Soaring costs sting Barrick – by Pav Jordan (Globe and Mail – July 27, 2012)

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Barrick Gold Corp. announced a massive cost overrun and one-year delay at its key Pascua-Lama gold project, as the world’s biggest gold miner struggles with soaring industry costs that are also forcing it to shelve other large projects in the pipeline.

Less than two months after it suddenly ousted chief executive officer Aaron Regent, Barrick said it is shifting its strategy to focus more on returns rather than growth in gold production. It slashed its 2015 production target to eight million ounces from nine million previously.

“In my view, rate of return should drive production, not the other way around,” said Barrick’s new chief executive, Jamie Sokalsky, pledging to take steps to reverse the company’s recent slumping stock price.

Shares of Barrick have plunged 40 per cent since September, more than its competitors, amid concerns about its aggressive move into copper and a management shake-up this year.

Investors were braced for more bad news after Mr. Regent’s ouster, but Barrick’s announcement that Pascua-Lama will cost up to $8 billion (U.S.) to develop, 50 to 60 per cent more than previously forecast, was a shock. Barrick shares tumbled 4.2 per cent, to close at $33.04 in Toronto, while other gold stocks rallied.

“This is very serious. That is an outrageous increase in capital costs for Pascua Lama,” said George Topping, an analyst with Stifel Nicolaus in Toronto. “I’m picking myself up from the floor.”

Cost overruns are plaguing resource companies as prices for everything from steel, concrete, energy and equipment soar along with labour costs – especially in Chile and Argentina. Canadian oil sands giant Suncor Energy Inc. said on Wednesday it is reviewing plans to spend tens of billions of dollars on new projects.

Barrick is also shelving the Cerro Casale project in Chile and Donlin Gold in Alaska, each of which would require billions of dollars to build. It said it would also hold back on organic expansion projects.

The new cost estimate for Pascua-Lama, on the border of Chile and Argentina, compares with a forecast of $3-billion in 2009, when a construction decision was reached, and earlier forecasts were even lower.

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