Barrick Gold Corp. announced a massive cost overrun and one-year delay at its key Pascua-Lama gold project, as the world's biggest gold miner struggles with soaring industry costs that are also forcing it to shelve other large projects in the pipeline.
Less than two months after it suddenly ousted chief executive officer Aaron Regent, Barrick said it is shifting its strategy to focus more on returns rather than growth in gold production. It slashed its 2015 production target to eight million ounces from nine million previously.
"In my view, rate of return should drive production, not the other way around," said Barrick's new chief executive, Jamie Sokalsky, pledging to take steps to reverse the company's recent slumping stock price.
Shares of Barrick have plunged 40 per cent since September, more than its competitors, amid concerns about its aggressive move into copper and a management shake-up this year.
Investors were braced for more bad news after Mr. Regent's ouster, but Barrick's announcement that Pascua-Lama will cost up to $8 billion (U.S.) to develop, 50 to 60 per cent more than previously forecast, was a shock. Barrick shares tumbled 4.2 per cent, to close at $33.04 in Toronto, while other gold stocks rallied.
"This is very serious. That is an outrageous increase in capital costs for Pascua Lama," said George Topping, an analyst with Stifel Nicolaus in Toronto. "I'm picking myself up from the floor."
Cost overruns are plaguing resource companies as prices for everything from steel, concrete, energy and equipment soar along with labour costs – especially in Chile and Argentina. Canadian oil sands giant Suncor Energy Inc. said on Wednesday it is reviewing plans to spend tens of billions of dollars on new projects.
Barrick is also shelving the Cerro Casale project in Chile and Donlin Gold in Alaska, each of which would require billions of dollars to build. It said it would also hold back on organic expansion projects.
The new cost estimate for Pascua-Lama, on the border of Chile and Argentina, compares with a forecast of $3-billion in 2009, when a construction decision was reached, and earlier forecasts were even lower.
"This project so complex because of the scale, the altitude, the extreme weather conditions and the fact that it is a cross-border, binational project," Mr. Sokalsky explained, saying Barrick erred in thinking it could manage construction of the project completely in house, rather than using outside experts.
"Ultimately we shouldn't have been managing as much of this as we did, so that is a big part of how the schedule slipped and how that productivity slipped."
Pascua-Lama is set to become one of the world's largest gold mines, with nearly 18 million ounces of proven and probable gold reserves and another 676 million ounces of silver. The mine has been a challenge to Barrick from the start, with years of delays amid environmental opposition before it was finally approved. The mine is now due to be built by mid-2014.
Costs have been a major challenge to the project. Labour costs alone, which make up 25 per cent of the total, were up 54 per cent on the Argentine side this year. Paying workers over another year of construction will be a major component of the cost overrun, Mr. Sokalsky said.
Mr. Regent was hired to great fanfare in late 2009, and is said to have clashed with the board over the company's direction and over concerns about costs at Pascua Lama and other projects. He was dismissed on June 6, after Barrick chairman Peter Munk publicly reprimanded Mr. Regent's failure to lift Barrick's stock price.
"Ultimately, to do that, we need to run the business well, run it in a financially disciplined basis, make good investment decisions, manage the portfolio, generate free cash flow and essentially create better shareholder returns, and hopefully that will translate into a higher share price," Mr. Sokalsky said in an interview Thursday.
Barrick also faces pain at the Lumwana copper mine in Zambia, where it has had to refocus after former owners targeted only short-term production. Analysts have long expected a writedown on the value of the mine, acquired under the $7.3-billion purchase of Equinox Minerals. Mr. Sokalsky said there are no plans to take a charge at Lumwana currently, but the company will conduct its customary impairment tests at year end.
Barrick reported adjusted net earnings of $780-million (U.S.), or 78 cents per share, in the three months ended June 30. That was down from $1.12 billion, or $1.12 per share a year ago, and was well shy of the average 93 cents-per-share estimate of analysts polled by Bloomberg.