Barrick to spend US$2.7 billion on Dominican Republic mine

The Pueblo Viejo gold-silver project in the Dominican Republic could be Barrick Gold’s (ABX-T, ABX-N) most expensive development project yet at US$2.7 billion.

Barrick, the world’s biggest gold mining company, will front 60% of the cost while the rest will be covered by 40%-owner Goldcorp (G-T, GG-N).

It’s estimated that Pueblo Viejo will produce 1 million oz. gold at a cash cost of US$250 per oz. over the first five years; translating into about 600,000 oz. gold for Barrick.

“(It’s) significant, even for us, in light of our size,” says Vincent Borg, Barrick’s senior vice president of corporate communications. “And it’s got a 25-year mine life so it’s going to be a very significant long-term asset.”

Before Barrick had finished the final feasibility for Pueblo Viejo, it was the company’s Pascua-Lama gold-silver project, which lies on the border of Chile and Argentina, with the massive development bill.

At last count, development costs were expected to be US$2.3 to US$2.4 billion at Pascua-Lama, which is estimated to produce 750,000 to 775,000 oz. gold over the first five years, reserves of 18 million oz. and a mine life of 20 years.

Estimates for Peublo Viejo in 2007 were US$2.1 to US$2.3 billion.

Borg says in the end the two projects will have roughly similar costs as cost estimates are updated.

Barrick acquired Pueblo Viejo in 2006 as a part of the Placer Dome takeover.

Placer Dome signed an agreement with the Dominican Republic government in 2001 for the mine, which closed in 1999 after producing 5 million oz. gold and 22 million oz. silver over more than 20 years’ time. By 2004, Placer expected to mine about 403,000 oz. gold per year and 2.2 million oz. silver over 33 years, with development costs estimated at US$336 million.

Things have changed in just a few years.

“Ours is fairly different, scope and scale wise,” Borg says. “Our tonnage capacity is now 24,000 tonnes per day and before it was 18,000 tonnes.”

Barrick has also identified additional reserves and resources. Proven and probable reserves now stand at 20.4 million oz. gold with 423.6 million lbs. copper and 117.3 million oz. silver contained within the gold reserves.

The copper and silver will be credited against the gold cash costs, as is reflected in the US$250 per oz. estimate.

The company discovered the Monte Oculto zone at Pueblo Viejo since taking over the project, which contributed about 900,000 oz. to the mine’s reserves. The new zone has a lot of zinc Borg says about 2.5 or 2.6 billion lbs.

“But we’re still evaluating the methods to treat it,” he says.

Barrick will employ about 3,500 people over the three-and-a-half-year construction phase and about 1,000 people during operations.

The company is shooting for 2011 start-up but Genuity Capital Markets analyst Chantal Gosselin has delayed her estimated production time line to mid-2012.

Gosselin gave Barrick a ‘hold’ rating with a 12-month target price of $52 per share and Goldcorp a ‘buy’ rating with a target of $43.50.

Richard Gray, an analyst at Blackmont Capital, also gave Barrick a ‘hold’ rating with a target share price of $53.

The holds are partially related to Barrick’s 2008 production guidance. Barrick forecast that production would fall slightly to range of 7.6 million oz. to 8.1 million oz. gold (from a total of 8.06 million oz. in 2007) while cash costs increase to US$390 to US$415 per oz. from US$350.

“Not an attractive combination,” Gray writes. “We also remain concerned with the ultimate capital costs and timing for large projects such as Pueblo Viejo, Cerro Casale, and Pascua-Lama, and the pressure these investments may put on an already levered balance sheet.”

Barrick shares were up 90 in Toronto today, or 1.8% to $50.60 on a trading volume of 3.3 million shares.

Goldcorp rose $1.10, or 2.7% to $42.54 each on a volume of almost 4.4 million shares.