After laying low for the summer while its peers grabbed the limelight,
At full capacity, these wholly owned projects — Alto Chicama in Peru, Cowal in Australia, Veladero in Argentina, and Pascua-Lama in Chile — are expected to produce 2 million oz. of attributable gold at a combined cash cost of US$125 per oz., or 29% below Barrick’s existing cost structure.
By 2006, under the plan, Barrick’s net production is expected to rise by 1.2 million oz., or 21%, to 6.9 million oz. at lower costs.
Over the first decade of the plan, Barrick expects the following (in terms of startup dates, average annual production rates, and cash costs):
o Alto Chicama (2005) — 500,000 oz. at US$130 per oz.;
o Cowal (2005) — 270,000 oz. at US$170 per oz.;
o Veladero (2006) — 530,000 oz. at US$155 per oz.;
o Pascua-Lama (2008) — 800,000 oz. at $85 per oz.
The major anticipates an internal rate of return for the four combined projects of 14% at US$325 per oz. gold, or 11% at US$300 per oz. gold. Both figures make use of a US$5-per-oz. silver price.
“Barrick is in a truly unique position today,” President Randall Oliphant told analysts during a conference call. “At a time when no other senior gold company can lay claim to growth, Barrick offers organic growth — not just new mines replacing existing ones, but plans for new mines that, as they come on-line, will add to our production profile.”
Oliphant expects that the new growth plan will put Barrick “on a path to become the world’s largest and most profitable gold producer, and the industry’s only major gold growth stock.”
The company notes that it should be able to carry out the expansion from a position of financial strength, characterized by:
o a US$1-billion cash balance;
o an undrawn US$1-billion credit line;
o an A-rated balance sheet;
o expected free cash flow of US$500 million annually from its operating mines; and
o a 12-million-oz. forward gold sales position.
“We can clearly withstand more debt,” said Oliphant, “and while our debt ratio could increase marginally over time, it will never go to the highly levered position some of our competitors find themselves in.”
He added that while the commitment to the four projects “does nothing to impede our ability to undertake acquisitions, . . . that’s not our focus today.”
Looking at the four projects in more detail:
o Alto Chicama — The discovery of this deposit was only announced in April. It is about 175 km from Barrick’s existing open-pit, heap-leach Pierina gold mine. Oxide mineralization is considered to be similar to Pierina, with high-grade outcroppings and “good” metallurgy.
At Sept. 16, indicated resources at Alto Chicama totalled 103 million tons grading 0.056 oz. gold per ton (or 5.7 million contained ounces) and inferred resources were 33 million tons at 0.046 oz. gold (1.5 million contained ounces). Resources still remain open to the south and southeast.
Alan Hill, executive vice-president of development, said Barrick “has done no detailed engineering on the Alto Chicama property yet, but — especially on the oxide material — we do see great similarity with Pierina, and I see no reason why there should be any difference in the capital cost structure, operating costs, recoveries, and the like.”
Barrick now has 11 drill rigs on the property, with three attempting to extend the deposit at Laguna Norte, three carrying out infill work, and five engaged in condemnation drilling. The 2002 exploration budget has been boosted to US$35 million from an initial US$5 million.
As well, metallurgical tests and mine-and-process planning are ongoing, with a fast-tracked feasibility study scheduled for completion in 2003.
Assuming the necessary permits and mineral rights are in hand next year, Barrick expects to be able to begin mine construction in late 2003 or early 2004.
The capital cost of the project is pegged at US$300-350 million, though costs are expected to rise if the resource continues to expand.
o Cowal — The Cowal project is in central New South Wales, Australia, some 350 km west of Sydney. It was acquired as part of Barrick’s merger with Homestake Mining last December.
Proven and probable reserves within Cowal’s main E42 deposit stand at 56.4 million tons grading 0.049 oz. gold per ton (2.8 million oz.)
One of the key, looming issues for the project is the settling of associated native land claims. Barrick says it is in negotiations with relevant parties.
The major launched a 20,000-metre drill program at Cowal in the first quarter of 2002, and now has four drills working on cleared areas of the property, aiming to expand reserves within the pit outline.
A revised and updated feasibility study for Cowal is due for completion in the first half of 2003, and Barrick has set itself an ambitious goal of completing the Native Title process by mid-2003.
