Kinross CEO Tye BurtFred Lum/The Globe and Mail
Barrick Gold Corp. is boosting its stake in the Cerro Casale gold and copper project to 75 per cent from 50 per cent as part of a $475-million (U.S.) deal with rival Kinross Gold Corp., despite the fact that costs to build the massive Chilean mine have soared to more than $4-billion.
The world's largest gold producer will pay Kinross $455-million in cash and assume a $20-million Kinross obligation for the 25-per-cent interest in the low-grade but mineral-rich project.
Cerro Casale contains more than 23 million ounces of gold and six billion pounds of copper but has languished in uncertainty for more a decade due to concerns about its economic viability.
Kinross disclosed late Wednesday that Cerro Casale's capital costs have jumped to $4.3-billion from a previous estimate of $3.6-billion, a figure that had already been revised upward.
The deal underscores Barrick's enthusiasm for major mining projects that could produce more than one million ounces of gold a year, despite high construction costs and the fact that they contain large amounts of other metals, in this case copper. One of Barrick's biggest challenges is increasing its gold reserves and raising its annual production of about eight million ounces a year.
In 2007, Barrick paid $773-million for the junior mining firm that owned half of Cerro Casale. Barrick recently became embroiled in a legal battle with Goldcorp Inc. for the right to buy the El Morrow project, a similar copper and gold deposit, also located in Chile.
For Kinross, the agreement gives the smaller Toronto miner much needed cash to be dispersed to its other development projects and to fund potential acquisitions, chief executive officer Tye Burt said in an interview.
"Frankly, overall capital for the project of this scale is about $4.3-billion in total. By selling half our exposure, we reduce our future capital spend by about $1.1-billion. And then add the cash proceeds we get of $475-million in value, that's almost a $1.5-billion swing in our future capital outlook. We have lots of places to deploy that, and are quite pleased with the result."
Mr. Burt said the money would be spent across Kinross's projects worldwide, but mostly in South America. Kinross will retain a 25-per-cent interest in Cerro Casale and will assume expected capital expenditure costs of about $1.05-billion.
"That much spending in one project doesn't make sense for us," he said of Cerro Casale's new overall price tag. "We decided it was prudent to split our exposure and reinvest the proceeds elsewhere."
Kinross said its 25 per cent annual share of production over the first five full years of Cerro Casale's mine life was expected to average between 250,000 and 275,000 ounces of gold at a cost of approximately $530 an ounce, according to a recently completed feasibility study. Kinross's share of copper production would be between 57 million and 63 million pounds at a cost of approximately $1.25 a pound.