Hope For Barrick Gold's Pascua Lama Project, Guidance On Gold Prices And Miners

by: Emmet Kodesh

Several recent news alerts are highly relevant to price guidance, profitability and investment in Barrick Gold (NYSE:ABX) and other precious metal miners, notably Gold Corp. (NYSE:GG) and Kinross Gold (NYSE:KGC). The guidance identifies the healthier miners and affects the mining sector generally.

First, Deutsche Bank announced a 2013 gold price estimate of $1637. This is very different from the Goldman Sachs revised estimate of $1450 and advice last week that its clients short sell the metal, guidance it has reiterated. Goldman's call helped drive Au prices below $1350/oz, the biggest drop in 25 years. The plunge in gold and silver prices crashed nearly all mining shares, precious, base and other commodity miners. Regarding the waterfall drop that triggered stops, margin calls and panic selling, John Hathaway, Senior Managing Director of Tocqueville Asset Management writes that on Friday and Monday more than 1 million contracts of "paper gold" were traded, 12% more than a year's total annual gold production. This is an example of the damage that derivative trading can do to markets and investors. Hathaway also believes that weakness in global persists and has "only been papered over" since 2008 by aggressive monetary policy. Thus the need for precious metals as a hedge remains strong and suggests holding bullion and patience while the tree is being shaken.

Deutsche Bank's divergent opinion went beyond its gold target price to address particular major miners. Analyst Jorge Beristain acknowledged the turbulent times for PM (precious metal) miners but said that "in a market that is throwing the baby out with the bathwater … investors looking for 'relative' safety should favor stocks with lower balance sheet risks." He identified the "highest quality balance sheets" as Gold Corp., Kinross Gold, Newmont Mining (NYSE:NEM) and Barrick Gold "in that order" (Street Insider article linked above). These are the PM miners with the lowest "balance sheet risk" in his view.

There was more good news for Barrick, which has suffered a two-year string of blows and ongoing problems at major development projects in Pakistan, Zambia, the Dominican Republic and Chile as reviewed in a recent article. Reuters reports that Barrick CEO Jamie Sokalsky has appointed two experienced Chilean mining executives to assist it with government relations and as representatives with local authorities. These appointments, together with Barrick's announcement that Pascua Lama remains its "Number 1 global priority", enhances the possibility that ways will be found to advance the large high altitude project currently stayed by a court over concerns about an adjoining glacier, drinking water and dust from mine tailings. Barrick stated that it is "taking all the necessary steps to advance in an appropriate fashion on the Chilean side of the project" (work on the Argentinian side of the border is not affected by the court ruling). While Barrick is situating its operations almost 45% in Nevada, Pascua Lama is key to its near and mid-term viability as a major miner so its focus and initiative are vital.

As its chief liaison to the Chilean government on regulatory issues, Barrick named as Deputy Director Marcelo Awad former head of Chilean mining giant Antofagasta Minerals. Awad had worked with Barrick when Antofagasta partnered with it in developing the Reko Diq site in Pakistan. Reko Diq was stalled in 2011 and quashed by a Pakistani court in January this year increasing Pascua Lama's importance to the company's prospects. According to the Reuters note linked above, Barrick simultaneously announced that Eduardo Flores, formerly General Manager of Gold Corp.'s El Morro project will become senior VP for Pascua Lama. The mine is projected to be one of the largest in the world with a production cost currently estimated at $100/oz, a fraction of the industry average.

Having Chilean representatives at top management levels should help defuse political opposition to Pascua Lama at a time when concerns about distribution of mining profits are hotly debated. Advancing the project with experienced national professionals could be a template for progress on Rio Tinto's (NYSE:RIO) Oyu Tolgoi mine in Mongolia. Oyu Tolgoi is owned by Rio's subsidiary Turquoise Hill (NYSE:TRQ) and the Mongolian government 66-34% and junior miner Entrée Gold (NYSEMKT:EGI) has the rights to develop the precious metals resources primarily on the northern part of the property. Many articles on RIO and TRQ's saga in Mongolia may be found on Seeking Alpha.

Barrick's initiative and the statement by Deutsche Bank may have a significant positive impact on what has become a rout of precious metals and miners with panic trading induced by short-selling and margin calls following the drop in spot bullion prices. Trading on Wednesday was heavy with mixed results for miners though gold rebounded. Note that the news on Pascua Lama and the Deutsche Bank guidance is counter pointed by analysts at RBC Capital who yesterday suggested that if gold remains below $1400/oz Barrick, Kinross, Newmont and other miners like Agnico-Eagle (NYSE:AEM) and Osisko (OSKFF) could have their credit lowered, in some cases to junk bond status. So the gold price will increase its whiplash effect on miners generally but the structural and personnel changes at Barrick are likely to give it traction regardless of which estimate proves more accurate.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ABX, KGC over 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.