Barrick Gold Waves the White Flag

Barrick Gold Waves the White Flag

Gold miner Barrick Gold followed through on its threat to suspend its potentially lucrative but stuck-in-limbo Pascua-Lama project in Chile.

With the government hounding it for alleged environmental violations, local indigenous tribes arrayed against it, threats of strikes by workers, and costs continuing to spiral upwards, the miner has finally thrown in the towel and said it will "temporarily" suspend all construction work at the project until some undetermined date in the future.

I'm not so sure the suspension isn't a closed-for-good action, despite the riches the mine holds.

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, and it has 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 if Barrick can't surmount the opposition to the project, it can't keep wasting resources on it.

The suspension necessitated that it renegotiate the contract it has with Silver Wheaton , which was anticipating taking 25% of the silver streams from Pascua-Lama. Because Barrick was contractually required to have 75% of the construction completed by the end of 2015, something that obviously wasn't going to happen, the silver streamer could have demanded back the upfront payments it gave the miner, minus credits for silver already received from three South American mines where it had been getting 100% of their streams and which was scheduled to end this year. As of the end of September, the payback figure stood at $371 million.

Instead Silver Wheaton agreed to extend the timeline for completion out to Dec. 31, 2017, in return for continuing to receive silver production from the South American mines until the end of 2016.

While the new agreement gives Barrick a little more breathing room, the miner has watched its balance sheet come unglued as debt mounted to more than $15.4 billion and interest payments surged 20% from the year-ago period. While gold production rose 4% year over year as it increased mining activity at its Cortez, Pierina, and Pueblo Viejo mines, the ore grade achieved was lower such that average mill head grades dropped 2% in the quarter. As for copper, production was 24% higher this quarter than last year, yet total tons mined fell 18% as mining activity at Lumwana fell because of a reduction in waste stripping activities.

To address its burdensome debt load, Barrick also said it would dip into the equities markets, raising $3 billion by issuing 163.5 million shares with an overallotment option for up to an additional 24.5 million shares at $18.35 per share. The 10% discount to where it was trading before the announcement caused the stock to promptly fall. Along with the price of gold tumbling $24, or 2%, after it was rumored the Federal Reserve might ease up on its quantitative easing program sooner than expected, gold stocks generally tumbled in sympathy, falling around 5% or so.

Newmont Mining was spared most of the bloodletting of its counterparts, having the good fortune to report earnings that beat analysts expectations by a big $0.11 per share. Even so, its shares pulled back by more than 2%. Its Conga project in Peru is similarly on hold, as is Pebble Mine in Alaska, the largest undeveloped copper-gold-molybdenum deposit in the world, being developed by Northern Dynasty Minerals, Rio Tinto, and Anglo American.

Barrick is planning on using the stock issuance to strengthen its wobbly balance sheet, taking $2.6 billion of the $2.9 billion in net proceeds it expects to receive and pay off some of its debt.

While that should help stabilize the miner a bit, risks abound for investors, as Barrick has said it wouldn't be building any new mines and its production levels could be jeopardized. Earlier this year, some investors doubted it would carry through on its threat when I said it was checkmated in Chile, and the fact that it has now done so shows the dire straits that project is in.

Barrick Gold is lowering its debt load some, but production is going to be lower, and gold prices are still falling. It's not just the miner that's waving a white flag here, as investors may soon do the same thing.

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