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Last month, after reporting on the twin battles Barrick Gold (NYSE: ABX ) was waging in Chile at its Pascua Lama mining project, a commenter said the gold miner was playing a game of chess with the country, suggesting it was trying to outmaneuver the various pawns -- most notably the local indigenous tribes opposed to the project -- arrayed against it.
After Friday's announcement that all activity must cease at the mine and Barrick was drawing the heaviest fines possible for environmental violations, it's clear we can carry the analogy further and say Barrick has lost its queen and is about to be checkmated.
Chile's environmental regulator imposed the maximum $16 million fine on the miner that it could for violations of its environmental permit, and it ordered all construction activity at the mine to cease immediately until it builds the water management systems it promised to put in place for containing contaminated fluids.
Pascua-Lama is one of the world's largest gold and silver resources, expected to produce an average of 800,000 to 850,000 ounces of gold and 35 million ounces of silver in its first five years of operation, and it has an expected mine life of 25 years. It's said to possess nearly 18 million ounces of proven and probable gold reserves and 676 million ounces of silver.
Barrick previously said if it didn't get the mine going by the end of the year, it might have to abandon the project altogether, which would deal a blow to both Silver Wheaton (NYSE: SLW ) , which helped finance the project in exchange for a quarter of all the silver produced from the project, and Fluor (NYSE: FLR ) , which is serving as the project's lead contractor.
The costs of Pascua-Lama keep skyrocketing and stand at over $8 billion, an escalation that may soon make it economically unfeasible to continue work there, even if the mine itself -- were it ever able to be operational -- is expected to be an exceptionally low-cash-cost operation.
Under Barrick's definition of an all-in sustaining cash cost framework -- a new calculation it's developing with the World Gold Council to capture the total costs associated with producing gold -- Pascua-Lama is expected to run at just $50 to $200 per ounce (compared with $975 per ounce as a whole for the company), with total cash costs running from nothing to negative-$150. But now it appears that's going to be a pretty big "if" to surmount.
In chess, using pawns to mount an effective offense is often key to securing a checkmate. Barrick's king has been now cornered, and the pawns are lining up for a final assault. It seems all that's left is for the miner to do is resign or allow Pascua-Lama to be captured.
If you're looking for a company whose success is determined by the metals market, but without involving itself in the risks of physically mining the metals, then Silver Wheaton provides a unique play on the future of silver. SLW chooses to finance the mining of silver; it has grown sales and net income every year since 2008, and also has increased competitive advantages over its limited peer group. To learn more about Silver Wheaton, click here now to access The Motley Fool's premium research report on the company.