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Despite writedown, Barrick digs in on Zambia copper play

Barrick Gold CEO Jamie Sokalsky.

Philip Cheung/The Globe and Mail

Barrick Gold Corp. says it can still make its African copper business pay off, despite a multibillion-dollar writedown on Zambian mines hit by skyrocketing costs.

Toronto-based Barrick said on Thursday it took a $3.8-billion charge on its copper business in the fourth quarter, marking the second Canadian miner to be shaken this week by bets made two years ago, when commodity prices were soaring.

The charge stoked some of the worst fears of investors who have long fretted that buying the assets in 2011 under the $7.3-billion acquisition of Equinox Minerals Ltd. was a mistake.

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"Obviously I'm disappointed that we've had to take this impairment, and it's a sizable impairment, in hindsight, in terms of what we paid for it," Barrick chief executive officer Jaime Sokalsky said in an interview Thursday with The Globe and Mail.

"But it is a big asset in a world-class copper belt and ultimately, if we can get the costs under control and ultimately get a higher copper price down the road – which I think has a good likelihood of happening – this asset could be very very valuable for us."

Barrick's charge on its copper business Thursday came hours after Kinross Gold Corp., another Toronto-based miner, announced a massive writedown on its African operations, lengthening the growing list of global miners that have fallen victim in recent months to some of the worst cost inflation in decades.

Barrick bought Equinox in 2011, zeroing in on the Lumwana copper mine. Under the direction of former chief executive officer Aaron Regent, the massive company was looking for ways to grow in a world where large new gold finds were increasingly rare and China's appetite for copper was peaking.

In sealing the deal, Mr. Regent braved vocal investor opposition, and joined a growing list of mining CEOs pursuing large deals to build resource portfolios, and feed booming demand from China.

Like other corporate chiefs before and after him, Mr. Regent lost his job in June as investors rebelled and the stock price sank to some of its lowest levels since the global economic crisis, ushering Mr. Sokalsky to the helm and with him, a radical shift in strategy at Barrick to focus on investor returns rather than growth.

"Investors are rightfully demanding fundamental change in the gold industry, and Barrick is driving this new paradigm," said Mr. Sokalsky, who took over as Barrick announced a multibillion-dollar cost overrun at a gold project in the Andes amid some of the highest cost inflation seen in the industry in decades.

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When Barrick bought Equinox, copper prices were rising toward record highs above $4.50 (U.S.) a pound, and Barrick shrugged off investor concerns that it was stepping into uncharted waters with its bold move into copper.

Copper prices have fallen to around $3.70 a pound these days, but the writedown at the former Equinox assets are more related to costs than the trading price of copper.

Mr. Sokalsky said extensive drilling at Lumwana over the past year delineated massive copper reserves, but also showed the mineral-rich ore was deeper than originally thought, requiring more waste removal, and higher fuel and labour costs. A doubling of royalties also contributed to higher costs.

"It's really the assumed costs to get all of this copper out that were unfortunately much higher than the costs that were assumed when we built the asset and that differential between the cash flow on both models represented the difference and the impairment," he said as the company announced a new mine plan at the site.

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