 billion. According to CEO Jamie Sokalsky, the increase in total construction cost at Pascua Lama can be split approximately equally between the impact of the delay of first gold production to the second half of 2014, increased labor hours and installation rates. It also had to make additional payments to Fluor, the company now handling the project management, as an incentive to bring the project online on time. There have been no further increases since then. (Q3 2012 Earnings Conference Call, Seeking Alpha)

The total capital expenditure planned for the project now stands at $8-8.5 billion, including a 15-20% contingency on the amount that remains to be spent. The construction is approximately 40% complete and around $4.2 billion have been spent so far.

Before the latest ruling, Pascua Lama was supposed to begin production in the second half of 2014, but now even that seems in doubt. The suspension ordered by the court does not specify a time period for the same so it could be days, weeks or even months before work can resume on the Chilean side.


  1. Chile court suspends work at Barrick Gold mine, CBC News
  2. Barrick to Suspend Construction on Chilean Side of Pascua-Lama, Barrick Gold Press Release
  3. BMO Global Metals and Mining Conference, Barrick Gold Presentation

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