Delays At Jabal Sayid Cause Barrick To Lower 2013 Forecasts

Barrick Gold Corporation (NYSE:ABX) has lowered its copper production outlook for 2013 due to delays at its Jabal Sayid project in Saudi Arabia. CEO Jamie Sokalsky informed that the company was recently notified of non-compliance with Saudi Arabian safety and security standards for mines, which means that it it restricted from using explosives at Jabal Sayid. The company now expects its total copper output for 2013 to be in the range of about 500 million to 550 million pounds, down from a previous forecast of 600 million pounds. ((Barrick cuts copper output forecast due to Saudi Arabia delays, Reuters))

Barrick operates mines in North America, South America, Australia, Africa and the Middle East. 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). Barrick Gold acquired the Jabal Sayid copper project as part of its $7.5 billion acquisition of Equinox Minerals in 2011.

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Why This Situation Arose

According to Barrick, the previous owner, Equinox Minerals, designed the safety and security system to Western Australian standards, which differ from the more stringent Saudi Arabian standards. As the company has been restricted in its use of explosives, it will be hindered in its ability to mine the deposit. Barrick expects to be in full compliance with the required standards by 2014, but is doing its best to achieve this earlier. ((Barrick Gold lowers copper output on Saudi mine delay, Mining Weekly))

Barrick’s Cup Of Woes

Barrick has suffered quite a few setbacks in recent months. It announced a mind-boggling 50-60% increase in capital costs for its Pascua-Lama gold mine from the top end of the previously announced estimate of $4.7-$5.0 billion, with first production expected in mid-2014 instead of mid-2013 as estimated earlier. 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. Also, the Chilean Supreme Court struck down the planned 2,100-megawatt, $5 billion Castilla thermoelectric power plant project last month, citing environmental concerns.

Among others, this project was expected to supply power to Pascua-Lama. Thus, we think that power woes just got added to Barrick’s list of problems. Even if it eventually manages to arrange for power, it will most probably come at a significantly higher cost, not to mention additional delays. Given Barrick’s decision to focus only on projects which will meet its cash-flow hurdle rate, it has, for now, shelved two of its largest development projects, Donlin Gold, in Alaska, and Cerro Casale, in Chile. Also, it has found that its African Barrick Gold business does not meet its criteria for further investment. Hence, it is in early-stage talks with a Chinese gold company to sell its stake in the business. These problems have forced Barrick to lower its 2015 gold production guidance to 9 million tonnes from 8 million tonnes.

We think that the copper business isn’t faring any better. Rising costs are also a problem at its Lumwana copper mine. Barrick has again sought to blame the previous owner, Equinox, for the same, alleging that the practices followed by them were less than satisfactory. Barrick says that it is attempting to rectify those mistakes, resulting in cost escalations. It hasn’t helped that copper prices are going south due to a slump in demand and an expected supply glut.

Going Forward

The company has reaffirmed that despite a temporary setback in 2013, its copper output will reach 650 million pounds by end of 2015.

We have already factored in all of the problems listed above in our revised valuation for Barrick Gold. Despite all of its problems, our view of the long-term value of the company is still sanguine which is reflected in our 30% upside to the market price. We believe that short-term, unexpected problems have caused investors to panic.

Given that copper forms only 8% of the Trefis price estimate for Barrick Gold, lower shipment figures for 2013 will have only a marginal impact on its Trefis valuation. You can check the impact using the graph below.

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