More Pain for Barrick in Chile

More Pain for Barrick in ChileBarrick Gold (NYSE:ABX,TSX:ABX) just can’t seem to catch a break. Stock in the Canadian gold miner, the world’s largest in terms of gold production, but not by market capitalization — that honor now belongs to another Canadian mining company, Goldcorp (NYSE:GG,TSX:G) — continued to fall on Tuesday, finally resting at $14.51 in New York and $15.32 in Toronto.

Since the beginning of the year, Toronto-based Barrick has shed over half of its market cap and is now a shadow of its former self, valued at just $14.38 billion versus almost $35 billion in the first week of 2013.

Of course, the share prices of all the gold majors have taken it on the chin in the past two quarters as the gold price has tumbled, but Barrick has taken more of a pummeling than its gold-digging peers.

The latest flogging at the hands of investors came after Barrick said it would have to delay its mammoth Pascua-Lama gold and silver project until the middle of 2016, resulting in a writedown of as much as $5.5 billion. The project is over budget by around the same amount.

Barrick made the announcement on Friday afternoon, clearly hoping to minimize the damage as investors and traders cleared off their desks for the weekend. But when markets opened on Monday, investors were quick to dump the stock, taking it down from an opening price of $16.01 to $15.25, and as far as $14.34 on Tuesday, just a penny shy of its 52-week low. Canadian Barrick investors made up for a trading day holiday on Monday, peeling the stock with a 7.7 percent dip in value.

The company tried to couch Friday’s bad news in positive terms, saying the project will undergo a “re-sequencing” to reduce capital expenditures by $1.5 to $1.8 billion and reduce staff at the site as construction will now be extended over a longer time period.

First production is now targeted for mid-2016 using ore from Chile (the mine straddles Chile and Argentina), and Barrick says it will submit a plan to construct a water management system to Chilean regulatory authorities by the end of 2014, after which remaining construction will be completed included pre-stripping. Pascua Lama was originally slated to begin production in the second half of 2014.

Despite the project capex ballooning from $3 billion to over $8 billion, Barrick CEO Jamie Sokalsky observed that “When complete, Pascua-Lama will be one of the world’s great, low-cost mines, producing an average of 800,000-850,000 ounces of gold per year in its first five years of production,” he said.

Still, the CEO couldn’t hide the fact that the delays and declines in precious metals prices would impact the economics of the project:

“As a result of recent and continued significant declines in gold and silver prices, and the delay in first gold production, Barrick is conducting impairment testing. Preliminary analysis indicates an after-tax impairment charge in the range of approximately $4.5-$5.5 billion in the second quarter for the Pascua-Lama project,” Barrick announced. “The company will complete a final impairment assessment by its second quarter 2013 results release.” And then it got worse:

“In light of the lower metal price environment, Barrick is also reviewing its other assets, including goodwill, for possible impairment charges in the second quarter, which, although dependent on various analyses and assumptions which have not been finalized, are likely to be significant.”

Writedowns are becoming a common occurrence in the gold mining industry as acquisitions made by gold companies in the post-2008 boom days come home to roost in an era of sub-$1,300 gold and soaring costs. Bloomberg reported in June that its index of 14 large gold miners shows that these companies have written off about $17 billion worth of assets in the last 16 months. The most telling example came last month when Australian gold miner Newcrest (ASX:NCM,TSX:NM) said it will write down the value of its mines by as much as $5.5 billion – the biggest one-time charge in gold mining history, although that number has now been matched by Barrick.

Along with the deteriorating economics of the project, Barrick has also faced legal troubles in Chile, where indigenous peoples are suing the company over claims that development work has damaged water supplies and glaciers that feed local streams. In May, the country’s environmental superintendent ordered that all work at Pascua-Lama be halted due to serious environmental violations and levied on Barrick a record fine of $16 million.

Despite the obstacles, one of Barrick’s partners in Chile is not giving up on the company or the project, even as another tried to deflect responsibility. Silver Wheaton, (NYSE:SLW, TSX:SLW) which has a streaming agreement with Barrick for silver produced from the mine, said Tuesday it would extend a completion guarantee by a year, from the end of 2015 to year-end 2016. That means for the next two a half years, SLW will be entitled to silver produced from Barrick’s other three South American mines, to make up for the shortfall at Pascua-Lama.

If Barrick fails to honor the agreement, it would be obligated to return the $625 million in upfront cash (less silver delivered up to end of 2016) that Silver Wheaton has already invested.

“As long as Barrick is still advancing construction of Pascua-Lama at the end of 2015, Silver Wheaton does not intend to cancel the silver stream”, Silver Wheaton CEO Randy Smallwood said in a statement, adding: “We are in regular contact with Barrick, and are confident that all the right measures are being taken to achieve production at this mine.”

Nevertheless, SLW said it is revising down its 2017 production forecast from 53 million silver-equivalent ounces to 49 million to account for the delay, while maintaining 2013 production guidance of 33.5 million ounces. Pascua-Lama is estimated to yield SLW an annual silver stream of 9 million ounces.

Royal Gold (TSX:RGL), which has a sliding scale net smelter royalty on the Chilean side of Pascua Lama, was less sanguine, saying Monday that the company “is not responsible for capital costs or other costs of the project.”

Mineweb quoted Scotiabank analysts as saying that Barrick will likely continue to deliver 2 million to 3 million silver ounces from its three South American operations in 2015. However, the bank cut Silver Wheaton’s net asset value from $26.32 per share to $26.08 “as the delay of Pascua-Lama’s production is not fully offset by production from Barrick’s other operations.”

Scotiabank reduced its target share price for Royal Gold from $71 to $65, and its one-year target price for Barrick from $26.50 to $23, according to Mineweb.

 

Securities Disclosure: I, Andrew Topf, own stock in Goldcorp and Silver Wheaton. 

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