More trouble at Pascua Lama

Investors showed fatigue with complications at Barrick Gold’s (ABX-T, ABX-N) Pascua Lama project.

The key development project perched high in the Andes along the Chilean and Argentine border has suffered from a series of cost overruns and environmental challenges over the last few years that have tried investors’ nerves.

The latest blow comes courtesy of a Chilean court, which has ordered construction on the Chilean portion of the project to stop.

The news sent Barrick shares to the lowest value they have traded at all year as the stock was off 9% or $2.35 on the news and finished the day in Toronto at $24.81 per share.

The suspension of development comes after indigenous groups from the surrounding area filed complaints over alleged groundwater contamination. According to Chile’s Radio Cooperativa, the court ruling cited concentrations of arsenic, aluminum, copper and sulphates in groundwater that were above acceptable levels.

While the court decision clearly isn’t good for shareholders, it isn’t immediately clear just how bad it is either. There was no word on how long operations were to be suspended and Barrick said it had not even received official word from the court about the suspension.

Pascua-Lama has recently raised investor eyebrows due to rising costs. Barrick upped its capex estimate twice last year, with the latest estimate ringing in at a resounding $8.5 billion. When the green light was initially given on development back in 2009, it was expected the mine would cost $3 billion to build.

Anticipated production has also been revised for the worse, as the company pushed back expected start-up a year to the second half of 2014.

The court ruling is connected to claims brought before it in September and October of last year. It was then that four indigenous communities served Barrick and the local environmental authorities with complaints about the groundwater, the degradation of which it blamed on Barrick not meeting environmental regulations.

The groups also accused environmental authorities of not enforcing regulations.

The latest environmental salvo comes years after the project had gathered attention for its proximity to glaciers — a key water source in the area. The company spent considerable time and money mitigating those risks and the issue has largely receded.

It is important to note that the Chilean court decision has no affect on construction activities in Argentina. Fortunately for Barrick that is where most of the critical infrastructure is located, including the process plant and tailings storage facility. On the Chilean side construction largely has to do with pre-stripping for the mine area, which lies mainly on the Chilean side.

Barrick is operating the Veladero mine immediately to the north of Pascua Lama on the Argentine side of the border. Last year that mine produced 766,000 oz. of gold at total cash cost of US$510 per oz. It expects to produce between 570,000 and 610,000 of gold this year at cash costs of US$630 to US$670 per oz.

Pascua Lama is expected to produce between 800,000 to 850,000 oz. of gold in the first five years of operations and is expected to be one of the company’s lowest-cost mines once it is in operation.