Barrick shelves Pascua-Lama

Barrick Gold (TSX: ABX; NYSE: ABX) has suspended construction at its controversial Pascua-Lama gold-silver project in Argentina and Chile, citing lower metal prices and regulatory and legal uncertainties.

The company says this decision would reduce its near-term capital requirements and allow development “under a more effective, phased approach.”

Barrick, which has been conserving cash over the past year, anticipates the halt will cut its 2014 capital requirements by up to US$1 billion. The Toronto-based miner intends to ramp down the US$8.5-billion project in the coming weeks while fulfilling its environmental and social obligations.

While the halt came as a surprise, Pascua-Lama has been plagued with cost escalations and delays. The company was ordered to stop developing the Chilean side of the project in April because of alleged environmental non-compliance, with Chile’s regulatory authorities demanding Barrick to complete a water-management system by the end of 2014 before it could resume construction in the country.

As a result, the gold producer slowed development in Argentina and pushed first production to mid-2016. In August, Barrick announced a US$5.1-billion impairment charge at Pascua-Lama, which further frustrated shareholders. But Barrick cautiously pushed the megaproject forward and highlighted its potential. The binational mine was anticipated to churn out 800,000 to 850,000 oz. gold and 35 million oz. silver in the first five years of its estimated 25-year life.

Barrick dropped nearly 6%, or $1.27 per share, to $20.28 on the suspension, despite reporting strong third-quarter results. The global producer announced adjusted earnings of US$580 million, or US58¢ a share, beating the consensus of US50¢. Quarterly gold production was 1.85 million oz. at all-in sustaining cash costs of US$916 per oz. Copper output totalled 139 million lb. at C3 fully allocated costs of US$2.15 per lb.

Silver Wheaton (TSX: SLW; NYSE: SLW) shares also took a hit, slipping 7.5%, or $1.93, to $23.66. In 2009 the major-streaming company agreed to acquire 25% of Pascua-Lama’s life-of-mine silver production, as well as 100% of silver production from Barrick’s Lagunas Norte and Pierina mines in Peru and Veladero mine in Argentina until 2013. But if there was a shortfall in production from Pascua-Lama, Silver Wheaton could receive silver production from those three mines until 2015.

Barrick also agreed to complete Pascua-Lama to at least 75% of design capacity by the end of 2015. But the deadline was later extended to Dec. 31, 2016.

After the suspension news, Silver Wheaton said it had extended the completion test deadline to Dec. 31, 2017, and that it was entitled to silver production from the Lagunas Norte, Pierina and Veladero mines until the end of 2016 to make up for the lost ounces from Pascua-Lama.

“While we would like to see more certainty regarding Pascua-Lama, we view the additional year of silver revenue from three of Barrick’s other mines as adequate compensation to justify extending the outside completion test date by a year,” Silver Wheaton CEO Randy Smallwood said in a release.

If Barrick fails to meet the amended completion test deadline, Silver Wheaton could walk away from the silver-purchase agreement. If that happens, Barrick would need to return Silver Wheaton’s upfront cash payment of US$625 million, minus any silver ounces delivered.

Royal Gold (TSX: RGL; NASDAQ: RGLD), which holds a 0.78% to 5.23% sliding-scale net smelter return royalty on the Chilean side of Pascua-Lama, also dropped 7.2%, or $3.89, to $50.16. However, it says it doesn’t expect the halt to affect the carrying value of its royalty investment at the mine.  

Barrick notes construction at Pascua-Lama is 50% complete and that the decision to restart development depends on improved project economics, gold prices and reduced uncertainties.

Silver Wheaton expects production in 2013 to surpass 33.5 million equivalent oz. silver, but has cut its 2017 output guidance by 13% to 42.5 million equivalent oz. silver, mainly due to the delay at Pascua-Lama. 

Meanwhile, Barrick forecasts producing 7 million to 7.4 million oz. gold at all-in sustaining costs of US$900 to US$975 per oz. It has revised its 2013 copper guidance to 520 million to 550 million lb. copper at C3 fully allocated costs of US$2.40 to $2.60 per lb., compared to 500 million to 540 million lb. copper at US$2.50 to US$2.75 per lb. earlier.

To strengthen its balance sheet and reduce its debt, Barrick has launched a US$3-billion bought-deal offering through a global syndicate of underwriters to sell 163.5 million shares at US$18.35 apiece, with an over-allotment option of another 24.5 million shares at the same price. The gross proceeds will be US$3.5 billion if the over-allotment option is fully exercised. 

It is also targeting annual cost savings of US$500 million by using a “flatter operating model.”