UPDATE 6-Barrick to shelve Pascua-Lama, issue shares to cut debt
By Allison Martell and Euan Rocha
TORONTO Oct 31 (Reuters) - Barrick Gold Corp said on Thursday it would stop development of its Pascua-Lama mine in South America indefinitely, a surprise reversal on a project that has already cost the world's largest gold producer more than $5 billion.
Pascua-Lama, which Barrick has been counting on to provide a large share of its future gold production, has been plagued by political opposition, permitting issues, labor unrest, cost-overruns and a sharp drop in bullion prices.
Even so, Barrick had signaled that it intended to keep plowing ahead with the remote project, which straddles the border of Chile and Argentina high in the Andes, a location that has bumped up costs and fueled environmental opposition.
Separately Barrick, which is attempting to reduce its debt load, said later on Thursday that it will raise more than $3 billion through a share offer, with much of the funds earmarked to pay down borrowings.
Barrick's stock dropped more than 5 percent to $18.34 in New York in after hours trade after it announced it would offer 163.5 million shares to the public at $18.35 each.
It is no secret that Barrick has looking for ways to reduce its debt load, which sat at $14.6 billion at the end of third quarter. Several sources familiar with the situation have told Reuters the company was considering a wide range of options from a strategic equity investment to further streaming deals that yield upfront cash.
The Toronto-based company stressed that the decision to stop development at Pascua-Lama was not the end of the road for the project. Barrick said it would resume construction when conditions warrant, and would explore strategic partnerships or royalty and similar deals to fund the project.
"The project has been, and continues to be, a top priority for the company, and also our biggest challenge," Chief Executive Jamie Sokalsky said on a call with analysts and investors.
If completed, Pascua-Lama is expected to produce up to 850,000 ounces of gold annually in its first five years, and at exceptionally low operating costs, which could pay dividends for years to come.
In suspending construction at Pacua-Lama, Barrick is following in the footsteps of other big miners that have mothballed projects in recent years.
Rival Newmont Mining Corp has put its Conga project in Peru on hold, and Anglo American last month dropped plans to push ahead with the Pebble copper-gold mine in Alaska. Pebble, like Pascua-Lama, has faced strong environmental opposition.
Investors seemed to take the decision in their stride as it will further ease cash flow pressures on the company.
"I can't fault their decision. They are being conservative and that's fine," said Caesar Bryan, a portfolio manager at Gabelli, which owns about 2.9 million shares in Barrick. "I still think this can be a strong cash generator at some point."
Barrick announced its decision on Pascua-Lama as it reported third-quarter earnings that topped expectations, helped in part by lower operating costs. Still, earnings and revenue tumbled from a year earlier.
The decision to suspend construction is a blow to Argentina's president, Cristina Fernandez. Pascua Lama is the main foreign investment project in Argentina after Brazil's Vale halted a $6 billion potash project at the beginning of the year due to high costs.
And it is another disappointment for Chile's mining sector, which faces regulatory delays and increasing opposition from local communities and environmental groups.
Barrick had been expected to raise its estimate of the cost of Pascua-Lama - which it pegged last year at as much as $8.5 billion - when it announced quarterly results, but it did not give a new figure.
Problems with permits had been expected to raise the mine's price tag. Regulators halted construction on the Chilean side of the border last spring, citing serious environmental violations, and Barrick agreed to build a new water management system.
Some investors had urged Barrick to stop building, but the miner had emphasized repeatedly how far it had already come, spending $5.4 billion by the end of the second quarter. Capital spending on the project was $310 million in the third quarter.
Barrick said it will continue activities needed to comply with regulatory requirements at Pascua-Lama and protect the environment. Local environmental groups are worried about the project's effects on nearby glaciers and on the water supply, although supporters say the impact will be small.
The company, which has been pushing to cut costs, has also faced labor unrest. Unionized workers on the Chilean side of the project said on Wednesday they had voted to strike as early as this Friday.
Suspending Pascua-Lama could weigh on Barrick's production in 2016 and beyond, especially as the company has already said it has no plans to build other new mines in the near future.
Barrick said the move will reduce its 2014 capital costs by as much as $1.0 billion. As of Sept. 30, it had cash and equivalents of $2.3 billion, and $4.0 billion available under a credit facility.
"It would have been financially irresponsible for them to continue with the project at this point," said Deutsche Bank analyst Jorge Beristain. Beristain said he believes the project will be completed eventually.
Barrick produced 1.85 million ounces of gold in the third quarter, up slightly from 1.78 million a year earlier. All-in sustaining costs fell to $916 an ounce from $1,010 an ounce.
Earnings fell to $172 million, or 17 cents a share, in the quarter from $649 million, or 65 cents, a year earlier. Revenue dropped to $2.99 billion from $3.40 billion.
Excluding an unusual tax expense and other special items, adjusted earnings fell to 58 cents a share from 88 cents a year earlier. On that basis, analysts, on average, had expected 50 cents a share, according to Thomson Reuters I/B/E/S.
The move to mothball Pascua-Lama also affects Silver Wheaton Corp, which in 2009 bought 25 percent of the mine's silver production, paying Barrick cash in exchange for future silver sales at a discounted price.
Vancouver-based Silver Wheaton said in a separate statement on Thursday that it sees Barrick's decision as prudent. It said it is now entitled to silver output from three of Barrick's producing mines - the Lagunas Norte, Pierina and Veladero mines - until the end of 2016 to make up for the production it is losing from Pascua-Lama.
Silver Wheaton has also agreed to extend a completion test deadline on Pascua-Lama until the end of 2017 from the end of 2016. The company, which is reviewing its production forecasts for 2017, said it still expects its silver output to top 33.5 million silver equivalent ounces this year.
Shares of Silver Wheaton dropped 7.5 percent to C$23.66. Royal Gold Inc, which has a royalty deal on Pascua-Lama, fell 7.0 percent to C$48.04.
Hurt by the problems in Chile, the weak gold price and other issues, Barrick's shares hit C$14.22 in July, their lowest point since 1992, before rebounding nearly 50 percent.
Barrick's debt reacted positively to the news. The yield on its benchmark 10-year bond narrowed by six basis points to 2.82 percent above the U.S. government yield curve, a trader told IFR, a Thomson Reuters service, showing investors were demanding less of a premium to hold the company's debt.