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Regulator orders Barrick to close Chilean side of Pascua-Lama project

In this May 23, 2013 photo, mining trucks sit parked at the Barrick Gold Corp's Pascua-Lama project facilities in northern Chile.

Jorge Saenz/AP

Chile's environmental regulator has ruled that Barrick Gold Corp. must shut down its above-ground operations on the Chilean side of its massive Pascua-Lama gold and silver project.

But the latest admonishment by Chile is not expected to overly affect Barrick's plans for Pascua-Lama, which sits at an elevation between 3,800 to 5,200 metres in the Andes, and straddles the border between Chile and Argentina.

For some time now, Barrick has been exploring the possibility of restarting the suspended project by building an underground mine on the Argentinian side, which may be less detrimental to the environment.

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In a press release on Thursday, Barrick said the closure of affected operations in Chile was "consistent with the company's plans to advance a prefeasibility study for an underground mining operation at Pascua-Lama."

"We would expect Barrick to seek to modify the Pascua-Lama development plan to access the higher-grade ore on the Chilean side of the project from Argentina," RBC Dominion Securities Inc. analyst Stephen Walker wrote in a note to clients on Thursday.

Seeing Pascua-Lama through to eventual production is one of the keys to addressing a long-term challenge that Toronto-based Barrick is facing – namely declining production. According to preliminary numbers released this week, the company's production fell last year to 5.3 million ounces of gold, down about 3.6 per cent from 5.5 million ounces in 2016. Pascua-Lama is estimated to contain about 18 million ounces of gold, or about 25 years worth of mine production.

Barrick spent years and billions of dollars attempting to build a conventional above-ground open-pit mine at Pascua-Lama, with a target start date of mid-2014. But in 2013, the company ran afoul of Chile's Superintendence of the Environment (SMA), which ordered it to halt construction at Pascua-Lama. The regulator objected to the company's water management and drainage system . SMA also ordered Barrick pay a $16-million (U.S.) fine because of non-compliance. On Thursday, Barrick said the fine has since been reduced to $11.5-million.

Environmental opposition was one reason Barrick mothballed Pascua-Lama in 2013. But huge cost overruns and plunging gold prices that made the project uneconomical were also factors. By mid-2013, Barrick had already spent around $5.4-billion on developing Pascua-Lama, and had projected total costs would be in the region of $8.5-billion. The company also eventually recorded close to $6-billion in writedowns pertaining to the project.

In 2014, Barrick's then-CEO Jamie Sokalsky told The Globe and Mail that gold prices would need to trade around $1,500 an ounce, and silver in the region of $25 an ounce for Pascua-Lama to be viable. On Thursday, gold traded around $1,325, while silver traded in the region of $16.90 an ounce.

For the past few years, Barrick has been increasingly focused on profitable mining, and generating free cash flow as opposed to being the top dog worldwide in production.

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Barrick could end up spreading the risk on Pascua-Lama, a practice that is becoming increasingly common in the high-capital-expenditure world of mining. Last year, after selling a 50-per-cent stake in another Argentinian mine to Shandong Gold Group of China, Barrick said it was looking into partnering up on the development of Pascua-Lama with Shandong.

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