Expect fireworks at Barrick Gold Corp.’s (TSX: T.ABX, Stock Forum) (NYSE: ABX, Stock Forum) annual shareholders meeting in Toronto on April 24th, says veteran gold analyst John Ing.
The warning comes after short sellers had a field day with Barrick this week, watching the stock tumbled on news of a court-ordered suspension of the company’s flagship gold-copper project in Chile.
News of the work suspension at the Pascua Lama project sent the stock down almost 9% on Wednesday to a new 52-week low of $24.62, leaving the gold miner with a market cap of $24.9 billion, based on over one billion shares outstanding.
On Thursday, the stock was largely unchanged, rising 0.77% to $25.00.
Clearly Barrick has been disaster for investors who bought the stock at levels closer to the 52-week high of $44.75.
There could be more pain in store the if the suspension in Chile is prolonged and analysts at Goldman Sachs are correct in lowering their gold price forecast to US$1,270 in 2014 and US$1,200 in 2017, down from US$1,563.89 this week,
As RBC Capital Markets noted recently, if gold were to trade at $1,200 for any significant period, it would put severe pressure on the likes of Barrick Gold and Kinross Gold Corp. (TSX: T.K, Stock Forum) (NYSE: KGC, Stock Forum), companies that are discounting a price of US$1,520 for the commodity.
It all seems a far cry from the days in the late 1980s when Barrick founder, Chairman Peter Munk, and his new company – known at the time as Amerian Barrick -- were in the ascendancy after Munk’s disastrous foray into the hi-fi equipment sector in Nova Scotia.
At that time, the focus was on Barrick’s Goldstrike mine in Nevada, a shiny foundation stone for a company that emerged from its launch in 1983 to become the world’s leading gold miner, with targeted production this year of up to 7.4 million ounces.
As Munk gears up to preside over his final annual meeting as Chairman on April 24, the focus has shifted to the southern Andes, where the gold miner has suspended construction on the Chilean side of Pascua-Lama. The open pit project straddles the border separating Chile and Argentina and is expected to produce up to 850,000 ounces of gold annually and 35 million ounces of silver during the first five years of production.
The work stoppage is in response to a court order and allegations from indigenous groups that the project is polluting groundwater, destroying glaciers and rivers in the Atacama desert.
“Mega projects bring mega problems,” said Ing who believes the stock may have further to fall before any kind of recovery kicks in.
The Maison Placements Canada President says that in Pascua-Lama’s case, the situation is highly complex because Barrick is having to deal with multiple jurisdictions, including local communities in Chile who are opposed to mining.
Even before this week’s court order, Pascua-Lama had emerged as something of a millstone around the company’s neck.
In July of 2012, Barrick said the mine would take a year longer to build and cost 60% more than originally budgeted, raising the price tag at over $8-billion. That’s up from the original $3-billion estimate.
At current levels, Pascua-Lama is thought to be the world’s most expensive gold mine.
While work remains halted, Barrick said it will work to address the regulatory and environmental requirements to the satisfaction of the Chilean authorities.
Barrick also said construction activity in Argentina, where the majority of Pascua Lama’s critical infrastructure is located, including the processing plant and tailings storage facility, are not affected.
However, this ignores the fact that since roughly 80 per cent of the metal reserves are located in Chile. It means that any permanent prohibition would kill the project.
A Reuters News service report speculated that is far from clear what action Barrick can take to protect its investment.
“At this point it is somewhat bad news, that has the potential to be very bad news,’’ said David West, an analyst with Salman Partners, during an interview with Reuters.
A court source told Reuters that the dispute could take several months to resolve and appeal in the Chilean Supreme Court is likely. In a research note, Canaccord Wealth Management said projects such as El Morro, owned jointly by Goldcorp Inc. (TSX: T.G, Stock Forum) (NYSE: GG, Stock Forum), and New Gold Inc. (TSX: T.NGD, Stock Forum) (NYSE: NGD, Stock Forum) have been suspended for well over a year after similar court rulings.
“Also impacted by the court decision is Silver Wheaton Corp. (TSX: T.SLW, Stock Forum), which has a silver stream agreement on the project,’’ wrote Canaccord in a note to investors.
Ing said Barrick did a survey recently to find out what would attract investor interest. “The conclusion is that the company had to become more profitable,’’ he said.
Under a new chairman and revamped board of directors, Barrick may yet become more profitable. But Ing thinks any recovery will be slow. “It’s hard to turn a supertanker around,’’ he said.