Barrick Gold Corporation (NYSE:ABX) recently announced that it has achieved commercial production at its Pueblo Viejo project in the Dominican Republic. Barrick owns a 60% stake in this project. The remaining 40% is owned by Goldcorp Inc. 
Pueblo Viejo was completed at a capital cost of $3.7 billion and is expected to produce gold for nearly 25 years. Barrick’s share of gold production for 2013 is expected to be 500,000 to 650,000 ounces. Over the first five years, its share of production is expected to average 625,000 to 675,000 ounces at a total cash cost of $300-$350 per ounce. To put the cost figure in perspective, Barrick has incurred a total cash cost of $592 per ounce in 2012. ((Pueblo Viejo Achieves First Gold Production, Barrick Gold Press Release))
The production figure for 2013 is on the lower side of the expected five-year average because production will be ramped up to full capacity only in the second half of 2013. To put production figures in perspective, Barrick Gold produced 7.68 million ounces of gold in 2011 and expects production for 2012 to range between 7.3-7.5 million ounces. 
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The total gold reserves at Pueblo Viejo stood at 25.3 million ounces at the end of 2011.
This is a piece of good news for the company which has been beset by interminable delays and cost escalations at its Pascua Lama project, had its mining lease at Reko Diq in Pakistan declared invalid by the Supreme Court recently, and was unable to close a deal with a Chinese company for its African assets.
What Does The News Mean For Barrick?
For companies operating in the natural resources space, valuations generally tend to focus on the asset base of a company. If a company has significant reserves, it is assumed that growth is assured over the life of the mines. A value is assigned to unexploited reserves based on prevailing prices.
There is a distinction between reserves and resources. The classification of assets as reserves indicates that the inherent economic value of resources can be captured. This requires necessary legal permissions to be in place. The classification of assets as resources merely indicates their presence, it may or may not be possible to get them out of the ground. 
Therefore, unlike in the case of Barrick Gold’s Reko Diq project in Pakistan, where its assets were classified merely as resources, Pueblo Viejo’s gold reserves are already a part of investors’ valuations. Also, the project has consistently been on track, managing to achieve first production in August 2012 as scheduled. The amount of reserves or production figures haven’t been revised either from initial estimates. For these reasons, this news does not qualify as a positive surprise and we see no upside to valuation.
This development still comes as some Barrick Gold which has been struggling with massive cost overruns and time delays at Pascua-Lama, the gold and silver mine it is building between Chile and Argentina. In Q2 2012, Barrick Gold had announced a 50-60% increase in capital costs for Pascua Lama from the top end of the previously announced estimate of $4.7-$5.0 billion. The increased costs were attributed to a combination of high inflation in Argentina and Chile, lower-than-expected contractor productivity, schedule extension and engineering and planning gaps.
The timely project execution at Pueblo Viejo may reassure investors that the project execution capability of the company is still in good shape. Also since the first production at Pascua Lama has been pushed back to mid-2014, the production from Pueblo Viejo will help production growth in 2013 as well as lower the overall cost of production.
Our price estimate for Barrick Gold is $51, which will be revised once the results for Q4 2012 are declared.Notes:
- Pueblo Viejo Achieves Commercial Production, Barrick Gold Press Release [↩]
- Barrick Gold Earnings: Profit Nosedives As Capital Expenditure Soars, Trefis [↩]
- What is the difference between resources and reserves?, British Geological Survey [↩]