In its Q1 report, Barrick Gold Corporation (NYSE:ABX) (TSE:ABX) indicated that it may need to reassess the long-term gold and silver price assumptions used in its most recent annual impairment test should metal prices remain at lower levels for an extended period of time. As a result of recent and continued significant declines in gold and silver prices, and the delay in first gold production, Barrick Gold Corporation (NYSE:ABX) (TSE:ABX) is conducting impairment testing. Preliminary analysis indicates an after-tax asset impairment charge in the range of approximately $4.5B-$5.5B in Q2 for the Pascua-Lama project.
In the recent report Barclays noted that they believe a write-down was inevitable. In terms of magnitude, they see the “kitchen sink” write-down as prudent as opposed to a “death by a thousand cuts” scenario. Overall, they believe the latest announcement on Pascua-Lama is a net negative for Barrick Gold Corporation (NYSE:ABX) (TSE:ABX), however they believe much of the news was already incorporated in the stock.
Near-Term Capex Reduced
With construction halted at the Pascua-Lama development project since April 2013, the company has focused largely on working with the Chilean government to come up with a resolution on the environmental issues at the mine, which mainly relates to water infrastructure. As a result of the delayed work progress, the company has taken down near-term development capex estimates at the project as work at the site until the end of 2014 will focus solely on completing the required water infrastructure, rather than mine and processing facility development. Barrick has indicated that near-term capex guidance has been reduced by ~$700-$800 mln to $1.8-$2.0 bln in 2013, and reduced by ~$0.8-$1.0 bln to $1.0-$1.2 bln in 2014.
Barrick Gold Production and Cash Cost Profile – Weaker in the Near Term
Barclays highlighted that the Barrick Gold’s production and cash cost profile changes post-2014, as Pascua-Lama is a large contributor to the company’s overall production profile (expected to contribute ~11 percent to overall production once fully ramped in 2017). The new timeline results in lower production coupled with higher cash costs in both 2015 and 2016, compared to previous expectations. Production and cash cost levels in 2017 are unchanged as it still represents a full year of production.
ABX Capex and Free Cash Flow – Look Better in the Near Term
Barclays notes that the deferral of the Pascua-Lama project also affects the company’s capex profile and ultimately FCF/sh over the next few years. With Pascua-Lama representing the largest capital expenditure for the company, you can see in chart below that the reduced capex in 2013 and 2014, results in higher capex in 2015 and 2016 once the company resumes development work at the asset, after completing the required water infrastructure at the end of 2014. As a result of the decreased near-term capex, namely 2013 and 2014, they see improved FCF/sh for Barrick. However, they note that FCF/sh deteriorates in 2015 and 2016 as the company resumes spending on the development project working towards mid-2016 start-up. Barclays also points out that for 2017 they don’t expect any material changes to capex or FCF/sh as they continue to expect the Pascua-Lama mine to be fully ramped and running through that period.