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While Barrick Gold (NYSE: ABX) already holds the title as the world's largest gold miner, it still plans to continue growing. That said, the company intends to take a more measured approach to growth in the future so it can avoid the pitfalls that plagued it in the past. Among the steps itis taking is beefing up the board of directors to bring in the expertise needed to drive growth going forward -- especially in Latin America, where it has several important projects.
Bolstering the board
This past week Barrick Gold announced that Pablo Marcet had joined the company's board of directors. He brings 30 years of mining experience to the company, including 15 years as a senior manager with global mining giant BHP Billiton (NYSE: BHP). Importantly, he brings a wealth of operational knowledge and geopolitical experience in Latin America, which is crucial for the company given its focus on that region going forward.
Currently, the company has several large gold projects in Argentina and Chile, including the massive Pascua-Lama project, the Alturas discovery, and the Cerro Casale deposit. Marcet's knowledge of the region should help Barrick move these projects forward in the most economical manner, especially considering the company's new capital allocation priorities, which include only investing in projects that generate or grow free cash flow per share. In the near term, that means sanctioning projects that meet a 15% internal rate of return hurdle at a $1,200-per-ounce gold price. As part of the board, Marcet will be a key voice in deciding whether projects can meet these criteria and are therefore worthy of an investment.
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Getting back on track in Latin America
One of the company's most pressing problems in Latin America is its stalled Pascua-Lama project, which straddles the border with Argentina and Chile. The company put the $8.5 billion development on hold in 2013 amid slumping gold prices, escalating costs, political opposition to the project, environmental issues, and labor unrest. Suffice it to say, the company has several issues to iron out before it can restart this stalled project. Barrick hopes adding Marcet to the board can help with some of the problems, especially its geopolitical issues given his expertise in the area.
Barrick Gold recently took steps toward restarting the project by appointing a senior vice president whose mandate is to review the Argentinian side of the project. An initial focus is to advance a starter project on that side of the border to begin a phased development of the mine. This project could enable the mine to start generating cash flow, which Barrick can then use to fund additional development on both sides of the border.
This mining project is an important one for Barrick because it proposes to be one of the largest and lowest-cost gold mines in the world with an expected life of 25 years. Furthermore, the company has already invested billions into its development, and it is running short on time to get the project back on track given that it has a streaming agreement with Silver Wheaton (NYSE: SLW). That agreement resulted in Silver Wheaton forking over a $625 million upfront payment in return for 25% of the mine's silver production at a fixed cost. However, if Barrick does not get back on track, it might have to forfeit that upfront payment in June 2020.
Aside from the growth potential at Pascua-Lama, the company revealed the Alturas discovery last year in the same region. Initial testing indicates that it contains more than 5.5 million ounces of gold, which for perspective puts it at about a third of the size as Pascua-Lama and slightly smaller than the company's currently producing Veladero mine, which is also in the region. This discovery holds enormous long-term potential for the company if it can avoid the same pitfalls that plagued Pascua-Lama.
After stumbling in its attempts to grow in Latin America over the past few years, Barrick Gold is bolstering its board by adding someone with the experience it needs to avoid some of those pitfalls. He is a valuable addition to the company given that it is slowing restarting development work at its Pascua-Lama project and recently made another large discovery in the same area. In fact, given those assets, the company's future success is clearlytied to the region.
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