Will This Spill Spell Disaster for Barrick Gold?

Image source: Getty Images.

Barrick Gold (NYSE: ABX), in compliance with a government request, temporarily suspendedoperations at its Veladero mine in Argentina in September, following the spill of process solution from the leach pad. This week the company announced that operations have resumed. Initially, management seemed confident that the incident was far from serious, stating in a press release that it did "notanticipate any material impact to Veladero's 2016 operating guidance."

The company may have underestimated the severity of the event, though. Failing to affirm its original estimate, management recently stated that it "will continue to assess the impact of the temporary suspension on Veladero's production for 2016" in a recent press release.

Getting to know Veladero

Veladero is Barrick's only operating mine in Argentina. In 2015, Veladero produced 602,000 ounces of gold with all-in sustaining costs (AISC) of $946 per ounce -- a decline in performance from 2014, when it produced approximately 722,000 ounces of gold with AISC of $815 per ounce. Based on existing reserves and production capacity, management forecasts the expected mine life to be eight years for mining and process operations.

In 2015, Veladero -- one of Barrick's five core mines -- accounted for approximately 10% of the company's total gold production. The mine may hold an even more prominent role in the company's portfolio this year. In the company's last annual report, it had forecast gold production at Veladero to fall between 630,000 and 690,000 ounces -- about 12.5% of the company's annual total gold production.

Attributing the increase over its amounts in 2015 to higher mined grade and improved mining activity, management also identified "better operational management of the leach pad" as a contributing factor to the growth in production. It remains to be seen if the numerous factors will compensate for the failure in the management of the leach pad and enable the company to achieve its guidance for the year.

A fine line

Currently, it's unknown if the Argentine government intends to fine Barrick for the recent spill. Based on recent history at Veladero, though, it should come as no surprise if Barrick is asked to dig into its pockets to pay for the operational miscue.

In 2013, the company paid $1.2 million in fines resulting from an excess accumulation of process solution at the site. More recently, in March of this year, the Provincial mining authority imposed a $9.5 million administrative fine related to a 2015 event, in which a valve failure on a leach pad pipeline led to the release of cyanide-bearing processsolution into a nearby waterway. Evidently, the spill -- which did not reach any waterways -- is not as egregious as the previous one; furthermore, management reports that "Environmental monitoring of surface and sub-surface water has been intensified, and no anomalies have been detected."

Compliance with environmental, health, and safety regulations is a paramount concern for companies in the mining industry; consequently, the failureto adhere to these regulations is a constant risk.

Located in the Frontera District, Veladero is about 230 miles northwest of the city of San Juan. Image source: Barrick Gold corporate website.

Although the risks are considerable, miners hardly find the incurring of fines to be a common occurrence. For example,Newmont Mining Corp. and Yamana Gold, two of Barrick's leading competitors, haven't paid a fine in more than five years.

Hot off the press

Although Barrick had believed that it had addressed all of the Argentine government's requests, last week, an Argentine judge, who said he would allow the company to resume operations if the company adequately addressed the spill, found that Barrick's actions had been insufficient.

The judge had based his decision on a report from provincial police that found Barrick had failed to install the required security cameras and sensors, which would help to prevent future spills.

Days after the judge's ruling, provincial authorities deemed the measures which Barrick implemented to prevent future incidents were adequate, and they approved the resumption of normal operations.

The takeaway

Although the suspension of operations may compromise the mine's performance for the year, the incident is far from catastrophic. Because the spilled process solution failed to reach any waterways, it's possible that the Argentine government decides against imposing administrative fines, further suggesting that the spill will not have too deleterious an effect on the company's financials.

Barrick reported $9.03 billion in revenue for 2015, so even if it receives a fine, it would most likely have a negligible effect, just as the recent $9.5 million fine will hardly be noticed. Of course, the investigation is ongoing, and new findings may prove that the spill was worse than previously expected. The number of incidents at Veladero is noteworthy, though, and portends future operating failures. Should these events occur, though, the impacts would probably be trivial.

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