Chile wants to make really, really sure Barrick Gold (ABX 1.26%) understands the Pascua Lama mine is absolutely, positively shut until the gold miner builds infrastructure to prevent groundwater pollution. An appeals court formally suspended work at the mine yesterday, although Barrick had anticipated the move last month, and said its work at the project would be delayed beyond its original forecast of late 2014.
Earlier this year, following clashes with both the government and local indigenous tribes, a temporary suspension of the work being done at Pascua Lama was imposed. Then, the country's environmental regulator weighed in saying it couldn't go forward, and now an appeals court has underlined the hard-line stance so that Barrick is looking at 2016 as the earliest date for production to begin.
Pascua-Lama is one of the world's largest gold and silver projects, and if it's ever allowed to go forward, it could 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. The expected life of the mine is 25 years, and is said to possess nearly 18 million ounces of proven and probable gold reserves, and 676 million ounces of silver.
Last month, in extending its production schedule further out, Barrick said it it anticipates having to write down as much as $5.5 billion related to the delays. Although gold prices have rebounded somewhat from the lows they tested in June, analysts see little upside for the metal in the immediate future and, in fact, Goldman Sachs predicts we'll hit $1,050 an ounce by the end of 2014. Such depths wouldn't be devastating to Barrick's project, but they would change the economics of it nonetheless.
Pascua-Lama is expected to have all-in sustaining cash costs of $50 to $200 per ounce, and total cash costs of $0 to negative $150 per ounce, based on gold trading at $1,700 per ounce, silver going for $30 an ounce, and oil running at $90 per barrel. In addition, the Chilean peso would exchange with the U.S. dollar at a rate of 475-to-1. Gold closed yesterday at $1,283, silver at $19.93, and oil at $107.04 a barrel. The peso is at 501.95 for every U.S. dollar.
Barrick had, at one time, suggested that if it couldn't get Pascua Lama going by year's end, it would walk away from it, following the path of other miners like Kinross Gold and Vale, which have recently abandoned projects in South America. However, it seems as though it has resigned itself to the lengthy process necessary to reach the riches that Pascua Lama contains.
Yet, even if it complies with the court orders, the Chilean tribes have said they still might seek a revocation of Barrick's permit if they believe the protections are insufficient. On which side the country's supreme court would come down remains a wild card, as it recently suspended a permit that Goldcorp had for its El Morro copper-gold project.
While it's not all doom and gloom for Barrick, investors should be mindful that it's going to be a long, arduous slog before there's any chance of redemption. Its shares have lost more than half their value over the past year, and nearly a quarter of it has come in the last month. I don't expect that we'll see any meaningful rebound before 2014 or 2015 at the earliest. Investors might want to look at other doors to open for their gold investments.
