Barrick Gold Corp.'s critics have been quick to view the company's suspension of its massive (and massively troubled) Pascua-Lama project as further evidence of Barrick's calamitous decision-making. That is both understandable and unfair. In this case, Barrick's management is delivering the right message – and, with its giant share issue late Thursday, buying itself much-needed time. The question is whether the market has any faith left in the messenger.
In premarket trading Friday, Barrick shares in New York were at $18.33 (U.S.), down 5.5 per cent.
Barrick's announcement Thursday, that it would "temporarily suspend" construction at the huge project on the Chile-Argentina border, was undoubtedly prudent. The project's capital costs were running at more than $8-billion (U.S.) and quite possibly headed north of $10-billion, more than triple the original budget. It was bogged down with environmental and labour woes. Gold prices have been falling and construction costs throughout the industry have been rising. Barrick has been forced to write down $14-billion in asset values on its books, and has $15-billion of debt.
The Pascua-Lama decision is only part of Barrick's new strategy to tame its balance sheet. Late Thursday, after stock markets closed, Barrick unveiled a $3-billion (U.S.) share issue, most of which will be used to pay down debt.
Halting Pascua-Lama will save the company another $1-billion in capital costs this year alone. It moves a major eater of the company's time, energy and resources to a back burner, where it certainly belongs. It buys Barrick time to get its balance sheet in order without the project's onerous cost pressures. It allows it to take care of its environmental commitments and wait for better market conditions, both on the cost side and the pricing side, before pushing ahead at a more measured and affordable pace. It might even give it increased leverage with Chilean authorities and unionized workers to smooth the company's path to completing the project.
The gold isn't going anywhere; there will be a time when this project will make sense for a more stable Barrick in a healthier market. With proven and probable reserves of nearly 18 million ounces of gold and another 676 million ounces of silver, this is one of the biggest remaining gold finds anywhere. And while its capital costs have been going through the roof, its estimated cash production costs once it is in operation will be among the lowest in the world. It will be a 25-year cash cow for its owner. You don't just walk away from that.
Most analysts viewed the Pascua-Lama suspension as a near-term positive for the stock, and critics have been aching for Barrick to raise money to help its ailing balance sheet. Still, the market knocked 5 per cent off Barrick's share price Thursday and, based on after-hours trading, is gearing up for further losses Friday. There is, of course, some arithmetic logic to that; when you dilute your shares by nearly 20 per cent and shut down a project that accounts for 5 per cent of your net asset value, that's going to send some ripples through your valuation.
Investors, however, have grown increasingly impatient with Barrick's board and management, where promised changes have been slow to come. The markets may be determined to shoot the messenger.
Thursday's decisions look like a fresh start, but it's hard for the market to set aside that they came from many of the same old faces who got the company into this mess in the first place. Their previous strategic missteps have eroded investors' trust; it will take positive results – and probably, new messengers – to restore investors' faith.