The uphill struggle for Barrick Gold (NYSE:ABX) to finally bring the Pascua-Lama mine into production hit another snag last week when a Chilean court ordered all works on the Chilean side of the project to cease pending a decision on a complaint filed by a group of native indigenous people. Court sources quoted by Reuters anticipate the dispute to go to the Chilean Supreme Court, which could mean delays to the order of several months. The suspension is the latest in a series of setbacks to the Pascua-Lama project. Target dates for initial production have been delayed, and cost estimates had to be corrected at least twice.
When completed, the Pascua-Lama mine will be the largest and one of the lowest cost gold mines worldwide. The mine straddles the border between Chile and Argentina at elevations up to 5200m (1700ft). The Pascua-Lama Mine hosts 17.9M ounces of gold and 676M ounces of silver within the proven and probable gold reserves.
Quite a few articles here on Seeking Alpha have been published on the latest stumbling block on the way to production and we would like to recommend this article (and this one, and this one) for further reading on various aspects of this topic. However, it is this article by fellow author Emmet Kodesh that we would like to respond to with our present offering. Emmet Kodesh compares the problems that Barrick Gold is facing on the Chilean-Argentinean border with other problems this company has come up against in recent times, most notably the disaster of the Reko Diq project in Pakistan, or the pressure that Barrick is facing in the Dominican Republic. Emmet Kodesh goes on to argue, that overblown and selective opposition by various NGOs and especially Greenpeace leads to the loss of jobs, wealth and value creation and specifically uses the Pascua-Lama mine as an example.
The mine has faced stiff opposition by environmental groups and local indigenous groups from the outset. And quite possibly rightfully so, we would like to argue in this article. Here are two premises for our argument:
- The Pascua-Lama project is being developed in the most fragile environment known to man. Much of the land around the mine and associated infrastructure is glaciated, the bare ground is frozen most times of year and precipitation is scarce. Vegetation that grows here is hardy but extremely slow growing. The glaciers and the water stored in the perma-frozen ground serve as natural regulators for the water supply further downstream for water courses originating in the area. Modifications to such a landscape are irreversible within human time frames and have massive consequences not only in the immediate vicinity of the mine but also at distance. Greenpeace are correct in saying that "Glaciers can't be repaired".
- The area affected by the mine is very scarcely populated, for obvious reasons. The number of people directly affected by the mine is therefore small. The mine will employ thousands of people, but these people will for the most part not be sourced from the local population. The local and mostly indigenous people stand to lose their land, their water, and their life style. In any Western society it would be natural to take special care of these people and to offer them appropriate solutions and compensation.
From personal experience we have come to understand that most environmental concerns to do with large infrastructure projects can be resolved or mitigated by application of appropriate technology. In many cases environmental problems are anticipated not only by environmental activists, but also by responsible engineers and planners. Procedures are in place in Western democracies to formalize a process of integration of all stake holders in a given project in order to find solutions for their concerns. These procedures sometimes lead to painful delays and seemingly endless discussions, but overall we strongly believe that these processes lead to better and more sustainable pieces of infrastructure.
The same can be said for social issues arising in the course of large infrastructure projects. From experience we would like to suggest that social dissent associated with large infrastructure projects can usually be overcome by meaningful dialog and the willingness to compromise. A fair balance between reaping benefits for the wider society of a country while still respecting the rights of minorities can be found in most cases.
Chile is a highly developed country with procedures in place to ensure the rule of law and a robust democratic culture to boot. Chile has mining legislation with clear and sensible rules, a capable work force and stable political conditions. The Chilean government strongly supports foreign investment in the mining sector. Don't just take our word for it; the latest edition of the Fraser Institute's Mining Survey bears ample testimony provided by mining executives supporting these statements. In terms of country risk Chile is on par with the USA or Australia.
So why is it, that this particular project is hampered by one (costly) setback after another?
Could it be that Barrick Gold has not done the necessary homework in terms of environmental and social planning and consulting necessary for such a vast project in a developed country? Could it be that social issues have not been addressed appropriately during the planning phase? Or worse, could it be that issues have been addressed, but solutions are not being implemented and shortcuts are chosen?
There certainly seems to be some evidence supporting such a suspicion if one is prepared to dig through propaganda mounting from both sides of the argument.
Here is a link to an open letter dated May 2012 from the Diaguita Huascoaltinos Indigenous and Agricultural Community, the very people that caused the latest delay by filing for suspension of the ongoing development work. There is a lot more material from this people available in the public domain for those willing to look for it. The tone of their communication is typically measured, but their desperation is palpable. One can't help but suspect that the concerns of this minority has not been taken seriously enough by Barrick Gold.
And here is a link to a document containing evidence that glaciers are already heavily impacted by mine development work, contrary to what is stated on the Barrick web site. Again, there is much more material publicly available for those wishing to dig.
Barrick Gold is the world's largest gold mining company. Their market capitalisation of $19.8B is almost a tenth of the Chilean GDP and a former Canadian prime minister is serving on their board. Barrick has a history of getting mines into production and overcoming problems against sometimes substantial opposition. Could it be, that they have become too used to getting what they want without caring enough for other stake holders in projects? There is an entire web site dedicated to protesting against Barrick's way of operating mines. We are not aware of any other major gold mining company drawing as much opposition as Barrick Gold. We wonder if this is really just selective targeting by certain environmental activists as Emmet Kodesh's article seems to suggest and we cannot help but think that a more inclusive approach to this particular project would have provided a more favourable outcome for the Pascua-Lama project.
If our nagging suspicions are correct then this would not bode well for Barrick's financial performance in coming years. We believe that rules will not be bent in Chile and the course of law will be followed. For Barrick this might mean more bad news to come. Any further delay or additional cost will weigh on the company's balance sheet and put further pressure on the already depressed share price.
To finish, here is another piece of personal experience from your humble scribe: Sometimes the cost of technology necessary to manage environmental problems is prohibitive; and sometimes the cost of managing social issues is prohibitive as well. In such a case, walking away from a project may just be the right decision. We cannot help but think that the Pascua-Lama mine might just be such a project.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.