A Closer Look At Barrick Gold’s Crucial Pascua Lama Project

by Trefis Team
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Barrick Gold Corporation (NYSE:ABX) operates mines in North America, South America, Australia and Africa. The company has mainly gold and copper in its portfolio and competes with other mining companies such as Newmont Mining (NYSE:NEM), Goldcorp Inc. (NYSE:GG) and Freeport McMoran Copper (NYSE:FCX).

In this article, we take a closer look at Barrick’s Pascua Lama project. It is located on the border of Chile and Argentina, approximately 10 kilometers from the company’s Veladero mine. Once in operation, Pascua-Lama is expected to be one of the world’s largest low cost mines and is expected to contribute significant free cash flow to Barrick for many years to come. However, before that can happen, the company has some major hurdles and challenges to overcome. The project has suffered substantial time and cost overruns forcing Barrick to push back production commencement to the second half of 2014. [1]

We’ll take a look at the mine’s potential, the expected cost of production, the significance of the project for Barrick’s overall portfolio and future, why is it suffering from time and cost overruns, and its current status.

See Full Analysis for Barrick Gold Here

Pascua Lama’s Potential

According to the latest available figures, Pascua Lama has proven and probable reserves of 17.9 million ounces of gold, 676 million ounces of silver contained within the gold reserves, and a mine life of 25 years. Once production begins, Barrick expects to produce 0.80-0.85 million ounces of gold and 35 million ounces of silver annually. In 2012, the company had a total gold production of 7.42 million ounces of gold. [2]

Cost Profile

In 2012, Barrick reported an all-in sustaining cash cost of $945 per ounce of gold. In contrast, the all-in sustaining cash cost at Pascua Lama is expected to be $50-200 per ounce. Including depreciation of capital expenditure incurred in mine construction, costs are not expected to exceed $550-700 per ounce. One must note that all cash cost estimates are based on gold, silver and West Texas Intermediate (WTI) oil price assumptions of $1,700 per ounce, $30 per ounce and $90 per barrel, respectively.

Barrick estimates that the all-in sustaining cash cost will increase to $1,000-1,100 per ounce in 2013. Hence, when Pascua Lama comes into operation in 2014, we expect this figure to decline.

Problems At The Project

At the end of Q2 2012, Barrick Gold announced a 50-60% increase in capital costs for the Pascua-Lama gold mine from the top end of the previously announced estimate of $4.7-$5 billion, and delayed first production to mid-2014 from the earlier estimate of mid-2013.

The company attributed increased costs to a combination of high inflation in Argentina and Chile, lower-than-expected contractor productivity, schedule extension and engineering, and planning gaps. Project execution had been tardy due to the challenging physical environment at high altitudes and the company’s decision to use in-house capabilities rather than outsourcing the work to external partners. The management was put under the microscope for not having detected such serious problems earlier. ((Barrick Gold Management Discusses Q2 2012 Results – Earnings Call Transcript, SeekingAlpha))

Current Status

At the end of Q3 2012, Barrick once again increased the capital expenditure planned for the project by nearly $1 billion. According to CEO Jamie Sokalsky, the increase in total construction cost at Pascua Lama can be split approximately equally between the impact of the delay of first gold production to the second half of 2014, increased labor hours and installation rates. It also had to make additional payments to Fluor, the company now handling the project management, as an incentive to bring the project online on time. There have been no further increases since then. ((Q3 2012 Earnings Conference Call, Seeking Alpha))

The total capital expenditure planned for the project now stands at $8-8.5 billion, including a 15-20% contingency on the amount that remains to be spent. The construction is approximately 40% complete and around $4.2 billion have been spent so far.

Barrick is aiming at an annual gold production figure of about 8 million ounces by 2016, but at the same time it has stressed that returns will drive production and not vice versa. In light of the information we have provided above, we think that Pascua Lama will help the company achieve both these objectives.

Our price estimate for Barrick Gold is $33.65.

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Notes:
  1. Barrick Gold Pascua Lama Operations, Barrick Gold Website []
  2. BMO Global Metals and Mining Conference, Barrick Gold Presentation []
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  • commented 1 years ago
  • tags: ABX VALE FCX NEM RIO
  • What partners do you have to help; and with whom to share revenues and to what extent if any?