Barrick needs to reassure investors after Veladero mine mishaps

TORONTO (Reuters) - Barrick Gold must take steps to safeguard investor confidence by ensuring there are no more operating mishaps at its mines after a third incident in 18 months at its big Argentina mine, analysts said.

FILE PHOTO: A traffic sign is seen near Barrick Gold Corp.'s Veladero gold mine, on the Argentine side of the border district between Chile's Huasco province and Argentina's San Juan province, a few kilometers from the site for the Pascua Lama gold project, some 834 km (518 miles) northeast of Santiago, Chile, February 28, 2007. REUTERS/Pav Jordan/File Photo

Argentine regulators told Barrick last week that it must overhaul environmental and operating processes at its Veladero mine, where operations have been partially suspended, after a cyanide solution spill on March 28.

“We are absolutely committed to making Veladero a mine that all of our stakeholders can be proud of and our resolve has not wavered,” Barrick spokesman Andy Lloyd said on Tuesday.

Veladero is Argentina’s largest gold mine and Barrick’s third largest contributor to output. Veladero’s income was $220 million in 2016, up 2 percent from 2015. Revenue in 2016 was $685 million, down from $720 million in 2015.

The company, the world’s largest gold producer by output and market value, has historically been a skilled mine operator, said Jefferies analyst Chris LaFemina.

“If you start to develop a track record of operational incidents, the market starts to reflect that in your equity. That’s not Barrick’s reputation in the market yet, but they have to be careful,” LaFemina said.

At a meeting last Thursday, national and provincial officials told Barrick executives that the Canadian company’s ongoing business in the country hinged on a new working plan for the open pit mine, Energy and Mining Minister Juan Jose Aranguren told Reuters in an interview on Friday.

The province rejected Barrick’s initial repair plan last week.

Processing operations at Veladero have been partially suspended, but Argentina’s environmental ministry asked a federal court on Friday to halt all activities at the site.

An extended halt would curtail production. Toronto-based Barrick has said it does not expect a material impact from the incident to its 2017 output forecast for Veladero.

Barrick expects Veladero to produce between 770,000 to 830,000 ounces of gold this year, about 14 percent of the company’s total forecast production. In 2016, Veladero produced 544,000 ounces.

Barrick’s stock is up around 5 percent since the latest incident, but it has underperformed the S&P/TSX Global Gold Index, which has risen approximately 6.3 percent as gold stocks benefited from higher bullion prices.

“So far, investors seem to have brushed it off,” said Adrian Day, chief executive of Maryland-based Adrian Day Asset Management. “But if they were to have a fourth spill ... it would definitely have a negative impact on the share price.”

Day, who last year sold his Barrick position of 156,000 shares, said the muted market reaction may reflect that the spill was contained and regulators had a relatively “benign” response.

Speaking in general about miners, Dan Denbow, senior portfolio manager at San Antonio-based USAA Investments, which holds some 700,000 Barrick shares, said any miner with a track record of operating issues would experience a “deteriorating effect on valuation as investors will be more concerned about the ability of a company to maintain its social license to operate in that country.”

Denbow said he was not specifically speaking about Barrick as he did not have enough details on the spill incidents.

On March 28, an unknown volume of gold and cyanide solution spilled at Veladero’s leach pad processing facility. Barrick has said the solution was contained within the facility, with no environmental impact, but the province of San Juan, where Veladero is located, ordered the company to stop adding cyanide until repairs were completed.

Six months ago, operations at the high-altitude mine in the Andes Mountains bordering Chile were suspended for nearly three weeks after falling ice damaged a pipe and spilled some ore saturated with cyanide solution over a raised bank. One year earlier, authorities suspended operations for eight days after more than one million liters of cyanide-contaminated liquid spilled into a nearby river. Barrick later paid a $10 million fine.

“Mining is inherently a tricky business, so you’re always going to have incidents,” Day said. “But when you have an issue at a mine, you would expect it to be fixed and you wouldn’t expect the same issue to come up again.”

Barrick said it was giving updates on the March incident to its new Veladero partner, Shandong Gold Mining Co, which last week agreed to buy a 50 percent stake in the mine for $960 million.

Barrick has also sent its President Kelvin Dushnisky and other senior staff to San Juan to meet with government officials. Executive Chairman John Thornton traveled separately to meet with local company managers.

In the lead up to October elections in San Juan province, the local government is likely to take a tougher line with Barrick to prevent opposition politicians from calling their response weak, according to a source close to the government, who is not authorized to speak to the media.

Reporting by Nicole Mordant and Susan Taylor in Toronto; Editing by Denny Thomas, Toni Reinhold