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Barrick shares drop as Pascua-Lama delayed again and $5.5 bln impairment charge looms

Troubled giant Barrick Gold lost another 5 per cent off it's share price Monday morning, after announcing a new delay at its troubled border-straddling Pascua-Lama site, with the gold giant extending the construction timeline for the project in light of what it called "challenging market conditions and materially lower metal prices,” a change that pushes the production target for the project even further back to mid-2016, two years beyond the previous timeline. 

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Troubled giant Barrick Gold lost another 5 per cent off its share price Tuesday Morning, after announcing a new delay at its troubled Pascua-Lama site, with the gold giant extending the construction timeline for the project in light of what it called "challenging market conditions and materially lower metal prices,” a change that pushes the production target for the project even further back to mid-2016, two years beyond the previous timeline.

The announcement, released on Friday afternoon before a long weekend in Canada, also warned shareholders to brace themselves for an impending impairment charge of up to $5.5 billion in the second quarter based on plummeting metal prices and delayed production at the high altitude project. The pain continues, with the company warning of what it calls “significant” additional charges in the second quarter.

Tensions over water safety issues at the project, which straddles Chile’s border with Argentina high in the Andes, came to a head in April when a local appeals court slapped a stop-work order on the site as the result of an injunction filed by indigenous communities, while an investigation was conducted which culminated in the ruling that the company had violated terms stipulated in the environmental approval it was granted for the site in 2006.

The finding resulted in a headline-making fine of US$16 million, the maximum amount available under Chilean law, but perhaps even more significantly brought construction work on the site to a halt until the company put in place the water-management systems previously agreed to.

In the announcement released Friday, the troubled gold giant said it "has submitted a plan, subject to review by Chilean regulatory authorities, to construct the project's water management system in compliance with permit conditions for completion by the end of 2014, after which [it] expects to complete remaining construction works in Chile, including pre-stripping.

"Under this scenario, ore from Chile is expected to be available for processing by mid-2016."

The company says it will provide an updated total capital cost estimate for the project in the upcoming quarter, once the new construction schedule is finalized, emphasizing that the extended schedule will result in “significantly reduced” monthly capital expenditures.

"In light of the challenging business environment we are facing today, and taking into consideration existing construction delays, the company is advancing the project in a prudent manner by extending the construction schedule over a longer period, which will reduce total planned capital expenditures by $1.5-$1.8 billion for the years 2013 and 2014, and allow us to efficiently re-sequence the remaining construction work," said president and chief executive officer, Jamie Sokalsky.

News of a massive looming impairment charge came in the same announcement, with the company cautioning that the long-term assumptions on the price of precious metals, which the company uses to determine various metrics, may be re-assessed, subject to prices remaining at their new lower levels.

“As a result of recent and continued significant declines in gold and silver prices, and the delay in first gold production, Barrick is conducting impairment testing. Preliminary analysis indicates an after-tax asset impairment charge in the range of approximately $4.5 to $5.5 billion in the second quarter for the Pascua-Lama project.

"The company will complete a final impairment assessment by its second quarter 2013 results release.”

In light of the lower prices that seem to be the new normal for the precious metals that provide the bulk of Barrick’s business, the company says in the announcement it is also reviewing its other assets for possible impairment charges in the second quarter, “which, although dependent on various analyses and assumptions which have not been finalized, are likely to be significant.”

The company is also awaiting a decision from the Copiapo Court of Appeals in connection with the constitutional rights protection action filed in September 2012 on behalf of four indigenous communities seeking an order suspending construction of the project in Chile.

Chiming in on the giant’s troubles is Silver Wheaton Corp. (TSE:SLW) (NYSE:SLW), the Vancouver-based streaming company with whom Barrick has a $625 million silver streaming agreement.

In an announcement released Monday, Silver Wheaton, party to an agreement under which it is entitled to 25 per cent of the silver produced from Pascua-Lama at favourable pricing, announced the downward revision of its production forecast for 2017 to 49 million silver equivalent ounces from the previous figure of 53 million as a result of the delay at the border-straddling mine. Production for 2013 is unaltered, continuing to be pegged at 33.5 million silver equivalent ounces.

As a consequence of the delay, Silver Wheaton will be entitled to silver production from three of Barrick's currently producing mines, the Lagunas Norte, Pierina, and Veladero mines during 2014 and 2015, to the extent of any production shortfall at Pascua-Lama.

Silver Wheaton also said it has agreed to extend the outside completion date by for the troubled mine by a year to the end of 2016, but cautions that should the terms of the completion guarantee still not be satisfied at that point, the streaming company will call in the $625 million in cash it put into the project, less a credit for whatever silver has been delivered up until that point.

The company reiterated that a facet of the original contract with Barrick included a completion guarantee, under which Barrick was required to have the high-altitude mine complete to a minimum of 75 per cent of design capacity by end of year 2015. Under the terms of the initial agreement, that date marks the point at which Silver Wheaton can terminate the contract if the requirements of the completion guarantee have not been met, making the extension of a year crucial.

"As long as Barrick is still advancing construction of Pascua-Lama at the end of 2015, Silver Wheaton does not intend to cancel the silver stream", said president and CEO, Randy Smallwood, in the release late Monday. 

"We are in regular contact with Barrick, and are confident that all the right measures are being taken to achieve production at this mine. Pascua-Lama is a world class gold and silver deposit and will be a world class mine once it begins production."

Once completed, Pascua-Lama is set, according to Barrick, to be one of the largest and lowest-cost gold mines in the world, expected to produce between 800,000 to 850,000 ounces of gold and 35 million ounces of silver in its first full five years of production.

Silver Wheaton shares were trading up on the TSX this morning, adding 74 cents to its previous close to hit $21.35 in intraday trading. Shares in Barrick were trading down, dropping 91 cents on the TSX to hit $15.69 at 10:24am, a drop of more than 5 per cent.

Quick facts: Barrick Gold Corp.

Price: 35.33 CAD

TSX:ABX
Market: TSX
Market Cap: $62.82 billion
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