Mining - Chile - Argentina

Barrick says Pascua Lama capex could reach US$8bn, start up deferred to 2014

Barrick says Pascua Lama capex could reach US$8bn, start up deferred to 2014

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Canadian miner Barrick Gold (NYSE: ABX) is forecasting a 50-60% capex increase for its Pascua Lama gold-silver project on the border of Chile and Argentina to as much as US$8bn, president and CEO Jaime Sokalsky said in a webcast to discuss Q2 results.

A previous cost estimate for Pascua Lama was US$3.3bn-3.6bn, but this was revised up to US$4.7bn-5bn after a review in 2011.

After taking office as CEO of Barrick in early June this year, Sokalsky called for a thorough review of the business to identify changes to maximize value and deliver improved share price performance. The Pascua Lama review was part of this process.

"The preliminary results from the review are disappointing with a greater than anticipated rise in project cost," Sokalsky said, adding: "Make no mistake; these revisions are very disappointing to me and my team."

WHAT HAPPENED?

"We underestimated the complexity of the project," the CEO said, citing scale, altitude (3,800m-5,200m), terrain, remoteness and the magnitude of skilled labor requirements.

High inflation, particularly in Argentina but also in Chile, rising input costs and an intensely competitive labor market exacerbated these challenges.

"We are all aware of inflationary pressures in the markets but there has been a 54% increase in per hour labor rates in Argentina this year, and labor is 25% of total project costs," Sokalsky said.

Barrick's decision to build Pascua Lama itself instead of hiring an external EPCM contractor was part of the problem. "We took on construction management ourselves instead of using an EPCM contractor... the project was too complex for an in-house team," Sokalsky said.

Of the cost increases, 30% can be attributed to lower than expected contractor productivity, 25% to gaps in engineering and planning, 25% to cost escalation and inflation and 20% to the extension of the project completion date.

ACTION PLAN

Barrick is implementing immediate actions to get the project back on track. "This is the number 1 priority and we are 100% focused on delivering on this project," Sokalsky said.

US-based Fluor (NYSE: FLR) will take over a greater proportion of project construction and the gold miner has hired another EPCM firm to provide an independent assessment of project status. Barrick has also already brought in additional and experienced people to manage the construction.

To counteract labor inflation in Argentina, Barrick is working with conservative assumptions, expanding procurement and using fixed price contracts. "But we're not going to be completely immune to further labor cost increases - we have assumed some fairly significant rates of labor inflation - I think we've been able to mitigate it somewhat and reduced exposure but not completely," Sokalsky said.

Fixed prices for machinery and equipment has been achieved as well.

Approximately US$3bn has been spent on Pascua Lama to date.

PRODUCTION

There has been no change to expected output and Pascua Lama will churn out 800,000-850,000oz/y of gold a year and 35Moz/y silver.

Inflationary pressure did have an impact on cash costs but they will still be negative at US$0/oz to negative US$150/oz based on a silver byproduct price of US$25/oz, according to the CEO.

Previously, total cash costs were negative US$225-US$275/oz, based on the same silver price.

Pascua Lama has 18Moz in gold reserves and 676Moz of silver in gold reserves. It has a projected mine life of 25 years.

Barrick is the world's biggest gold producer. In South America, it operates the Veladero gold mine in Argentina, and the Lagunas Norte and Pierina mines in Peru. It also has the Cerro Casale project in Chile for which a construction decision is pending.

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