A Look At Barrick Gold’s Pascua Lama Project


Barrick Gold’s (NYSE:ABX) Pascua-Lama project is one of the world’s largest gold and silver resources. Upon commencement of commercial production, originally expected in the second half of 2014, the mine will significantly boost Barrick’s gold output at extremely low operating costs. However, the project ran into legal and regulatory hurdles, resulting in the temporary suspension of the project in the fourth quarter of 2013. In this article, we will explore various dimensions of the Pascua-Lama project.

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The Pascua-Lama Project

The Pascua-Lama project straddles the Chile-Argentina border, located in Chile’s Frontera district  and Argentina’s San Juan province. Pascua-Lama had over 15 million ounces of proven and probable gold reserves and 675 million ounces of proven and probable silver reserves as on December 31, 2013. [1] As per estimates in the company’s 2012 annual report, the mine was expected to average 800,000 to 850,000 ounces of gold and 35 million ounces of silver in its first five years of production at all-in sustaining cash costs of $50-200 per ounce. [2] To put this into context, Barrick’s gold production in 2012 stood at 7.4 million ounces at all-in sustaining cash costs of $945 per ounce. This indicates the low cost nature of the deposit. ((Barrick Gold’s 2012 40-F, SEC))

During the fourth quarter of 2013, Barrick announced the temporary suspension of construction activities at its Pascua-Lama project, except for those activities required for environmental and regulatory compliance. Falling gold prices and legal and regulatory complications brought about the decision to suspend the project. [3] The company had previously suspended construction activities on the Chilean side of the project, except for those activities deemed necessary for environmental compliance, during the second quarter of 2013. [4] Construction on the Chilean side was halted in the second quarter of 2013, after a court injunction was filed by indigenous communities concerned about potential water supply contamination as a result of the project’s construction activities. [3] The ramp-down of the project was completed in the second quarter of 2014. [5]

Impact on Barrick Gold

The Pascua-Lama project has been beset by time and cost overruns. The company had initially decided to start construction activities in 2004. However, delays in obtaining approvals from relevant authorities in Chile and Argentina, including a dispute between the two countries on how the project will be taxed, meant that the Barrick could ultimately begin construction activities in 2009. The company estimated construction costs of $2.8-3 billion for the project in 2009. [6] However, the company raised this estimate by around 40% to between $4.7-5 billion in 2011 as a result of rising labor, material and energy costs. [6] The company further raised estimated construction costs to $7.5-8 billion in July 2012 as a result of the decision to manage construction in-house rather than hiring external contractors, which was originally expected to save costs, ended up raising project costs. [6] The estimated project cost was again pushed up to $8-8.5 billion in November 2012 as a result of construction delays and higher project management costs. [6] Barrick had spent around $5 billion on the project by the time it decided to suspend construction activities. ((TIMELINE-Barrick Gold shelves development of Pascua-Lama, Reuters))

The company recorded $5.1 billion in impairment charges on the Pascua-Lama project in the second quarter of 2013 as a result of falling gold prices. [7] The company expects total cash outflows of $700 million pertaining to the Pascua-Lama project in 2014, including expenditures for the ramp-down, care and maintenance, environmental and social obligations, and remaining capital expenditures. [8] The company has stated that the decision to restart the project will depend upon an environment of higher gold prices and reduced uncertainty pertaining to legal and regulatory compliance. The decision to suspend the project was primarily responsible for lowering the company’s estimated capital expenditure to $2.4-2.7 billion in 2014 from $5.5 billion in 2013, at the time of declaration of its 2013 annual results. [9]

Barrick may face further cash outflows pertaining to the Pascua Lama mine, as per the terms of its silver streaming agreement with Silver Wheaton (NYSE:SLW). As per the amended terms of the agreement pursuant to the suspension of the project, Barrick is expected to finish construction of the mine by 2017. If this is not accomplished, the company is liable to return the upfront cash consideration for the streaming agreement of $625 million to Silver Wheaton, less credits for silver already delivered. [10] With no date having been set for the restart of the project, Barrick may be subject to more cash outflows in the future . In addition to the potential liability associated with the streaming agreement with Silver Wheaton, the company may face a $3 billion class action lawsuit pertaining to alleged misrepresentation regarding the company’s development of the Pascua-Lama mine. [11]

Had the project gone according to plan, the mine would have been producing roughly 800,000-850,000 ounces of gold. This is around 13% of the company’s expected gold production of 6-6.5 million ounces in 2014. In addition to the significant boost in volumes, the mine’s low cost of production would have lowered the company’s average cost of production. ((Barrick’s Q2 2014 Earnings Release, Barrick Gold Website))

The Road Ahead

Barrick recently signed a memorandum of understanding with a group of 15 indigenous communities in Chile. [1] This marks the first step in a dialogue process with an important stakeholder group, which is an essential step if the project is to be restarted. However, a lot of work remains to be done and no date has been set for the restart of the project. For now, the Pascua-Lama project remains a missed opportunity for the company.

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Notes:
  1. Pascua-Lama Project, Barrick Gold Website [] []
  2. Barrick Gold’s 2012 40-F, SEC []
  3. Barrick to Suspend Work on Pascua-Lama to Conserve Cash, Bloomberg [] []
  4. Barrick’s 2013 40-F, SEC []
  5. Barrick’s Q2 2014 Earnings Release, Barrick Gold Website []
  6. TIMELINE-Barrick Gold shelves development of Pascua-Lama, Reuters [] [] [] []
  7. Barrick Backs Pascua-Lama After Huge Second-Quarter Bath, Forbes []
  8. Barrick Gold’s 2013 40-F, SEC []
  9. Barrick Gold’s 2013 40-F, SEC []
  10. Silver Wheaton’s 2013 40-F, SEC []
  11. Barrick Gold to face $3 bln class action lawsuit, Proactive Investors []