TORONTO (Reuters) – Barrick Gold Corp (ABX.TO: Quote) will likely raise the cost estimate for its huge Pascua-Lama mine project in South America for the third time in less than two years when the world’s top gold producer reports results on Thursday.
Much has changed since November, when Toronto-based Barrick pegged the cost of the gold and silver project at $8.5 billion, and markets are anxious to see the company’s new capital cost estimate.
High in the Andes, on the border between Chile and Argentina, Pascua-Lama is Barrick’s biggest and most important growth project. It’s risky, but the potential is great: when and if the mine is completed, it is expected to have exceptionally low operating costs, which could pay dividends for years to come.
Since Barrick released its November estimate, regulators have halted construction on the Chilean side of the project, citing serious environmental violations. Barrick has agreed to build a new water management system to meet their concerns, and said in June it would defer some spending that had been scheduled for 2013 and 2014.
These changes are widely expected to raise the overall cost of the project, possibly by a billion dollars or more. Barrick said in June that it was “focused on minimizing” capital cost increases.
“That number could be massive,” said Salman Partners analyst David West. “When you’re talking about re-engineering a project, all bets are off. Nobody really knows.”
But Chris Mancini, analyst at the Gabelli Gold Fund, said he does not think the cost of the new water system will be exorbitant. Gabelli holds some 2.9 million Barrick shares.
“My hope is that it’s not much more than it was last time they updated,” he said of the new capital cost estimate.
Barrick’s third quarter results are likely to be overshadowed by the news on Pascua-Lama. Analysts, on average, expect earnings to fall to 50 cents a share, from 85 cents a share a year earlier, according to Thomson Reuters I/B/E/S.
Hurt by the problems in Chile, a drop in the price of gold and other issues, Barrick’s shares hit C$14.22 in July, their lowest point since 1992, before rebounding nearly 50 percent. The shares were at C$20.78 on Tuesday.
Because a rise in Pascua-Lama’s capital cost is so widely expected, a modest increase could be seen by markets as good news.
Options trading in the stock has been brisk over the past week and upside calls lead downside puts by a factor of five to three, according to options analytics firm Trade Alert. Shares rose 19 percent in the two weeks to Monday’s close.
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