Has Barrick Gold Deceived Investors?

Dec.10.13 | About: Barrick Gold (ABX)

According to the City of Brockton Retirement System, which has filed a class action suit against Barrick Gold (NYSE:ABX), the answer to the question posed in the title is a resounding "Yes". This organization believes that Barrick Gold concealed the following facts from the investing public during the period of May 7 2009 to May 23 2013:

  • The company knew that the costs of bringing the Pascua Lama Project into production far exceeded any of Barrick's publicly presented estimates;
  • the Pascua Lama Project could not come into production within any of Barrick's various publicly presented time horizons;
  • the Pascua Lama project was not in compliance with key elements of its environmental protection program, imperiling the survival of the entire project; and
  • as a result the Defendant [Barrick Gold, ed.] had no reasonable basis for their statements regarding the cost, timing and production estimates for the Pascua Lama project, the company's compliance with environmental rules and regulations, and the reserves and earnings guidance for the company that Defendants provided to investors.

The Pascua Lama project has been a thorn in the side of Barrick Gold for a while and may well turn into a nail in the coffin in due time. Pascua Lama sits on the Chilean-Argentinean border at high altitude in a very sensitive environment. Permission to build the mine was granted under strict environmental constraints. After overspending by several billion dollars and running behind schedule by several years the project has been put on hold by Barrick Gold, but is also under investigation by Chilean authorities for alleged breaches of the environmental requirements outlined in the construction permit.

The allegations listed in the court documents are not plucked out of thin air, but are supported by four witnesses including:

  • a former manager at the Pascua-Lama Project;
  • a former operations manager at the Pascua-Lama Project;
  • a former Barrick employee who took part in the Company's financial reporting process;
  • a labor relations employee at the Pascua-Lama Project during the years 2010 and 2011.

The documents filed under this class action claim that Barrick Gold knew as early as 2008 that building the Pascua Lama mine would exceed the budget and the time frame announced to investors. According to witnesses a technical report to this regard was known to Barrick directors, but never published. It took until February 2011 for Barrick to acknowledge cost overruns at Pascua Lama for the first time; and it took several more reports and announcements for investors to find out the full extent of the catastrophe that this project had turned into.

The documents filed with courts also describe systematic ignorance of water and dust management requirements at the construction site. These protective measures would have been instrumental in protecting the glacial and peri-glacial environment around the mine, and the water run-off to the valley and the people below. If witnesses are telling the truth then Barrick actively decided against putting in the required environmental infrastructure for the sake of speeding up the delayed construction. And apparently this systematic breach at the construction site was known all the way to top management.

When Chilean authorities issued an injunction halting construction activities on the Chilean side of the mine site in April 2013 it was for these breaches of the environmental rules outlined in the construction permit. Barrick Gold has since suspended mine construction all together.

If proven true the emerging picture is of a company that turns a pretty face to the investing public, but shows quite another and much uglier face on the ground at its operations. This strategy may work in some places, but does not seem to be working for the company and its investors in Chile where rule of law is generally respected and environmental agreements are enforced.

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.