If construction can begin in mid-2003, then startup could proceed in 2005. Capital costs are estimated at US$180 million.
o Veladero — Barrick’s better-known Veladero project is in Argentina’s San Juan province at the northern end of the El Indio Belt and adjacent to Barrick’s Pascua-Lama project in Chile.
The takeover of Homestake gave Barrick 100% ownership of Veladero; previously, it was 60-40 joint venture between Homestake and Barrick.
Veladero’s proven and probable reserves total 196.6 million tons grading 0.043 oz. gold per tonne (8.4 million oz.).
Barrick expects to complete an updated feasibility study shortly, with an eye toward filing its permit applications in the fourth quarter.
Road and camp construction is scheduled for the fourth quarter of 2002, with site construction slated to begin in September 2003 and startup projected for 2006.
Capital costs for a heap-leach operation are estimated at US$425 million. However, these costs will likely benefit strongly from the spectacular devaluation of the Argentine peso over the past couple of years.
“The big money will have to be committed [at Veladero] in the [northern] fall of 2003 and the fall of 2004,” commented Oliphant. “By that time, there will be a clearer direction in terms of where Argentina is going. We’re having discussions with not only the government but also international agencies, because everyone wants to see more investment there.”
Oliphant added: “We find ourselves operating in a country that wants investment and is less able to attract it than it has in years — and we stand ready to make this investment.”
He said that in developing the district, Barrick wants to follow a similar program to what it accomplished at Goldstrike in Nevada: “We want to start with a smaller and simpler project [at Veladero], get established in the district, build a team, and make sure that we know how to operate in an optimal way there. Then what we’ll do, once Veladero is up and running, is simply move that team over to Pascua.
“We think this approach will be less expensive and lower-risk, and what we can work out, beyond the numbers we put out today, is the synergy in terms of capital and operating costs between the two projects.”
o Pascua-Lama — As for Pascua-Lama, Oliphant said Barrick had planned to develop the project a couple of years ago but changed its mind when the gold price went to 20-year lows; “It sat there at around US$270 an ounce and we couldn’t see any compelling reason to bring a multi-decade project into production with gold prices where they were.
“Today, the situation is quite different: what we’ve done over that time is further refine the whole operating parameters. We clearly expect Pascua to be a new mine for us: eight-hundred thousand ounces per year at US$85 per ounce is very compelling and very profitable in almost any gold-price environment.”
Barrick acquired Pascua-Lama when it took over Lac Minerals in 1994. At the time, reserves totalled 1.8 million oz. gold. Today, proven and probable reserves are pegged at 296 million tons grading 0.0
57 oz. gold per ton, or 16.9 million oz.
Barrick plans to fine-tune an existing feasibility study at Pascua-Lama and have it ready in the first half of 2004, so that construction can begin in late 2005.
Capital costs are already estimated at a hefty US$1.2 billion.
Meanwhile, Barrick says it intends to reduce its forward sales position to 12 million oz. by end of 2003, down from the 17.9 million oz. hedged at the end of June.
By 2004, Barrick will have 15% of its reserves hedged, compared with 22% at present. Proven and probable reserves currently stand at 82.3 million oz. gold.
This reduction, however, will be mostly accomplished by fulfilling existing contracts rather than through gold buybacks on the open market.
Still, the company plans to continue reducing its call option and variable price sales contract position, with a target of 1.5 million oz. by the end of 2003.
Commenting on the hedge book reduction, Oliphant said “we aren’t expecting any buy-backs to trigger any losses or anything dramatic — this will be a methodical wind-down of the position.” He added, however, that “we’ll also look for opportunities, if gold prices weaken, to reduce the hedge position a bit further than that.”
Chief Financial Officer James Sokalsky states, in a release, that there are three main reasons for the reduction: interest rates are at 40-year lows, leading to lower forward premiums; the company has never been stronger financially; and the outlook for gold prices is positive.
Barrick will receive US$365 per oz. for the hedged portion of its production this year. The company anticipates delivering a little more than half its production into its hedges in the current and fourth quarters.
In the years immediately ahead, Barrick expects to receive about US$345-350 per oz. for its hedged production.
More generally, Barrick has set itself two mid-term financial goals: the doubling of its earnings by 2006, based on a US$325-per-oz. gold price; and a significant improvement in its return on equity.
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