Chile’s environmental regulator has recently imposed a $16 million fine on Barrick Gold Corporation (USA) (NYSE:ABX). It has also stopped construction on the Pascua-Lama project due to serious environmental violations. This project has been a source of headache for Barrick for some time. It seems it does not get better. Or does it?
What’s the problem?
Pascua-Lama is one of the world’s largest gold and silver resources with nearly 18 million ounces of proven and probable gold reserves and 676 million ounces of silver contained within the gold reserves. The project has an expected mine life of 25 years. Pascua-Lama is expected to produce an average of 800,000 to 850,000 ounces of gold and 35 million ounces of silver in its first full five years of operation. The project is situated on the territory of Chile and Argentina.
The problems occurred on the Chilean side. Gold production needs big amounts of water. Cyanide, mercury and other heavy metals are used in the process of extracting gold from the ore. These metals get into the water and contaminate it. The project’s water-management system does not appeal to the Chilean government. Barrick Gold Corporation (USA) (NYSE:ABX) would have to enhance it in order to continue the construction.
How big is the problem?
Barrick Gold Corporation (USA) (NYSE:ABX) is a huge company that produced 1.8 million ounces of gold in the first quarter of 2013. The company has already spent $4.8 billion on the project. The total cost of the project is estimated to be $8.5 billion. The $16 million fine looks minuscule in comparison with the overall sum that was spent on Pascua-Lama. The main problem is the delay.
Barrick Gold Corporation (USA) (NYSE:ABX) has a large portfolio of mines. The delay of the construction of one mine is not pleasant, but surely is not catastrophic for the company. It can be said that the result of the court trial was anticipated. I think that the delay of Pascua-Lama was already reflected in Barrick’s stock price. Barrick Gold Corporation (USA) (NYSE:ABX) is down 45% year-to-date. Main reasons for the drop in stock price were falling gold prices and Pascua-Lama problems. Recent news on the project is not big news for investors – they saw it coming.
Who else is affected?
Silver Wheaton Corp. (USA) (NYSE:SLW), the world’s largest silver-streaming company, has a contract with Barrick Gold Corporation (USA) (NYSE:ABX) to purchase 25% of the silver production in Pascua-Lama for the life of the mine. Silver Wheaton does not own and operate mines. Instead, it purchases rights to buy silver at a predefined price. Pascua-Lama would become a major asset in Silver Wheaton Corp. (USA) (NYSE:SLW)’s portfolio when it finally comes to the production stage.
However, Silver Wheaton has made arrangements to purchase silver from three other Barrick Gold Corporation (USA) (NYSE:ABX) mines if the Pascua-Lama project does not start in time. These mines are Lagunas Norte, Pierina and Veladero. When commenting on the Pascua-Lama delay, Silver Wheaton has stated that it is sure these three mines would deliver the necessary amount of silver — should the Pascua-Lama project be late — on time. I think that Silver Wheaton Corp. (USA) (NYSE:SLW) is out of danger. Silver Wheaton’s unique business model presents a wonderful way to play silver if you are bullish on this metal.
Fluor Corporation (NEW) (NYSE:FLR) was awarded a construction contract on the project. Pascua-Lama is a big project, but it is one of many for Fluor. The company serves energy, chemicals, industrial, infrastructure, life science, mining, power and transportation sectors. The delay of Pascua-Lama would not be a major drag on Fluor’s earning power. The company is trading with an attractive forward P/E of 13.6. Fluor Corporation (NEW) (NYSE:FLR) is well positioned to profit from the improvement of the world’s economy.
Bottom line
Gold miners face big pressure this year. Barrick Gold Corporation (USA) (NYSE:ABX) is one of the biggest gold miners of the world. The company has a diversified portfolio of mines. The delay of such a big project is unpleasant news, but it is already reflected in the stock price. The company is trading at a very attractive forward P/E of 5.7. It pays a healthy 4.2% dividend. Barrick Gold is well positioned to profit when gold prices recover. Don’t be afraid of the Pascua-Lama problems. Consider adding Barrick Gold to your portfolio.
Vladimir Zernov has no position in any stocks mentioned. The Motley Fool owns shares of Fluor. Vladimir is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Chilean Problems Won’t Hurt Barrick originally appeared on Fool.com and is written by Vladimir Zernov.
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