Analysis: Latest Barrick mine delay fans price tag fears
TORONTO (Reuters) - Barrick Gold Corp (ABX.TO) has slowed spending at its Pascua-Lama project in South America, delaying first output to 2016, but that may not be enough for the its shareholders, who worry that the final price tag may creep beyond what the mine is worth.
While the flagship development, which straddles the border of Chile and Argentina, is one of the richest untapped gold deposits in the world, the string of delays and budget overruns have been a nightmare for world's top producer and its investors.
"They should walk from Pascua-Lama," said John Ing, president of boutique investment and research firm Maison Placements, adding that the embattled miner also needs to divest non-core assets, cut exploration spending and slash hefty board salaries if it wants to turn its fortunes around.
Barrick said late on Friday that it would re-sequence construction of the controversial project to target first production by mid-2016, deferring some $1.5 billion to $1.8 billion of planned capital spending in 2013 and 2014.
The company has not updated the market on capital costs, last projected to be up to $8.5 billion.
The delay was in-line with a scenario that Credit Suisse analyst Anita Soni outlined earlier this week, as the bank downgraded Barrick to 'Neutral' from 'Outperform'.
Soni estimated that a mid-2016 start-up would boost capital costs by about 20 percent to $10 billion and could shock the market, which was anticipating first production in late 2015.
"In our view, a mid-2016 start-up for Pascua would be a negative surprise to the street," she said in the Tuesday note.
That surprise could lead to another stock dive for Barrick, whose shares have already tumbled to their lowest point in more than 20 years, dragged down by Pascua-Lama, along with worrisome debt levels and the declining gold price.
But the alternative, walking away indefinitely, would not be an easy feat for the company. Once complete, the gold mine will be one of the cheapest in the world to operate, producing some 800,000 to 850,000 ounces a year at all-in sustaining costs of just $50 to $200 per ounce, in its first five full years.
And Barrick has already spent nearly $5 billion on the project, with mining and processing facilities partially built. The cost of shuttering the site would likely top $1 billion, according to analysts, and the company would also have to pay out Silver Wheaton (SLW.TO), which has rights to part of the mine's silver output.
Still, with the new delay and the recent drop in the gold price - which fell 23 percent in the second quarter - Barrick expects to take a writedown of up to $5.5 billion on the value of Pascua-Lama, a tough pill to swallow for investors.
"The Pascua impairment is higher than expected, but I didn't expect to see the gold price fall so far, so maybe it is not that surprising after all," said a portfolio manager, whose firm owns shares in Barrick Gold.
The fund manager, who declined to be named due to company policy, said that the delay is positive in light of sagging gold prices, but the downside is new cash flows from the mine are also delayed.
"Retail investors may be a bit spooked by this news, but less uncertainty is better," the fund manager said.
BACK ON TRACK?
Uncertainty has plagued Pascua-Lama over the last few years, as bad project management and environmental issues led the development wildly off-track. When construction was approved in 2009, the world's first bi-national mine was supposed to cost less than $3 billion to build, with production in early 2013.
After numerous delays, Pascua-Lama is now slated to start-up in mid-2016, and costs are expected to balloon again, hurting the rate of return for the project.
The potential of further budget overruns is a concern for investors, who worry that Barrick is not filtering enough cash into dividends and restraining its debt load, which has threatened the company's investment-grade credit rating.
"Barrick does have some of the best assets in the world, it's just they also have $16 billion in debt, which is potentially an issue at these gold prices," said Chris Beer, a portfolio manager with RBC Global Asset Management.
Indeed, rating agency DBRS put the miner under review with negative implications on Friday, citing troubled investment decisions, declining gold prices and difficulties with development projects, among other factors.
Barrick, aware of changing market conditions, has already slashed planned capital spending and reduced staff at sites around the world. The company is not currently building any new mines, with notable exception of Pascua-Lama.
And while the challenges at the project have hurt investors, prompting some to demand it iced, those who bought into Barrick with the expectation that the Toronto-based miner would produce gold - and lots of it - say the rich mine is worth the wait.
"I think Pascua-Lama has come out of their core mission of what they should be doing," said Caesar Bryan, a portfolio manager for the Gabelli gold fund. "There have been some mistakes, and it has been hard, and that is unfortunate. But it is absolutely what they should be doing."
(Additional reporting by Euan Rocha; Editing by Marguerita Choy)
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