Barrick To Build Pascua-Lama

It has taken more than a decade, but Barrick Gold (ABX-T, ABX-N) has finally decided to build an open-pit mine straddling the border between Chile and Argentina, many thousands of metres above sea level in the Andes.

The construction decision followed the recent resolution of outstanding taxation issues between the two South American countries, specifically an agreement that cross-border mining activities would not be subject to double taxation. About 75% of the orebody is located on the Chilean side of the border and 25% on the Argentinean side, but processing facilities will be built in Argentina.

The bi-national taxation agreement “clarified clearly that loading and hauling services are not subject to withholding tax and there is no loss of related (value-added tax) credits,” Jamie Sokalsky, executive vice-president and chief financial officer, explained to analysts and investors on a conference call.

“It eliminates the potential of double taxation (and) confirms the underlying principles allowing Pascua-Lama to apportion other mining costs to Argentina and Chile based on mining material, including ore and waste, moved in each specific country.”

When Pascua-Lama pours its first gold — likely in 2013 — it will be the first significant bi-national mine in the world, according to Barrick.

It will also be one of the lowest-cost mines on the planet.

Average annual total cash costs will fall in the range of US$20-50 per oz. in the first full five years, putting Pascua-Lama at the very bottom end of the global cost curve.

“If it was in production today, it would have the effect of reducing Barrick’s overall cash costs by about US$40 per ounce,” Barrick’s president and chief executive, Aaron Regent, said on the conference call.

With an estimated 25-year mine life and annual production of 750,000-800,000 oz. gold and 35 million oz. silver expected in the first five years, Pascua-Lama will have a significant impact on Barrick’s future earnings, the company says.

Commissioning is anticipated in late 2012 with production in early 2013. Preproduction construction is estimated to cost US$2.8-3 billion.

The deposit– about 150 km southeast of the city of Vallenar in Chile and about 380 km by road northwest of the city of San Juan in Argentina — holds reserves of 17.8 million oz. gold and 718 million oz. silver.

Given that silver production is mainly a byproduct of other mining operations, and the global recession has resulted in the deferral if not cancellation of many base metal mines, Sokalsky argued Pascua-Lama will be well positioned to replace a portion of an expected global silver production decline.

“With over 700 million ounces of contained silver, Pascua-Lama is one of the largest silver deposits in the world,” he said. “The silver market has been in supply deficit for the past five years. Since 2001, industrial demand has grown almost twice as fast as mine supply.”

Pascua-Lama sits just 10 km from Barrick’s Veladero mine in the Frontera district and the gold major believes the start of construction at Pascua-Lama will open up the entire district, where it holds a land position of roughly 2,600 km.

“We see significant potential to unlock further value from our highly prospective 2,600-kilometre land position, a strategic area which would be very difficult to assemble today,” Regent said.

The construction phase of the project will employ 5,500 workers and 1,600 people will be employed at the mine.

In terms of financing Pascua-Lama, Barrick says it plans to bring in strong international financing institutions, multilateral agencies and export credit agencies to not only access additional liquidity but also to lower its risk and increase the leveraged returns on the project.

Sokalsky noted that Barrick’s debt repayments are less than US$300 million over the next four years and that cash at the end of March stood at US$2.1 billion, while the company’s US$1.5-billion credit facility remains fully available. “Our access to debt and capital markets is excellent,” he said. And in combination with strong operational cash flows, Sokalsky said Barrick’s financing strategy for Pascua-Lama is “well advanced.”

It’s been a big news month for Barrick. In addition to the Pascua-Lama construction decision, Barrick announced on May 4 that it had poured gold at its newest mine in Africa, the Buzwagi mine in Tanzania.

The company has two other projects in construction as well: Cortez Hills in Nevada, which it expects to come online in the first quarter of 2010 and Pueblo Viejo in the Dominican Republic, which is anticipated to contribute production in the fourth quarter of 2011.

Together with Pascua-Lama, these new mines at full capacity are expected to contribute about 2.6 million oz. of annual production.

While Barrick is making headway in Chile, Argentina and Tanzania, it is having to fend off complaints from some Papuans regarding its mine in Papua New Guinea. The Papuans claim police have brutally forced them from their homes.

Photographs published recently on the Internet of huts in flames near Barrick’s 95%-owned Porgera gold mine, 600 km northwest of Port Moresby in the highlands of Papua New Guinea, have become an irritant for the gold major.

According to local reports, police are burning down the homes of illegal miners living near the mine. Jethro Tulin, executive officer of the Akali Tange Association, a Porgera landowners’ group, travelled to Canada at the end of April to protest the police action at Barrick’s annual general meeting.

The police increased their presence in the area in late April to deal with illegal artisanal mining in the area and related social problems in the communities around Porgera, including crime and drug and alcohol abuse. Authorities also issued an alcohol ban in the area.

“It is our understanding that the police tore down approximately fifty temporary shacks that were illegally occupying part of the mining lease as a part of an effort to address the illegal mining problem and curb associated violence and drug and alcohol abuse,” says Vince Borg, Barrick’s executive vice-president of corporate communications.

Since the Porgera mine went into production in the early 1990s, internal migration to the area has resulted in a population explosion from about 4,000 to 5,000 people to roughly 40,000 or 50,000, Barrick says. (Barrick acquired the mine from Placer Dome in 2006.)

Borg says that police are faced daily with armed men and some women who illegally invade the Porgera mine to steal gold.

“In the middle of the night, hundreds of individuals will climb down the face wall of the open pit, which is quite steep, and steal ore,” he says. “Most of them are armed with machetes and they take the ore and then go and process it offsite.”

Borg also noted that Tulin of the Akali Tange Association, leads a group of largely non-local people who have moved to the area and illegally established shanties on Porgera’s mining lease at the edge of the operating mine.

“He is trying to extract compensation for people who now wish to be paid to move off the mining lease despite the fact that they have never had title to the land in question,” he says. “Mr. Tulin is representing them for a portion of any settlement they may get — that is, for profit. That is not exactly a grassroots human rights activist in most people’s minds.”

In 2008, Barrick’s share of production from Porgera was about 627,000 oz. gold at cash costs of US$417 per oz. The company’s share of proven and probable mineral reserves at Dec. 31, 2008, was estimated at 7.8 million oz. gold. This year, Barrick expects Porgera will produce 550,000-600,000 oz. gold at cash costs of US$500-525 per oz.

At presstime in Toronto, Barrick was trading at $40.62 per share. The gold major has a 52-week trading range of $22-52.47 per share with 873.3 million shares outstanding.