TORONTO (Reuters) - Barrick Gold Corp (ABX.TO) will likely raise the cost estimate for its huge Pascua-Lama mine project in South America for the third time in less than two years when the world's top gold producer reports results on Thursday.
Much has changed since November, when Toronto-based Barrick pegged the cost of the gold and silver project at $8.5 billion, and markets are anxious to see the company's new capital cost estimate.
High in the Andes, on the border between Chile and Argentina, Pascua-Lama is Barrick's biggest and most important growth project. It's risky, but the potential is great: when and if the mine is completed, it is expected to have exceptionally low operating costs, which could pay dividends for years to come.
Since Barrick released its November estimate, regulators have halted construction on the Chilean side of the project, citing serious environmental violations. Barrick has agreed to build a new water management system to meet their concerns, and said in June it would defer some spending that had been scheduled for 2013 and 2014.
These changes are widely expected to raise the overall cost of the project, possibly by a billion dollars or more. Barrick said in June that it was "focused on minimizing" capital cost increases.
"That number could be massive," said Salman Partners analyst David West. "When you're talking about re-engineering a project, all bets are off. Nobody really knows."
But Chris Mancini, analyst at the Gabelli Gold Fund, said he does not think the cost of the new water system will be exorbitant. Gabelli holds some 2.9 million Barrick shares.
"My hope is that it's not much more than it was last time they updated," he said of the new capital cost estimate.
Barrick's third quarter results are likely to be overshadowed by the news on Pascua-Lama. Analysts, on average, expect earnings to fall to 50 cents a share, from 85 cents a share a year earlier, according to Thomson Reuters I/B/E/S.
Hurt by the problems in Chile, a drop in the price of gold and other issues, Barrick's shares hit C$14.22 in July, their lowest point since 1992, before rebounding nearly 50 percent. The shares were at C$20.78 on Tuesday.
Because a rise in Pascua-Lama's capital cost is so widely expected, a modest increase could be seen by markets as good news.
Options trading in the stock has been brisk over the past week and upside calls lead downside puts by a factor of five to three, according to options analytics firm Trade Alert. Shares rose 19 percent in the two weeks to Monday's close.
"The flow has been decidedly bullish, and to see a stock run up into earnings, traders may have already priced in the positive news," said Henry Schwartz, president of Trade Alert.
Barrick may face questions on Thursday about how it will pay for cost increases at Pascua-Lama, J.P. Morgan analyst John Bridges said in a recent note to clients. He said the company could sell more assets or sign new streaming deals.
One source briefed by Barrick on the matter told Reuters that the miner has been considering a further streaming deal to pay for any additional outlays.
But that may be off the table now that ratings agency Standard & Poor's has said it will start classifying streaming deals - where miners get cash upfront in exchange for future sales at a set price - as debt, rather than nondebt financing.
That could make Barrick cautious as S&P has already cut its credit rating on the company twice in the past 15 months.
The history of cost overruns and delays at Pascua-Lama is extensive. In July 2012, Barrick said the cost of building the project could be as much as $8.0 billion, up from its previous estimate of $4.7 billion to $5.0 billion. Last November it bumped up the top end of the estimate to $8.5 billion.
The latest word is that first production should come by mid-2016. Until the summer of 2012, the mine had been expected to start up sometime in 2013.
Credit Suisse analyst Anita Soni estimated last month that the new capital cost could be $10 billion. RBC Capital Markets analyst Stephen Walker recently pegged the figure at $9.0 billion, but observed that other analysts are more pessimistic.
"The market is concerned that total capital estimate could be well in excess of $10 billion," he wrote.
Any large cost increase is likely to revive calls from some investors for Barrick to suspend the project. But that decision would be complicated by the billions it has already spent.
When it last reported earnings, Barrick had spent about $5.4 billion on Pascua-Lama. The question facing it now is not whether the mine is worth spending $8.5 billion, or even $10 billion, to build. Barrick must ask itself whether the mine is worth the billions still unspent.
The reward could be significant. Pascua-Lama is expected to produce 800,000 to 850,000 ounces of gold a year at bargain basement all-in sustaining costs of only $50 to $200 per ounce in its first five years.
"What's done is done," Mancini said. "From this point forward you have to look at how much more needs to be invested."
Additional reporting by Alastair Sharp and Euan Rocha in Toronto and Doris Frankel in Chicago; Editing by Janet Guttsman and Peter Galloway