Barrick Gold Faces New Fines at Pascua-Lama

Out with the old penalties, in with the new.

Mar 6, 2014 at 4:00PM

Following imposition of the maximum $16 million fine last year for some 22 serious environmental violations at its Pascua-Lama gold and silver project in Chile, Barrick Gold (NYSE:ABX) halted all construction at the mine until it could build a water management system previously promised to contain contaminated fluids. The miner then followed that up with an indefinite suspension of all work at the mine last November as it became clear there was no end to the impasse that's blocked the project's progress.

Barrick History

Source: Barrick Gold.

Now Chile's environmental court has revoked all the fines, but is set to impose new ones based on a new calculation for determining the amount.

In revoking the penalties, the court said the superintendent erred in lumping all 22 violations into five groups and instead said Barrick should be punished for each and every one individually. It also noted that while the fines are revoked (and being recalculated), the other orders imposed, including shutting down work on Pascua-Lama and the requirement to build shelter works necessary to protect water resources, remain in place.

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. The site is said to possess nearly 18 million ounces of proven and probable gold reserves and 676 million ounces of silver. It's all-in sustaining costs at Pascua-Lama were expected to run at just $50 to $200 per ounce, compared with $975 per ounce as a whole for the company.

Silver Wheaton (NYSE:SLW) was a partner in the project, having helped finance it in return for receiving a quarter of all the silver produced from the project. Despite Barrick putting Pascua-Lama on indefinite hiatus, it was still contractually required to have 75% of the construction completed by the end of 2015. Without that happening, the silver streamer could have demanded back the up-front payments it gave the miner, minus credits for silver already received from three other South American mines where it had been getting 100% of their streams. That agreement had been scheduled to end last year, but Silver Wheaton agreed to extend the timeline for completing Pascua-Lama until Dec. 31 2017, in return for continuing to receive silver production from the South American mines until the end of 2016.

Barrick subsequently took writedowns on Pascua-Lama totaling more than $5 billion, and took $2.82 billion more in the fourth quarter across all its assets, which brought the total writedowns for 2013 to $11.5 billion for the miner.

The new decision could see Barrick liability at Pascua-Lama increase substantially, but because of its preeminent position in the industry, and the rally in gold's price so far in 2014 -- up almost 10% -- the miner should be able to withstand the storm. That it still remains heavily indebted, though, means Barrick Gold remains a risky investment and investors might be better served looking elsewhere.

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