Barrick Gold Corp. suffered another major setback at its Pascua-Lama project on Wednesday, as a Chilean court ordered a halt to construction work at the massive mine.
Shares of Toronto-based Barrick plunged 8.7% on the news, reaching their lowest level in more than four years, as the company suspended work on the Chilean portion of the project. Investors worried that the ruling could push first production at the oft-delayed gold-silver project even further into the future.
The injunction from the appeals court comes after many local complaints of environmental damage around the Pascua-Lama site. Chile’s environmental regulator said last month that it detected problems at the project, according to Bloomberg.
Pascua-Lama has been a challenging and controversial project from the start. It is located at very high elevation in the Andes and straddles the border between Chile and Argentina, creating all sorts of unique technical, environmental and cross-border challenges.
It took Barrick several years to resolve the fiscal matters around the project before it finally began construction in 2009. But it turned out that the real problems were just beginning. Since then, the expected cost of Pascua-Lama has ballooned from US$3-billion to US$8.5-billion as Barrick mismanaged development and dealt with huge inflationary pressures. The timeline to production has been pushed back from early 2013 to the second half of 2014.
This ruling will not halt the project. While roughly 80% of the deposit is in Chile, most of the infrastructure is in Argentina, where Barrick can continue construction work.
“However, there has been controversy in Argentina over the mine’s impact on local glaciers,” TD Securities analyst Greg Barnes wrote in a note.
All the same, investors fear the heightened legal threat could weigh on the company for some time, potentially slowing down development. Mr. Barnes calculated that an additional 12-month delay at Pascua-Lama would reduce his net present value for the project by 27%, or $1.54 per share.
The court ruling comes at a very challenging time for the company. Like many of its competitors, Barrick shares are under pressure as the gold miner has taken a major writedown and struggled to boost earnings due to high costs and stagnant gold prices. Chief executive Jamie Sokalsky said he has no plans to build any new mines as he focuses on maximizing profits at the company’s existing operations.
While cost inflation has reduced the value of Pascua-Lama, it remains a very attractive asset. The mine is expected to churn out up to 850,000 ounces of gold and 35 million ounces of silver a year in its first five years of production at very low cash costs.
Article source: http://business.financialpost.com/2013/04/10/chile-court-temporarily-suspends-barricks-pascua-lama-project/