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Operational Suspensions at Barrick Gold's Veladero Mine Should Concern Investors

- By Alberto Abaterusso

After experiencing the same problem for the third time in a span of 18 months at its Veladero mine in Argentina in March, Barrick Gold Corp. (ABX) shares are still performing well.

On March 28, a pipe carrying cyanide solution broke, leading Argentine authorities to restrict Barrick Gold's use of cyanide for its heap leaching operations at the Veladero mine. Regardless of the halt in operations, the stock has gained 4%, almost in line with its peers: Goldcorp Inc. (GG) is up 3% and Newmont Mining Corp. (NEM) is up 5%.


The world's largest gold producer's shares are also in line with those of Goldcorp and Newmont Mining when their performance on the stock market are compared with the Market Vectors Gold Miners ETF (GDX).

Barrick Gold underperformed the Market Vectors Gold Miners ETF by 4% while Goldcorp underperformed the index by 5% and Newmont by 3%.

This indicates the market did not overreact to the company's news regarding the halt in its operations. Since this issue is becoming more and more frequent, however, I would be concerned if I were an investor. Another cyanide spill at the open-pit mine may severely affect production and, as a consequence, the value of the stock.

Barrick's management needs to reassure investors it is taking care of the problem because Veladero, one of the company's five core mines, contributes to a significant portion of the miner's total production. The miner is hoping the combined production of the Veladero and Cortez mines will offset expected decreases in production at the Goldstrike and Pueblo Viejo mines, which is needed in order for 2017 production to exceed that of 2016.

Barrick Gold expects to produce between 770,000 and 830,000 ounces of gold at Veladero mine, which will represent approximately 14% of the company's total production.

More importantly, until these operating issues cease at Veladero, Barrick Gold will likely not be able to benefit from mining sequence phases characterized by higher head grade in the mineral that the miner is expecting to process in 2017.

This means that if Barrick Gold does not resume operations at Veladero soon, the company may not only miss its production targets for 2017, but may also miss the opportunity to benefit from lower operating costs.

Disclosure: I have no positions in Barrick Gold Corp.

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This article first appeared on GuruFocus.