Why Barrick suspended Pascua-Lama operations

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Nov. 26 2019, Updated 1:33 p.m. ET

World’s largest resources

Pascua-Lama is one of the world’s largest gold and silver resources, with more than 15 million ounces of proven and probable gold reserves and 675 million ounces of silver reserves. The mining project is located on the Argentine-Chile border. Its mine life is more than 25 years.

Pascua Lama

Temporary mine suspension

During the fourth quarter of 2013, Barrick Gold Corporation (ABX) temporarily suspended construction of its Pascua-Lama project in Chile and Argentina. Only activities required for environmental and regulatory compliance were continued. Construction was partially halted amid the concerns of local groups regarding water contamination.

Positive for financial flexibility

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This suspension is positive for Barrick as far as its financial position is concerned. The capital that had been allocated for the development of this project will be used to pay down Barrick’s debt and improve its overall financial condition. According to the company, capital expenditures will be reduced by $1 billion in 2014.

We’ll discuss Barrick’s debt position in the later part of this series.

Negative for production

In contrast, the suspension is negative for the company’s production profile. At the time of suspension, Barrick had already spent $6 billion on Pascua-Lama and completed nearly 50% of the construction.

The project was expected to start production in 2016 with an average production rate of 800 to 850 thousand ounces of gold and 35 million ounces of silver in the first five years. The AISC (or all-in sustaining costs) would have ranged between $50 and $200 per ounce of gold. So obviously, the project would have had a positive impact on Barrick’s production and cash flows.

Barrick may be facing additional cash outflows over Pascua-Lama because of the terms of its silver-streaming agreement with Silver Wheaton Corp. (SLW).

According to Barrick, resumption of activities will depend on future costs, gold prices, and the regulatory and legal outlook. For now, Barrick has missed an opportunity to increase production and reduce costs per unit.

Meanwhile, Pascua-Lama isn’t an isolated case. Citing environmental concerns, the Chilean government has also ordered a stop to the development of the $3.9 billion El Morro mine, owned by Goldcorp Inc. (GG) and New Gold Inc. (NGD).

The VanEck Vectors Gold Miners ETF (GDX) invests in large and intermediate gold companies. The SPDR Gold Trust ETF (GLD) is a good way to gain exposure to the spot gold prices

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