Canada’s Barrick Gold Corp. (NYSE: ABX) is facing some fairly significant problems with its Pascua-Lama mine project. Reuters indicates the company’s project has been delayed by the lack of a water management plan, which it will provide to Chilean regulatory agencies soon. When production finally begins, the mine should become one of Barrick’s key assets.
The mine is expected to generate around 800,000 to 850,000 ounces of gold and as much as 35 million ounces of silver annually for the first five years of operation. However, Barrick – which happens to be the world’s leading gold producer – has warned that there is no telling what time and cost overruns could amount to once the water management plan is put in place.
Reuters quotes CFO Ammar Al-Joundi:
“Until this plan is approved, we can’t establish a definitive time frame. Once we have that, then we will be able to take a look at the overall project, take a look at the impact on scheduling and costs and everything else.”
Barrick Mine Delays
The fuss with the water management plan began last April, when a Chilean court forced development work at the Pascua-Lama project to grind to a halt. Pascua-Lama is right on the Chile-Argentina border, and problems were reported alleging that Barrick’s operations were causing damage to regional water supplies and glaciers.
Ultimately, Barrick was required to pay nearly $16 million in fines and, in addition, develop a satisfactory water management plan. These are the factors that have delayed work on the mine, and hence operations aren’t likely to begin before 2014.
And of course, the cost of developing the mine went up drastically. It’s not like it was an inexpensive proposition; the mining project already had a budget of $8.5 billion, and Barrick has run through $5 billion of that. Overall, estimates of capital expenses were raised by nearly 70 percent.
Barrick has been grappling with this project in various forms for over ten years now. Speculation has run rife that the company may choose to simply shelve the project entirely due to the endless cost overruns, delays, and other stumbling blocks.
Nonetheless, CFO Al-Joundi has openly stated that Barrick stands behind the Pascua-Lama project, and that it is seen as a vital asset for the future.
Once Barrick submits the water management system proposals, Chile’s regulators will need to approve them. Apparently, that process could take as long as two years. Meanwhile, the mining company proceeds with construction and development on the Argentine side of things.
Struggling Mining Industry
Let’s pull back a bit to take a look at the larger mining picture. PriceWaterhouseCooper’s latest yearly mining industry report indicates a rough start to 2013, with mining stocks falling by almost 20 percent worldwide over the first four months.
This is a significant change from the rest of the past ten years, during which (as the report notes) the mining industry stayed well ahead of the general equity market. The first stumbles occurred last year, and so far this year the mining sector has displayed clear distress signals.
Of the leading 40 companies in the industry, market capitalization is down for 37. That, in other words, is a loss exceeding $200 billion. Of these leading 40, gold miners bore the brunt of it – they lost $58 billion all by themselves. The April crash did not help matters at all; gold prices dropped 12 percent over that month, leading to a 28 percent decrease in stock prices for the leading 40 companies.
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Interestingly, even as the general markets showed strong performances (undoubtedly propped up significantly by the Fed’s asset-buying stimulus actions), the HSBC Global Mining Index fell by 30 percent. In fact, it trailed the Dow by 46 percent and the FTSE 100 by 43 percent.
Major gold companies – including Barrick, Anglo Gold Ashanti (NYSE: AU), Goldcorp (NYSE: GG), and Newmont (NYSE: NEM) – were especially affected, facing the greatest losses in market capitalization among gold companies in the top 40.
On the other hand, companies with greater diversification – BHP Billiton (NYSE: BHP) and Rio Tinto (NYSE: RIO), for example – made quick gains, racking up $61 billion. Altogether, though, the gold companies among the top 40 showed losses of $29 billion.
The question that remains is: will gold fall further? It’s unclear at best. Gold has had a rough few months, and at present the lure of platinum and palladium remain strong.
But gold has a long history of recoveries and continues to inspire faith in many. Don’t write it off yet.
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