Barrick sees huge jump in mine costs, shares tumble

TORONTO Thu Jul 26, 2012 12:13pm EDT

TORONTO (Reuters) - Barrick Gold Corp (ABX.TO) reported a 35 percent decline in quarterly profit on Thursday and warned capital costs on one of its biggest growth projects would come in much higher than forecast, driving down shares of the world's largest gold miner.

The company blamed the higher costs for building Barrick's massive Pascua-Lama gold mine, straddling the border between Chile and Argentina, on a decision to use an in-house team to manage construction rather than hiring an outside contractor.

The move, intended to save money, ended up backfiring, the company said on Thursday, an admission that may shed some light on last month's sudden dismissal of Aaron Regent as CEO.

The original decision to build Pascua in-house was made some five years ago, before Regent joined Barrick. The company has linked his ouster to the lackluster performance of the stock.

Before Thursday's news, Barrick's Toronto-listed shares had dropped some 26 percent in 2012. By midday, shares fell another 8.1 percent to C$31.69 on the Toronto Stock Exchange.

The Toronto-based miner said the cost of building Pascua-Lama would likely be 50 to 60 percent higher than the top end of its earlier estimate of $4.7 billion to $5 billion. That boosts the estimated price tag to some $7.5 billion to $8 billion.

"These are just extremely large numbers for single-project development," said John Hughes, a senior mining analyst at Desjardins Securities.

Barrick also delayed first production at Pascua-Lama to 2014 from a previous target date in 2013. The massive gold project is located high up in the Andes mountains where the weather can be challenging and unpredictable.

Chief Executive Jamie Sokalsky, who took over the top job after Regent's departure in June, said in a conference call with investors that his main focus was on delivering Pascua-Lama within the new budget and timeframe.

He said the overall project management by the in-house team - a departure from standard practice - was a major factor in the cost overrun and delay.

"In retrospect, the challenges that come with a project of this size and unique complexity were greater than anticipated and proved to be beyond the capabilities of the Barrick in-house construction team," Sokalsky said.

While Sokalsky promised to contain costs going forward, some analysts worried that inflation, particularly in labor costs, would lead to more overruns.

"As long mining companies continue to pay whatever consultants ask and whatever employees ask of them, then inflation will continue," said George Topping, a mining analyst with Stifel Nicolaus. "You need to take a stand and say enough is enough."

SALES, PRODUCTION DROP

Net income in the second quarter fell to $750 million, or 75 cents a share, from $1.16 billion, or $1.16 a share, a year earlier. Excluding one-time items, earnings dropped to 78 cents a share from $1.12.

Revenues dropped 4 percent at $3.28 billion, as sales and production of gold declined.

While Barrick maintained its gold production outlook of some 7.3-7.8 million ounces in 2012, it revised down its planned 2012 copper output to 460-500 million pounds, mainly due to lower production at its Lumwana mine in Zambia.

Barrick said it is taking steps to improve operations at the copper project, acquired in its much-criticized C$7.3 billion ($7.16 billion) takeover of Equinox Minerals last year.

Barrick produced 1.74 million ounces of gold in the quarter, down from some 1.98 million ounces in the second quarter of 2011. Quarterly gold sales volumes fell some 12 percent, while the average realized gold price rose 7 percent to $1,609 an ounce.

Total cash costs per ounce rose to $613 from $445 in the year-ago period on higher costs at the Barrick's Australian projects and from its African Barrick Gold PLC (ABGL.L) subsidiary.

(Additional reporting by Euan Rocha and Jon Cook in Toronto; Editing by Frank McGurty)

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