Barrick to shelve Pascua-Lama, issue shares to cut debt

Reuters

By Allison Martell and Euan Rocha

TORONTO, Oct 31 (Reuters) - Barrick Gold Corp saidon Thursday it would stop development of its Pascua-Lama mine inSouth America indefinitely, a surprise reversal on a projectthat has already cost the world's largest gold producer morethan $5 billion.

Pascua-Lama, which Barrick has been counting on to provide alarge share of its future gold production, has been plagued bypolitical opposition, permitting issues, labor unrest,cost-overruns and a sharp drop in bullion prices.

Even so, Barrick had signaled that it intended to keepplowing ahead with the remote project, which straddles theborder of Chile and Argentina high in the Andes, a location thathas bumped up costs and fueled environmental opposition.

Separately Barrick, which is attempting to reduce its debtload, said later on Thursday that it will raise more than $3billion through a share offer, with much of the funds earmarkedto pay down borrowings.

Barrick's stock dropped more than 5 percent to$18.34 in New York in after hours trade after it announced itwould offer 163.5 million shares to the public at $18.35 each.

It is no secret that Barrick has looking for ways to reduceits debt load, which sat at $14.6 billion at the end of thirdquarter. Several sources familiar with the situation have toldReuters the company was considering a wide range of options froma strategic equity investment to further streaming deals thatyield upfront cash.

The Toronto-based company stressed that the decision to stopdevelopment at Pascua-Lama was not the end of the road for theproject. Barrick said it would resume construction whenconditions warrant, and would explore strategic partnerships orroyalty and similar deals to fund the project.

"The project has been, and continues to be, a top priorityfor the company, and also our biggest challenge," ChiefExecutive Jamie Sokalsky said on a call with analysts andinvestors.

If completed, Pascua-Lama is expected to produce up to850,000 ounces of gold annually in its first five years, and atexceptionally low operating costs, which could pay dividends foryears to come.

In suspending construction at Pacua-Lama, Barrick isfollowing in the footsteps of other big miners that havemothballed projects in recent years.

Rival Newmont Mining Corp has put its Conga projectin Peru on hold, and Anglo American last month droppedplans to push ahead with the Pebble copper-gold mine in Alaska.Pebble, like Pascua-Lama, has faced strong environmentalopposition.

Investors seemed to take the decision in their stride as itwill further ease cash flow pressures on the company.

"I can't fault their decision. They are being conservativeand that's fine," said Caesar Bryan, a portfolio manager atGabelli, which owns about 2.9 million shares in Barrick. "Istill think this can be a strong cash generator at some point."

KEY PROJECT

Barrick announced its decision on Pascua-Lama as it reportedthird-quarter earnings that topped expectations, helped in partby lower operating costs. Still, earnings and revenue tumbledfrom a year earlier.

The decision to suspend construction is a blow toArgentina's president, Cristina Fernandez. Pascua Lama is themain foreign investment project in Argentina after Brazil's Vale halted a $6 billion potash project at the beginningof the year due to high costs.

And it is another disappointment for Chile's mining sector,which faces regulatory delays and increasing opposition fromlocal communities and environmental groups.

Barrick had been expected to raise its estimate of the costof Pascua-Lama - which it pegged last year at as much as $8.5billion - when it announced quarterly results, but it did notgive a new figure.

Problems with permits had been expected to raise the mine'sprice tag. Regulators halted construction on the Chilean side ofthe border last spring, citing serious environmental violations,and Barrick agreed to build a new water management system.

Some investors had urged Barrick to stop building, but theminer had emphasized repeatedly how far it had already come,spending $5.4 billion by the end of the second quarter. Capitalspending on the project was $310 million in the third quarter.

Barrick said it will continue activities needed to complywith regulatory requirements at Pascua-Lama and protect theenvironment. Local environmental groups are worried about theproject's effects on nearby glaciers and on the water supply,although supporters say the impact will be small.

The company, which has been pushing to cut costs, has alsofaced labor unrest. Unionized workers on the Chilean side of theproject said on Wednesday they had voted to strike as early asthis Friday.

Suspending Pascua-Lama could weigh on Barrick's productionin 2016 and beyond, especially as the company has already saidit has no plans to build other new mines in the near future.

Barrick said the move will reduce its 2014 capital costs byas much as $1.0 billion. As of Sept. 30, it had cash andequivalents of $2.3 billion, and $4.0 billion available under acredit facility.

"It would have been financially irresponsible for them tocontinue with the project at this point," said Deutsche Bankanalyst Jorge Beristain. Beristain said he believes the projectwill be completed eventually.

Barrick produced 1.85 million ounces of gold in the thirdquarter, up slightly from 1.78 million a year earlier. All-insustaining costs fell to $916 an ounce from $1,010 an ounce.

Earnings fell to $172 million, or 17 cents a share, in thequarter from $649 million, or 65 cents, a year earlier. Revenuedropped to $2.99 billion from $3.40 billion.

Excluding an unusual tax expense and other special items,adjusted earnings fell to 58 cents a share from 88 cents a yearearlier. On that basis, analysts, on average, had expected 50cents a share, according to Thomson Reuters I/B/E/S.

SILVER WHEATON

The move to mothball Pascua-Lama also affects Silver WheatonCorp, which in 2009 bought 25 percent of the mine'ssilver production, paying Barrick cash in exchange for futuresilver sales at a discounted price.

Vancouver-based Silver Wheaton said in a separate statementon Thursday that it sees Barrick's decision as prudent. It saidit is now entitled to silver output from three of Barrick'sproducing mines - the Lagunas Norte, Pierina and Veladero mines- until the end of 2016 to make up for the production it islosing from Pascua-Lama.

Silver Wheaton has also agreed to extend a completion testdeadline on Pascua-Lama until the end of 2017 from the end of2016. The company, which is reviewing its production forecastsfor 2017, said it still expects its silver output to top 33.5million silver equivalent ounces this year.

Shares of Silver Wheaton dropped 7.5 percent to C$23.66. Royal Gold Inc, which has a royalty deal onPascua-Lama, fell 7.0 percent to C$48.04.

Hurt by the problems in Chile, the weak gold price and otherissues, Barrick's shares hit C$14.22 in July, their lowest pointsince 1992, before rebounding nearly 50 percent.

Barrick's debt reacted positively to the news. The yield onits benchmark 10-year bond narrowed by six basis points to 2.82percent above the U.S. government yield curve, a trader toldIFR, a Thomson Reuters service, showing investors were demandingless of a premium to hold the company's debt.

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