How Will Barrick Gold (NYSE:ABX) Fix 140 Years of Debt?

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A year ago, Barrick Gold (NYSE:ABX) sold a 50% interest in the Veladero mine to Shandong Gold Mining for $960 million. Also several days ago both companies signed a Strategic Cooperation Agreement that is both ambiguous and intriguing.

The shadow of Pascua-Lama

Barrick Gold (NYSE:ABX) is one of the world's largest gold miners of the Pascua-Lama notoriety. This is the massive 17 million gold deposit that was going to be open-pit mined amongst the clouds of the Andes on the border of Chile and Argentina. The former country laid claims to three-quarters of the attributable ounces and the remaining one quarter was located under the Argentinian soil.

Both Veldadero and Pascua-Lama are found in the San Juan Province. The latter deposit had been entangled in a web of controversy for many years running. There had been a mixed bag of events from ambitions to move the local glaciers (WTF!), to continued litigations over claims that never allowed precious metals to be uplifted in the first place, to excavation activities that would have wiped out thousands of farmers in the Huasco Valley, all the way to claims of uncontrolled acidic mine runoff. Anyway, the project has been finally suspended by the Chilean authorities in January of this year.

What once was going to be Barrick Gold's pride and joy, think of The Titanic here, now merely gets a 130-word paragraph under the Exploration section of the corporate website. In the meantime, a lightly inked $5 billion impairment charge had been scribbled in its accounting papers.

A cyanide hat-trick

The Veldadero site has also been a thorn in the company's side. This one has been famed for multiple spills of cyanide solution. Cyanide is used to separate gold from ore. The incidents happened three times over a period of a year and a half. Not a convincing PR stunt that had the mine's labor unions go on strikes and poor communities taking to walls with the graffiti of "Barrick Out".

A one hundred and forty-year wait ahead

As of March 31, 2018, Barrick Gold (NYSE:ABX) was settled with a debt of $6.4 billion. Most likely, Barrick Gold (NYSE:ABX) will take the proceeds from the sale of the Veladero stake to pay down its current debt. The company will have to do a lot more than hope that the Chinese gold flakes will bring it into the Promised Land, five billion dollars in the red is a long way from home.

Its current level of debt is 56.8% compared to its net worth. On the bright side, there has been a reduction of just over two percent in the past five years. Indeed, a commendable achievement. At this rate, it will take the company one hundred and forty years to get out of the red. Perhaps one way to lose the unwanted fat is for Barrick to divest itself of some more assets that would be more valuable to others than itself.

What is that all about?

Barrick Gold (NYSE:ABX) and Shandong Gold Mining are now partnering to evaluate the future of Barrick's Pascua-Lama deposit. I do find it intriguing that in spite of the categorical suspension of that site by the Chilean authorities, the new Chinese partners display a glimmer of hope that perhaps Pascua-Lama could be a go after all. Chinese are known for their patience, so perhaps the issue of time is the least of their concerns.

Maybe when the price of gold races up towards the $2,000 per ounce, then all parties will be more amenable to carving out a more satisfactory and profitable solution for all concerned. Is the Chilean government expecting a windfall of higher magnitude when the prices do take off? Or will Barrick Gold (NYSE:ABX) become the sacrificial lamb?

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