Having one of the world's largest undeveloped gold deposits in your portfolio really doesn't do you any good if you can't ever develop it. A Chilean environmental court ruling may help Barrick Gold (NYSE:GOLD) avoid that fate.
A lofty goal
High in the Andean mountains straddling the border between Argentina and Chile, Barrick's Pascua-Lama project is an open pit mine of gold, silver, copper and more, containing 15.4 million ounces of gold and more than 674 million ounces of silver. It was 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.
But its location also brought with it environmental challenges and allegations that the project would contaminate sensitive glacial waters. After years of battling local communities and environmentalists who opposed its development, Barrick put Pascua-Lama on hiatus; took after-tax impairment charges of $11 billion; renegotiated its contract with Silver Wheaton (NYSE:SLW), which had an agreement with Barrick for output from the mine; and damaged its standing with investors.
The company estimated it would be spending only $170 to $190 million to keep the project in maintenance mode this year while capital costs are expected to run just $30 million to $40 million for the year. Total capital expenditures for 2015 for Barrick Gold are expected to be in the range of $1.9 billion to $2.2 billion. In 2014, the miner had capex of $2.2 billion.
A new ice age
Andean glaciers aren't the typical mountain of compacted ice floes you'd normally conjure images of, but rather they consist mostly of rocklike crust with a massive core of frozen ice. The indigenous people of the region rely upon the glaciers for their water and it was feared Barrick's work would contaminate them.
According to a statement issued by the gold miner on Monday, Chile's Environmental Court ruled Pascua-Lama hadn't damaged the glaciers within the project's "area of influence."
That doesn't mean Barrick's gotten the green light to start up development again. It still has other legal and regulatory problems surrounding the project and it faces potentially steep fines still that were assessed by Chile's environmental regulator.
Last December the country's Supreme Court rejected Barrick's appeal of a decision by the Environmental Court to set aside $16 million in fines it was assessed for violations at the mine. The court ruled the regulator had been wrong to group the 22 violations into five categories, but should have considered them individually. Barrick appealed and the Supreme Court declined to consider the motion meaning the miner could face fines that run 10 times higher.
Good as gold
Yet Pascua-Lama remains an extremely low-cost project that despite the depressed prices of precious metals can still be economical to restart. Even though silver averaged just over $19 per ounce last year and currently trades under $17 -- and Barrick says silver prices have a significant effect on the project's overall economics -- those are based on a price of silver at $12 per ounce and gold at just $800 per ounce. There's still plenty of cushion to make this a viable project.
And Barrick needs something soon. According to JPMorgan Chase, Barrick Gold is expected to see its gold production drop to just 4.5 million ounces by 2020, well below the reduced output of 6.25 million ounces last year. The analyst believes it will fall even further later on. That would put it behind the annual production of Newmont Mining, AngloGold Ashanti, and Goldcorp.
Moreover, Barrick has had to amend its agreement with Silver Wheaton several times because of the problems at Pascua-Lama, most recently at the end of January. When the silver streamer was originally taking production from three Barrick Mines until Pascua-Lama was up and running, that had to be changed in light of the delays and eventual mothballing of the project.
The silver lining
Two months ago Barrick updated the agreement again, this time it extended how long Silver Wheaton will take production from Barrick's other mines from the end of 2016 until March of 2018. Also, Barrick now has until 2020 to complete a test of Pascua-Lama's readiness. Originally it was supposed to be completed by the end of this year, then it was moved to 2017, and now it's out till the end of the decade.
If Barrick fails to live up to its end of the agreement, it has to pay back to Silver Wheaton the upfront cash of $625 million that it loaned the miner, minus any silver production the streamer received. As of the new agreement date, Barrick was still on the hook for $350 million.
A deep hole to dig out of
Barrick Gold's stock trades under $12 a share these days, down 40% from its 52-week high it hit last summer. And the stock is 80% below the all-time highs of 2011 when it traded at over $55 a share, gold was going for $1,900 an ounce, and Pascua-Lama looked like it would be a profitable venture.
There are a lot of sunk costs already into this project, and the Chilean Environmental Court decision is a win that Barrick Gold desperately needed, but the miner needs more than just a few such wins before its stock can be considered a buy again.