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(Reuters) - Barrick Gold Corp (ABX.TO) said on Thursday it is suspending construction at its Pascua-Lama mine in South America, a surprise reversal on a project that has been hit by years of delays and cost overruns and has already cost it billions of dollars.
Pascua-Lama was a key growth project for Barrick, risky but with big potential. It had been expected to produce up to 850,000 ounces of gold a year in its first five years at exceptionally low operating costs. Barrick had targeted mid-2016 to start production.
Toronto-based Barrick, the world's top gold producer, also reported lower third-quarter earnings, hurt in part by the drop in gold prices that has pressured miners around the world.
The company said it would continue to explore options for Pascua-Lama, located high in the Andes on the border between Chile and Argentina, including establishing royalty or other similar deals, or strategic partnerships.
"We have determined that the prudent course - at this stage - is to suspend the project, but naturally we will maintain our option to resume construction and finish the project when improvements to its current challenges have been attained," Chief Executive Jamie Sokalsky said in a statement.
Barrick had been expected to raise its estimate of the cost the project - which it pegged last year at as much as $8.5 billion - when it announced quarterly results, but it did not do so.
Some investors have urged Barrick to call off construction, but the miner had emphasized repeatedly how far it has already come, spending $5.4 billion by the end of the second quarter. Capital spending on the project was $310 million in the third quarter.
Barrick said it will continue activities needed to comply with regulatory requirements at Pascua-Lama and protect the environment.
Local environmental groups are worried about the project's effects on nearby glaciers and on the water supply, though the project's supporters say the impact would be small.
Problems with permits had been expected to raise the mine's price tag. Regulators halted construction on the Chilean side of the border last spring, citing serious environmental violations, and Barrick agreed to build a new water management system.
The company, which has been pushing to cut costs, has also been facing labor unrest. Unionized workers on the Chilean side of the project said on Wednesday they had voted to strike as early as this Friday.
"The strike vote yesterday was probably the final nail in the coffin," said one investor in Barrick, who asked not to be named as his firm does not comment on its individual holdings.
"I'm fine with the decision," he said. "The decision takes investors' near-term liquidity concerns off the table. Wish they had done it sooner, but am glad it is done."
Suspending Pascua-Lama could weigh on Barrick's production outlook, especially since the company has already said it has no plans to build other new mines in the near future.
Barrick said the move will reduce its 2014 capital costs by as much as $1.0 billion. As of September 30, it had cash and equivalents of $2.3 billion, and $4.0 billion available under a credit facility.
Barrick produced 1.85 million ounces of gold in the third quarter, up slightly from 1.78 million a year earlier. All-in sustaining costs fell to $916 an ounce from $1,010 an ounce.
Earnings attributable to Barrick shareholders fell to $172 million, or 17 cents a share, in the quarter from $649 million, or 65 cents, a year earlier. Revenue dropped to $2.99 billion from $3.40 billion.
Excluding an unusual tax expense and other special items, adjusted earnings fell to 58 cents a share from 88 cents a year earlier. On that basis, analysts, on average, had expected 50 cents a share, according to Thomson Reuters I/B/E/S.
Barrick shares fell 2 percent to $20.00 in premarket trading. Hurt by the problems in Chile, the weak gold price and other issues, Barrick's New York-listed shares hit $13.43 in July, their lowest point in more than a decade, before rebounding more than 50 percent.
The move to mothball Pascua-Lama also affects Silver Wheaton Corp SLW.TO, which in 2009 bought 25 percent of the mine's silver production, paying Barrick cash in exchange for future silver sales at a discounted price.
Vancouver-based Silver Wheaton said in a separate statement on Thursday that it sees Barrick's decision to suspend the project as fiscally prudent. It said it is now entitled to silver output from three of Barrick's currently producing mines - the Lagunas Norte, Pierina and Veladero mines - until the end of 2016 to make up for the production it is losing from Pascua-Lama.
Silver Wheaton has also agreed to extend a completion test deadline on Pascua-Lama until the end of 2017 from the end of 2016. The company, which is reviewing its production forecasts for 2017, said it still expects its silver output to top 33.5 million silver equivalent ounces this year.
Additional reporting by Euan Rocha; Editing by Janet Guttsman and Peter Galloway