Barrick Gold warns of cost overrurns and delay at major South American gold mine

Barrick Gold Corp. (TSX:ABX) warned of significantly higher costs and a production delay at a major gold mine project in South America after announcing Thursday that its second-quarter earnings dropped 35 per cent.

The world’s largest gold producer said its capital costs of about $5 billion for the Pascua-Lama mine are expected to go up 50 per cent to 60 per cent. First production at the mine is expected in mid-2014 instead of next year.

“Make no mistake, these revisions are very disappointing to me and our team,” president and CEO Jamie Sokalsky said of his first set of quarterly results since taking over from ousted chief executive Aaron Regent in June.

Barrick reported net earnings fell to US$750 million, or 75 cents per share in the three months ended June 30. That’s down from $1.16 billion, or $1.16 per share, a year ago.

The results missed analyst expectations by 18 cents per share, according to average estimates from Thomson Reuters.

Barrick shares closed down $1.45, or 4.2 per cent, to $33.04 on the Toronto Stock Exchange.

Pascua-Lama is in the Andes mountains between Chile and Argentina and is expected to be one of the world’s largest gold mines. Barrick has said the mine has proven and probable reserves of 17.9 million ounces of gold, with 676 million ounces of silver contained within the gold reserves.

Sokalsky said Pascua-Lama is a “world class” asset and will contribute free cash flow to Barrick for many years.

RBC Capital Markets analyst Stephen Walker described the capital cost overruns at the Pascua-Lama mining project as a “blowout.”

Walker said the mining project now could have capital costs as high as $8 billion and noted that first production is scheduled a year later than expected.

“This negative impact was a result of lower than expected contractor productivity and inflationary cost pressures,” Walker said in a research note.

Sokalsky told analysts during a conference call that the complexity of the Pascua-Lama project was “underestimated” and as chief executive he accepts responsibility for this.

Earlier this month, Barrick suffered a legal reversal that may also affect development of the Pascua Lama project.

Argentina’s Supreme Court decided to remove injunctions that have blocked key parts of a law to protect glaciers. Barrick has argued it shouldn’t need to provide the national government with new environmental assessments.

Sokalsky also told analysts his goal is to increase the company’s share price and increase the company’s free cash flow.

“Returns will drive production. Productions will not drive returns,” he said.

“By being disciplined with our capital allocations and running the business well and focusing on profitable productions, returns and free cash flow in a disciplined way, I am confident we can deliver superior share price performance. And that is our ultimate goal.”

Barrick also has cancelled some projects that are considered too costly, he said, and added the company has made changes at its Lumwana mine to bring it “up to Barrick standards” after lower production at the Zambian mine.

The company also maintained its 2012 gold production guidance of 7.3 million to 7.8 million ounces.

Total and net cash costs for gold are now expected to be slightly higher in the range of $550 to $575 per ounce and $460 to $500 per ounce, respectively, mainly due to higher costs in Australia Pacific and at African Barrick Gold in the first half of the year.

But total cash costs are expected to be lower in the second half as a result of higher overall production levels and lower-cost mines contributing to a greater share of total company production.

Full year copper production is now expected to be 460 to 500 million pounds, mostly due to lower than anticipated production from Lumwana mine with cash costs of $2.10-$2.30 per pound.