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.

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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.

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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.

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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.