Barrick's Pascua-Lama costs rise again, shares dive

Thu Nov 1, 2012 12:49pm EDT

Barrick Gold Corporation Chairman Peter Munk speaks during the annual general meeting of shareholders in Toronto May 2, 2012. REUTERS/ Mike Cassese

Barrick Gold Corporation Chairman Peter Munk speaks during the annual general meeting of shareholders in Toronto May 2, 2012.

Credit: Reuters/ Mike Cassese

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(Reuters) - Barrick Gold Corp (ABX.TO) reported a sharp drop in third-quarter profit on Thursday and again increased its cost estimate to build the massive Pascua-Lama mine, pushing back the date when production at the project will begin.

Shares of the world's top gold miner dropped more than 9 percent after Barrick delayed the mine's start date to the second half of 2014 from a previous target of mid 2014.

The cost of building the mine located high in the Andes mountains on the border between Chile and Argentina rose to between $8 billion and $8.5 billion from an earlier estimate of $7.5 billion to $8 billion.

The company blamed the increase on delays and higher labor and project-management costs.

This is the second time Barrick has boosted its cost estimate. Three months ago it raised the Pascua-Lama budget by 50 to 60 percent from a previous estimate of $4.7 billion to $5 billion.

The high-altitude project has proved more challenging than Barrick anticipated as the harsh climate and cross-border negotiations with the Chilean and Argentine governments repeatedly held up the pace of development over the last decade.

Once complete, Pascua-Lama will be one of the largest and lowest-cost gold mines in the world.

In June, Jamie Sokalsky, the company's long-time chief financial officer, replaced Aaron Regent as chief executive and said he would take a more disciplined approach to spending.

Making good on that promise even as Pascua-Lama costs climbed, Barrick on Thursday said it had deferred some $3 billion in capital spending over four years, with about $1 billion lopped off 2013 spending.

Next year's capital expenditures are now expected to be largely in line with 2012 spending.

"We will run this company with a goal of optimizing our overall investment portfolio," said Sokalsky in a conference call with investors.

"Assets that don't generate target returns or significantly impact our ability to generate long-term cash flow will be deferred, shelved or divested."

Barrick is in talks with China National Gold Group Corporation over the sale of its 74 percent stake in African Barrick Gold (ABGL.L), which has struggled with soaring production costs and lower output.

PROJECT WOES

Barrick lowered its full year outlook for copper production to 450 million pounds as production was delayed at its Jabal Sayid project in Saudi Arabia.

While construction is complete at the Saudi copper mine, the project, designed to Australian standards, does not meet Saudi safety and security rules. The mine is now expected to start up in 2014, instead of in the second-half of 2012 as originally expected.

Barrick maintained its total capital budget for Jabal Sayid at about $400 million, with the mine set to produce 100 million-130 million pounds of copper a year.

The company's gold production took a slight hit from lower output at African Barrick. Barrick stuck to a 2012 production range of 7.3 million to 7.5 million ounces.

The company nudged up its estimate for total cash costs to $575-$585 an ounce from $550-$575 an ounce.

Barrick has already spent about $3.7 billion on the project, which is expected to produce some 800,000-850,000 ounces of gold and 35 million ounces of silver in its first full five years of production.

SALES FALL

Barrick's net profit fell to $618 million, or 62 cents per share, in the quarter ended September 30, from $1.37 billion, or $1.37 per share, a year earlier.

Adjusted to exclude one-off items, Barrick earned 85 cents per share, down from $1.38 per share a year earlier. Analysts, on average, had expected earnings of 98 cents a share, according to Thomson Reuters I/B/E/S.

Revenue fell 13.5 percent to $3.4 billion on lower gold sales and a lower realized gold price in the third quarter.

The average realized gold price fell 5 percent to $1,655 per ounce, while gold sales dropped 6 percent to 1.8 million ounces. Total cash costs rose 31 percent to $592 per ounce in the quarter.

Shares of Barrick dropped C$3.69 to C$36.70 on Thursday at midday on the Toronto Stock Exchange.

($1=$1.00 Canadian)

(Additional reporting by Bhaswati Mukhopadhyay in Bangalore; Editing by Frank McGurty, Peter Galloway and Andrew Hay)

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