Barrick puts Pascua-Lama on slow track, eyes US$5B writedown, job cuts

When you’re in trouble, by all means keep digging, but just slow down the pace a bit. At least that is the solution Barrick Gold (ABX-T, ABX-N) has devised for its bloated Pascua-Lama gold mine project under construction in Chile and Argentina. 

In a release put out the evening of June 28 before the Canada Day long weekend, Barrick stated that it had submitted a plan — subject to review by Chilean regulatory authorities — to build the project’s water-management system for completion by the end of 2014, after which it expects to complete remaining construction works in Chile, including pre-stripping. That means ore from Chile would be available for processing by mid-2016.

More to the point, Barrick said that “in line with this time frame, and in light of challenging market conditions and materially lower metal prices, the company intends to re-sequence construction of the process plant and other facilities in Argentina in order to target first production by mid-2016 [compared to the previous schedule of the second half of 2014].”

It noted that re-sequencing the project “primarily entails a reduction in project-staffing levels, as construction is extended over a longer period of time to coincide with the availability of ore from Chile in mid-2016.”

On the upside, this will reduce planned capital spending in 2013 and 2014 by US$1.5 to US$1.8 billion.  Barrick will update the total capital cost of the mine before October, once the re-sequencing schedule is finalized. 

Barrick says it is conducting impairment testing “as a result of recent and continued significant declines in gold and silver prices, and the delay in first gold production,” and that preliminary analysis indicates an after-tax asset impairment charge in the range of US$4.5 to US$5.5 billion in the second quarter of 2013.

Silver Wheaton (SLW-T, SLW-N) has a silver-streaming agreement with Barrick at Pascua-Lama, and has told its shareholders that it is cutting its 2017 production forecast to 49 million equivalent oz. silver from 53 million oz. to reflect the delay at Pascua-Lama. Silver Wheaton still expects 33.5 million equivalent oz. silver production this year.

Silver Wheaton notes that its contract with Barrick provides Silver Wheaton with a completion guarantee, requiring Barrick to complete Pascua-Lama to at least 75% of design capacity by Dec. 31, 2015. During 2014 and 2015, Silver Wheaton says it will be entitled to silver production from three of Barrick’s producing mines — Lagunas Norte and Pierina in Peru, and Veladero in Argentina — to “the extent of any production shortfall at Pascua-Lama, until Barrick satisfies the completion guarantee.” 

Furthermore, if the requirements of the completion guarantee have not been satisfied by an outside completion date of Dec. 31, 2015, Silver Wheaton says it may terminate the agreement.

Silver Wheaton has agreed to extend the outside completion date for Pascua-Lama to Dec. 31, 2016, adding that “in such an event, Silver Wheaton will be entitled to returning the upfront cash consideration of $625 million less a credit for silver delivered up to Dec. 31, 2016. Silver deliveries from the other three mines will still end at the end of 2015, to the extent of any Pascua-Lama production shortfalls.”

In a release, Silver Wheaton president and CEO Randy Smallwood says that “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.”

With the price of gold down more than 20% this year, its share price down more than 50% in eight months and setbacks piling up at its operating and developing mines, Barrick is laying off 30% of its corporate staff.

The move puts Barrick on a growing list of gold miners turning to layoffs to cut costs. Fellow gold majors Newmont Mining (NMC-T, NEM-N) and Newcrest Mining (NM-T) have also announced layoffs of late, with Newmont eliminating a third of the positions at its Denver headquarters and Newcrest, Australia’s largest listed gold miner, closing its Brisbane office as part of an effort to slash overall spending by 20%.

Barrick is cutting about 100 office positions — most of them from its home base in Toronto, where the company has until now employed 300 of its 400 corporate staff. Regional offices will also see jobs eliminated. Barrick employs 25,000 people around the world.

Barrick also announced a reduction in its 2013 capital spending plan. The major now expects to spend between $5.2 and $5.7 billion this year, down from a previous budget of $5.7 to $6.3 billion. 

CEO Jamie Sokalsky announced the layoffs at a staff meeting in Toronto, and sources say he was visibly emotional making the announcement. June was quite the month of layoffs for the world’s largest gold miner: a week earlier Barrick cut 60 to 65 jobs at its U.S. operations, and a few weeks earlier it eliminated several dozen mining positions in Australia. 

Sokalsky took over as CEO a year ago and his tenure has been marked by a focus on cutting costs and increasing profitability, despite big setbacks. The latest setback came last month, when the Chilean government fined Barrick and ordered it to halt all work on the Chilean side of Pascua-Lama due to environmental violations. The fine and work stoppage further tarnished the battered project, where an initial US$3-billion capital cost estimate has ballooned to US$8.5 billion. 

The gold price is not helping. After peaking above US$1,900 per oz. in late 2011 gold has fallen below US$1,300, recently touching a three-year low below US$1,200 per oz. Copper prices are also struggling, having declined 16% since the start of the year to hover only a few cents above US$3 per lb.

Barrick’s share price lost 43¢ on news of the layoffs to close at $17.28, and ended at $15.32 at on the first trading day after news of the slowdown at Pascua-Lama. Nine months ago, Barrick shares were worth more than $40. Barrick has just over 1 billion shares outstanding.