Barrick Gold: Burning the Furniture to Heat the House?


In for a penny, in for a pound, as the saying goes, and it could apply to gold miner Barrick Gold , which continues to slog through its Pascua-Lama project in Chile despite costs that keep running higher.

Pascua-Lama gold and silver project, Chile
Source: Barrick Gold, Denver Gold Forum Presentation

At a gold investors' forum in Denver Tuesday, the world's biggest gold miner said that, had it known from the start what it knows now of the regulatory and financial hurdles in its path, it likely never would have begun the undertaking.

"The current economics of this project aren't as robust as it would need to be to greenlight a new project," said Barrick CEO Jamie Sokalsky. But since it's already there, and it's gone through all the trouble and expense, it may as well forge ahead and see it through.

There's some reason to it too. Pascua-Lama is one of the world's largest gold and silver resources, expected to produce an average of 800,000 to 850,000 ounces of gold and 35 million ounces of silver in its first five years of operation. With an expected mine life of 25 years, it's said to possess nearly 18 million ounces of proven and probable gold reserves and 676 million ounces of silver.

But costs have continued to mount, and, while it's reducing its capital expenditures by $1.5 billion to $1.8 billion this year and next by extending the construction timetable over a longer period, it still had to take an impairment charge on the project in excess of $5 billion last quarter.

Barrick hasn't been the only miner beset by troubles that spun dreams of vast gold wealth into nightmares of straw. Kinross Gold thought it had "one of the most exciting gold discoveries of the past 15 years" in Ecuador's Fruta del Norte, but so did the South American country's government, which passed a usurious windfall profits tax designed to seize 70% of all profits above the negotiated base price for the metals mined. The miner was forced to walk away.

And then there's Newmont Mining which had to shut down its $4.8 billion Conga gold project in Peru following local opposition that believed it would wreak environmental havoc. While it's received hopeful assurances from the government that it could soon restart -- and Southern Copper has gotten the same vibe for its Tia Maria mine, also closed for similar reasons -- there remains much doubt it will actually make progress.

Unlike its industry peers, however, Barrick continues to slash costs to maximize shareholder value. At that same Denver conference, the gold miner highlighted its slashing of its 2013 guidance for all-in cash costs by $100 per ounce, with three quarters of its production this year being mined at just $800 per ounce. Fully 60% of that will come from just five mines -- Cortez and Goldstrike in Nevada, Veladero in Argentina, Lagunas Norte in Peru, and Pueblo Viejo in the Dominican Republic -- and they'll be producing at an average of $700 an ounce.

Of those five, the biggest -- Cortez -- also happens to be one of the world's largest and lowest-cost gold mines, with all-in cash costs of $392 per ounce and adjusted operating costs of just $179 per ounce.

Source: Barrick Gold, Denver Gold Forum presentation

Despite all the cost savings Barrick is engineering, though, it's still looking to offload non-core projects. Last month it agreed to sell to Gold Fields its interests in three Australian operations, for $300 million, and said it wants to sell 12 of its 27 existing mines. The miner would even consider entering into a joint venture with Newmont if it meant reducing costs. There's also an increasing likelihood that over the next 12 to 18 months it will sell its African Barrick Gold subsidiary, in which it still holds a 74% interest.

Yet Pascua-Lama remains an albatross. Certainly, gold prices as weak as those the industry's experienced over the past six months or so play a role in the decision-making process, but, when you're talking about a mine with a 25-year life span, CEO Sokalsky says it's a very minor one.

While the miner's toyed with the idea of abandoning the project if it couldn't get it started, Barrick seems resigned at this point to seeing it through. But that could be just throwing good money after bad if opposition to the project remains intransigent, and it could end up burning the house down around itself because of dogged determination to get through to the other side.

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