Peak Gold?

Barrick Says Cost of Pascua-Lama May Jump to $8 Billion

Barrick Gold Corp. (ABX), the world’s biggest producer of the metal, said the estimated cost of building a mine in the Andes may jump to about $8 billion because the project is more complex than it had anticipated.

Business Week,

26 July, 2012

Pascua-Lama, located at an elevation of 3,800 to 5,200 meters (12,468 to 17,061 feet) on the border between Chile and Argentina, will cost about 50 percent to 60 percent more than top end of a previously estimated range of $4.7 billion to $5 billion, Toronto-based Barrick said today in a statement. Initial output is now expected in mid-2014 instead of mid-2013.

Barrick Chief Executive Officer Jamie Sokalsky is revising costs and reviewing the company’s other development projects after taking over last month from Aaron Regent, who was fired. Barrick raised Pascua-Lama’s cost estimate by $1.4 billion a year ago. The latest increase is “outrageous” and suggests “a lack of controls,” said George Topping, an analyst at Stifel Nicolaus & Co. in Toronto.

“You have to question at what point did they know about this and whether they actually should be proceeding with it at this point,” Topping, who recommends buying the shares, said today in a telephone interview.

Barrick dropped 4.2 percent to C$33.04 at the close in Toronto. The shares have declined 28 percent this year.

Projects Reviewed

“Based on information gathered to date, it is apparent that the challenges of building a project of this scale and complexity were greater than we anticipated,” Barrick said in the statement.

Barrick said “various pipeline projects” aren’t viable amid current economic conditions. It said the Cerro Casale project in Chile and Donlin Gold in Alaska don’t currently meet the company’s investment criteria.

“Rate of return should drive production, not the other way around,” Sokalsky said in the statement.

The company is targeting more than 8 million ounces of output in 2015, compared with a previous estimate of 9 million ounces in 2016.

Second-quarter profit trailed analysts’ estimates after production fell and costs rose more than expected. Net income fell 35 percent to $750 million, or 75 cents a share, from $1.16 billion, or $1.16, a year earlier.

Profit excluding one-time items was 78 cents a share, missing the 93-cent average of 22 estimates compiled by Bloomberg. Sales declined to $3.28 billion from $3.42 billion.

Copper Forecast

Gold production dropped to 1.74 million ounces from 1.98 million ounces a year earlier. Stephen Walker, an analyst at RBC Capital Markets in Toronto, estimated output at 1.84 million ounces while Stifel Nicolaus’s Topping predicted 1.78 million ounces.

Barrick’s so-called total cash costs rose 38 percent to $613 an ounce from $445 a year earlier. Topping estimated $564.

Gold futures averaged $1,613 on the Comex in New York in the quarter, 7 percent higher than a year earlier. Prices have posted 11 consecutive annual gains.

Barrick reaffirmed its gold production forecast for this year of 7.3 million to 7.8 million ounces. Copper production will be 460 million to 500 million pounds, compared with an earlier forecast of 550 million to 600 million, because of lower output at the Lumwana mine in Zambia.

The company raised its forecast for 2012 gold cash costs to $550 to $575 per ounce, from $520 to $560.