Barrick spending more on big new mines

TORONTO (miningweekly.com) – Barrick Gold increased second-quarter net earnings 35% compared with a year earlier, to $1.2-billion, thanks to higher gold and copper prices and increased gold sales, but the company said it has raised the cost estimates for two big new South American mines under construction.

The Pascua Lama gold/silver project on the border of Chile and Argentina could cost as much as $5-billion, compared with previous estimates of $3.6-billion, because of inflationary pressures and additional material needed, the firm said on Thursday.

Barrick shares 0.3% on Thursday, to C$45.87 apiece by 16:00 in Toronto. The stock traded as low as $44.79 a share earlier in the day.

The big increase in the cost estimates for Pascua Lama reflects rising costs for inputs like steel, cement, equipment and labour, CEO Aaron Regent said on a conference call.

The company also needs to increase spending at Pascua Lama to meet its 2013 production target because of weaker than expected productivity levels, and will need more of certain materials than initially estimated.

The mine is located at an altitude of more than 4 500 m, and the strong winds and other weather factors mean that it simply requires more of things like structural steel, COO Peter Kinver said.

The altitude and weather conditions were also a factor in the lower productivity levels, he said.

The mine is now expected to cost between $4.7-billion and $5-billion. The previous range of $3.3-billion to $3.6-billion was issued in February and was already as much as 20% higher than an earlier estimate.

The group also said it now expects the Pueblo Viejo mine under construction in the Dominican Republic will cost between $3.6-billion and $3.8-billion, after heavy rainfall damaged a tailings dam.

The cost of the mine was already raised this year, to between $3.3-billion and $3.6-billion, because of inflationary pressures. Barrick owns 60% of Pueblo Viejo and is the operator, and partner Goldcorp holds the other 40%.

The operation, which is now only expected to start up in mid-2012, is one of a handful of large, low cost operations that Barrick is building to bring overall costs down and help achieve an output target of nine-million ounces within five years.

Despite the higher costs, the projects are still attractive, and even more so at current high metals prices, Regent argued.

"While we are disappointed with the increased capital costs of these projects, their overall economics have improved significantly as a result of much higher gold and silver prices than originally forecasted," Regent commented.

NOT UNEXPECTED

Together, Pueblo Viejo and Pascua Lama will add an average of 1.4-million to 1.5-million ounces a year to Barrick's production over the first full five years of operation, and lower the company's overall total cash costs by an impressive 20%.

The cost increases at were “not unexpected”, Maison Placement Canada analyst John Ing said in an interview.

“There's been inflation on capital projects across the board, and of course it's been very wet at Pueblo Viejo, so that's understandable.

“I don't see it as a very big problem.”

Barrick has also updated its cost estimate for a third Latin American project, Cerro Casale in Chile, which is now expected to cost $6-billion to build. The previous estimate for the mine was $4,2-billion.

The company will work on permitting and engineering work for the project over the next 18 months, and hopes to be ready for a construction decision towards the end of 2012, Regent said.

BALANCED APPROACH

Barrick strives for a “balanced approach” between building its own projects and buying new mines, Regent said on Thursday's conference call.

At least one analyst suggested that, given the escalating costs of construction and development, the group might be better off just paying cash for existing operations.

“From a strategic perspective I think it's important to have a balanced approach of acquisitions and developing projects,” Regent said.

“Obviously there's a real attraction to buy producing assets. But typically they also tend to be higher valued.”

Higher prices for gold, silver and copper are also making the development projects increasingly valuable, offsetting the increased capital requirements, he said.

“The returns are higher on the project side, so you get paid for taking that risk.”

EARNINGS RISE

Barrick, the biggest gold miner in the world, produced 1.98-million ounces in the second quarter, compared with 1.94-million ounces a year ago.

Net income rose to $1.16-billion from $859-million in the second quarter of 2010. Excluding some once-off items, adjusted net income rose 36%, to a company-best $1.1-billion.

Net cash costs, which include by-product revenue, were $338/oz, up from $302/oz in the second quarter of last year.

Barrick's gold margins – the difference between the price it receives and costs of production – rose 33%, to $1 068/oz excluding by-product credits.

The gold price reached a new high of $1 628/oz on Wednesday. The price has been pushed up this month amid concerns over a potential US debt default, breaching $1 600/oz for the first time on July 18.

The group said it still expects to meet full-year forecasts of between 7.6-million and eight-million ounces of gold at total cash costs of $450/oz to $480/oz, and net cash costs of $290/oz to $320/oz.

Including its new Lumwana copper mine in Zambia, copper production is estimated at between 455-million and 475-million pounds in 2011, at total cash costs of $1.55/lb to $1.70/lb.

The Toronto-based gold miner agreed in April to buy copper miner Equinox Minerals for C$7,3-billion, trumping an earlier bid from China's Minmetals Resources.