Barrick Gold Corporation (NYSE:ABX) (TSE:ABX)’s crucial Pascua Lama project may face a minimum delay of one year beyond its expected late 2014 commencement date. This is the minimum time the company will need to comply with action points specified by the Chilean environmental regulators.
Last month, Chile’s environmental regulators had imposed a $16 million fine on Barrick Gold Corporation (NYSE:ABX) for breach of conditions specified in the environmental impact assessment report. This followed an order by a Chilean court to suspend all activities at the under-construction mine in April. The regulators have identified 23 specific steps that Barrick must take to be in compliance with norms. 
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Pascua Lama has already seen innumerable delays on account of project mismanagement and escalating capital expenditure costs. A further delay would reduce Barrick’s growth prospects in the short term. According to conservative estimates, it will take the company a minimum of one year to set up the infrastructure to check expected water pollution.
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Pascua Lama’s Potential
According to the latest available figures, Pascua Lama has proven and probable reserves of 17.9 million ounces of gold, 676 million ounces of silver contained within the gold reserves, and a mine life of 25 years. Once production begins, Barrick Gold Corporation (NYSE:ABX) expects to produce 0.80-0.85 million ounces of gold and 35 million ounces of silver annually. In 2012, the company had a total gold production of 7.42 million ounces of gold. It has been aiming at producing 8 million ounces by 2016, and Pascua Lama is integral to achieving this target. In light of the delays expected now, we think that it will miss this target. ((BMO Global Metals and Mining Conference, Barrick Gold Presentation))
Once in operation, Pascua Lama is expected to be one of the world’s largest low cost mines and is expected to contribute significant free cash flow to Barrick Gold for many years to come.
In 2012, Barrick reported an all-in sustaining cash cost of $945 per ounce of gold. In contrast, the all-in sustaining cash cost at Pascua Lama is expected to be $50-200 per ounce. Including depreciation of capital expenditure incurred in mine construction, costs are not expected to exceed $550-700 per ounce. One must note that all cash cost estimates are based on gold, silver and West Texas Intermediate (WTI) oil price assumptions of $1,700 per ounce, $30 per ounce and $90 per barrel, respectively.
Barrick estimates that the all-in sustaining cash cost will increase to $950-1,050 per ounce in 2013. If Pascua Lama were to come into operation in 2014 as originally scheduled, this figure would have definitely gone down considerably. Now that will have to wait another year at the very least. 
Operations in Chile have been suspended in accordance with a court order. ((Barrick to Suspend Construction on Chilean Side of Pascua-Lama, Barrick Gold Press Release)) However, the Argentinian side of operations have not been affected. By the end of the first quarter, Barrick had spent $4.8 billion on the project. The total budget, excluding new commitments on account of environmental spending, is $8.5 billion.
What Barrick Gold Is Required To Do
Barrick Gold needs to carry out the construction of canals and drainage systems to divert run-off water away from the Pascua Lama mine. This is likely to take time. According to some analysts, a late 2015 commencement date is still possible but it depends on whether Barrick voluntarily chooses to stop the project for two years. Doing so would be costly and perhaps annoy the Chileans, but that decision is likely to be guided by its internal assessment of the gold pricing scenario.
Given the currently low gold prices and tight cash flow, Barrick Gold’s management might even contemplate slowing down spending on the project or in the worst-case scenario walk away from it altogether. We think the possibility is remote though, given the time, money and energy invested already and the importance of Pascua Lama for Barrick’s future.
The half-built project is located in the Andes mountains and reaches over the Chilean border into Argentina. While work on the Chilean open-pit mine has been suspended, construction continues on the processing plant on the Argentine side.
Barrick Gold Corporation (NYSE:ABX) has already paid the fine imposed by the regulators. It ended up paying only $11.6 million as Chilean law allows a 25% discount if the fine is paid within 5 days of imposition. Even so, the company maintained that the fine levied on it was due to administrative breaches and not actual pollution. 
Our price estimate for Barrick Gold is $26.