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Chilean Problems Won’t Hurt Barrick Gold Corporation (USA) (ABX)

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Chile’s environmental regulator has recently imposed a $16 million fine on Barrick Gold Corporation (USA) (NYSE:ABX). It has also stopped construction on the Pascua-Lama project due to serious environmental violations. This project has been a source of headache for Barrick for some time. It seems it does not get better. Or does it?

Barrick Gold Corporation (USA) (NYSE:ABX)

What’s the problem?

Pascua-Lama is one of the world’s largest gold and silver resources with nearly 18 million ounces of proven and probable gold reserves and 676 million ounces of silver contained within the gold reserves. The project has an expected mine life of 25 years. Pascua-Lama is expected to produce an average of 800,000 to 850,000 ounces of gold and 35 million ounces of silver in its first full five years of operation. The project is situated on the territory of Chile and Argentina.

The problems occurred on the Chilean side. Gold production needs big amounts of water. Cyanide, mercury and other heavy metals are used in the process of extracting gold from the ore. These metals get into the water and contaminate it. The project’s water-management system does not appeal to the Chilean government. Barrick Gold Corporation (USA) (NYSE:ABX) would have to enhance it in order to continue the construction.

How big is the problem?

Barrick Gold Corporation (USA) (NYSE:ABX) is a huge company that produced 1.8 million ounces of gold in the first quarter of 2013. The company has already spent $4.8 billion on the project. The total cost of the project is estimated to be $8.5 billion. The $16 million fine looks minuscule in comparison with the overall sum that was spent on Pascua-Lama. The main problem is the delay.

Barrick Gold Corporation (USA) (NYSE:ABX) has a large portfolio of mines. The delay of the construction of one mine is not pleasant, but surely is not catastrophic for the company. It can be said that the result of the court trial was anticipated. I think that the delay of Pascua-Lama was already reflected in Barrick’s stock price. Barrick Gold Corporation (USA) (NYSE:ABX) is down 45% year-to-date. Main reasons for the drop in stock price were falling gold prices and Pascua-Lama problems. Recent news on the project is not big news for investors – they saw it coming.

Who else is affected?

Silver Wheaton Corp. (USA) (NYSE:SLW), the world’s largest silver-streaming company, has a contract with Barrick Gold Corporation (USA) (NYSE:ABX) to purchase 25% of the silver production in Pascua-Lama for the life of the mine. Silver Wheaton does not own and operate mines. Instead, it purchases rights to buy silver at a predefined price. Pascua-Lama would become a major asset in Silver Wheaton Corp. (USA) (NYSE:SLW)’s portfolio when it finally comes to the production stage.

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