Barrick Gold Checkmated in Chile

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.

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  • Report this Comment On May 25, 2013, at 12:23 PM, techy46 wrote:

    "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."

    Umm, all work at Pascua-Lama had already been halted on the Chile side weeks ago. The $16 million fine and conditions for continuing the project are all really good news. ABX has already spent $5 billion so spending another $100 million that was probably already budgeted is good news not bad news. If ABX can get that mine going by this time next year ABX will go back to $25-30 PS while paying 3-4% dividends.

  • Report this Comment On May 25, 2013, at 2:40 PM, TMFCop wrote:

    techy46,

    You're correct that work had been suspended, but the environmental regulator has now said the work cannot go on until ABX first implements the water management systems it promised to install. Perhaps a bit of clunky writing at the first pass though I clarified it in the third graf of the article.

    It's possible if it can get the mine going by next year it may be able to recoup its investment. Walking away from the billions invested isn't easy, but it seems it's going to be difficult to reach that goal now with the new conditions being placed on the miner.

    They've said they may be able to seed the project with ore from the Argentinean side, but that's no guarantee either since poor results there could make it unfeasible. Besides, the real value of PL is in Chile where 80% of the resources are located.

    I think we'll see cost estimates of the project balloon further before any real progress is made.

    Rich

  • Report this Comment On May 25, 2013, at 3:33 PM, DaveG99 wrote:

    Who is it that has been checkmated? The governments of Chile and Argentina who will not have this cow to milk if the project is cancelled. ABX has superlative prospects in Nevada, not yet earmarked for development. The company can shift the resources wherever they see fit.

    Indeed, ABX should correct the impairments which are related to construction - but it should not be afraid of simply putting this project on ice for a long time - if there is any reneg on the part of either government to what they have already agreed to.

  • Report this Comment On May 26, 2013, at 6:37 PM, Ventureshadow wrote:

    Barrick canceling this project would give Chile a black eye. It would put a stink on Chile as a place for foreign miners to operate in. Chile would become a loser, not a winner.

    Looking severe against Barrick is a political gambit by Chile. This fine against Barrick appears to be uncalled for because work had been stopped. Later Chile can allow Barrick to restart, pointing to the fine as a sign of its effectiveness as a disciplinarian. So the fine and temporary work stoppages are a win-win situation. I expect that both sides agreed to them.

    Politics can be more subtle than chess, and opinions about stocks in view of politics can be foolishly oversimplified. I doubt the real situation is as simple as you describe Mister Duprey.

  • Report this Comment On May 26, 2013, at 7:14 PM, techy46 wrote:

    TMFCop,

    The production estimates for Pascua-Lama are 800,000 ounces a year for 20-25 years. At a gold price of $1300 ounce and cost of $1000 ounce we're looking at $300 x 800,000 or $240 million a year in profits. That $1000 ounce cost includes amortization and interest costs of $400 ounce on the $8 billion invested. Additionally, for each ounce of gold there are 35 ounces of silver that could be worth $700 to further offset the $8 billion invested. Seriously, Barrick's $14 billion in debt on their balance sheet represents a $100 per ounce of debt for their 140 million ounces of gold reserves. Those are pretty good ratios as long as gold stays in the $1100-1300 ounce price range.

  • Report this Comment On May 29, 2013, at 10:39 AM, WolfSheppard wrote:

    I don't see this project being cancelled. Therefore, use of the word 'checkmate' is incorrect, or at the least, very strong.

    Chile wants it to go ahead, but they probably realize they could extract more flesh from Barrick. That Barrick hasn't built the water management systems is shameful. Honestly, this is just politics as usual.

    Chile want leverage to get a better deal for themselves, just as how Barrick wants leverage (Barrick's empty threat to abandon the project). No one wins if the project is cancelled completely.

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