When Barrick Gold (ABX 0.19%) announced its $3 billion equity offering and the suspension of its key Pascua-Lama project, I expressed my doubts about the moves. Since then, Barrick has fallen 15%. The demand for the share offering was not overwhelming, and when it was fulfilled, the stock was free to slide further.
Clearly, the investors that participated in the offering are not happy now. Does it make it a decent purchase for those who are still on the sidelines?
Pascua-Lama
Back in 2009, Barrick thought that it would need $2.8 billion-$3 billion to start production at Pascua-Lama. However, multiple difficulties led to a big revision of the budget, and the latest estimate came in the $8 billion-$8.5 billion range.
The company had already spent more than half of this budget when it decided to call it a day and start a ramp-down. Barrick plans to spend no more than $300 million on Pascua-Lama's water management system in the next year. Water management is key to getting the green light from authorities to proceed with other work.
As gold prices are near their yearly lows, Barrick is reluctant to spend more than necessary to keep the project afloat. As of now, Pascua-Lama is going the way of Newmont Mining's (NEM +0.72%) Conga project in Peru. The project got stalled because of the opposition from the local community. Since then, Newmont is in the slow-spend mode on this project, and is building a water management system to comply with regulations.
Pascua-Lama is too big a project to ignore. Barrick states that it will evaluate different options to continue, such as strategic partnerships, royalty or income streaming deals. It's worth noticing that Barrick has already a streaming deal with Silver Wheaton (NYSE: SLW) and a royalty deal with Royal Gold.
I don't think it would be easy for Barrick to sign similar new deals. Silver Wheaton is the world's largest silver streaming company, and it is already waiting on the sidelines. What's more, silver is under bigger pressure than gold, and so are shares of Silver Wheaton.
Share dilution and chairman exit
Offering additional equity when the share price is already depressed is rarely a good move, at least in the short term. Recent price action in Barrick's shares confirms this thesis. Importantly, offering proceeds were used to reduce indebtedness rather than to fund growth. Barrick is paying a high price for the ambitions of its founder, Peter Munk, to build a mining behemoth.
Barrick has recently announced that Mr. Munk will retire as chairman of Barrick and will step down from the company's board of directors at the 2014 annual meeting of shareholders. John L. Thornton, who has been co-chairman since 2012, will become chairman in 2014.
It's too early to say whether these developments will bring meaningful changes. On the positive side, Barrick Gold remains a low-cost producer with all-in sustaining costs of $916 per ounce in the third quarter.
Bottom line
Barrick Gold states that its five biggest mines contributed 55% of its third quarter production at all-in sustaining costs of just $660 per ounce. One can only speculate if the company will sell worse-performing assets to become smaller, but more profitable. Currently, the price environment is not great for asset sales.
Pascua-Lama problems continue to weigh on Barrick's shares. Together with share dilution and the continuing drop in gold prices, they do not make a good mix.
