Following a 35 percent drop in quarterly earnings, Barrick Gold’s new chief executive officer, Jamie Sokalsky, is working to get the company's spending under control and is putting his primary focus on the Pascua-Lama project.
Sokalsky took over the top spot of the world’s largest gold miner following the departure of Aaron Regent and he inherited a project that has seen cost overruns reach $8 billion at the Pascua-Lama project in the Andes mountains, straddling Chile and Argentina.
With pressure from investors to be stricter on capital allocation and cash flow Soklasky said the project’s out of control costs are now being reviewed by a third party, Engineering Procurement Construction Management organization, which hopefully will provide a more detailed explanation of what went wrong and how it can be remedied. However, that review is not yet completed.
Barrick’s project pipeline woes now extend to the Cerro Casale project in Chile and the Donlin Gold joint venture in Alaska, both of which have been shelved.
However, the Pueblo Viejo joint venture in the Dominican Republic has defied Barrick’s current project pipeline morass, by coming in on time and on budget.
Sokalsky explained that Barrick project managers underestimated the complexity of the Pascua-Lama project with challenges that proved to be beyond the capabilities of the Barrick in-house construction team. The group had not anticipated the complexities of combining a two-nation project located at high altitude in remote terrain, with the magnitude of skilled labor shortages now plaguing the mining industry.
Barrick is now moving back to the standard model of having an engineering, procurement and construction-management contractor build projects for the company.
To fix the problem will add more delays to commercial start-up, which Barrick now plans for mid-2014.
After 11 straight years of gains which have seen gold rise more than fivefold, the price of the precious metal is up just 3.4 percent this year.
The NYSE Arca Gold BUGS (HUI) Index of 16 gold-mining companies has fallen 18 percent in 2012. The index is trading at about 13 times earnings, compared with a five-year average multiple of 35, according to data compiled by Bloomberg.
Gold-mining valuations show that investors have been “dissatisfied” with capital allocations in the gold industry, Sokalsky said in a conference call.
“They are looking for higher rates of return and free cash flow, not just production growth for the sake of production growth,” he said.
Pascua-Lama, located 3,800 to 5,200 meters (12,468 to 17,061 feet) up in the Andes on the border between Chile and Argentina, was forecast to cost no more than $3 billion when Barrick, then led by Regent, approved its go-ahead in 2009.
That estimate was revised to $4.7 billion to $5 billion in July last year. Barrick yesterday the price tag will be about 50 percent to 60 percent more than the top end of that range. Initial production will now be in mid-2014, not mid-2013. Among the explanations given by the company are the project’s unanticipated complexity, delays to a tunnel and processing plant, and local cost inflation.