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Costs balloon at Barrick, Kinross mine in Chile

A key development project for mining giants Barrick Gold Corp. and Kinross Gold Corp. has run into massive capital cost escalation, raising more doubts from experts that it will get built any time soon.

The project in question is Cerro Casale, a huge, low-grade gold-copper deposit in northern Chile. Kinross filed a technical report this week that pegged the construction cost of the project at a whopping US$3.6-billion.

That is an increase of 86% over the last estimate of about US$2-billion, made in August, 2006.

"This number is obviously going to have pretty big implications," said Dundee Securities analyst Paul Burchell, who used to work at Cerro Casale.

"It suggests to me that a project difficult to justify five years ago is probably more [difficult] today."

Experts are also concerned with the aggressive pricing assumptions made in the Cerro Casale study. Kinross is using a gold price of US$725 an ounce and a copper price of US$2 a pound, which is actually higher than the current copper price.

"It's a tough project economically because of the capex and the prices required to make it work. In this market, it will probably be deferred," said David Whetham, a resource fund manager at Scotia Cassels.

As commodity prices soared in the middle of this decade, mining companies were beset with higher costs for all their inputs, including labour, energy and heavy equipment. There were a number of examples of outrageous cost overruns, most famously at the Galore Creek project owned by Teck Cominco Ltd. and NovaGold Resources Inc.

But since commodity prices crashed last fall, costs have also come down. Analysts said yesterday that there is a good chance that the final price tag on Cerro Casale will be lower than US$3.6-billion, especially given that the technical report was completed a few months ago. But it will not be a huge decline. "That number might come down 10% or 15%. But it won't be down 50%," one analyst said.

Mr. Burchell said that Cerro Casale is a tough project because the grade, which is low, is very similar throughout the entire deposit. That means a company cannot start mining a high-grade section and quickly recoup its capital costs.

Experts also pointed out that Barrick and Kinross did not release any internal rate-of-return figures from Cerro Casale, suggesting that they may be "less than compelling," according to one source.

Kinross spokesman Steve Mitchell said the technical report demonstrated positive cash flow and an acceptable rate of return on the project. He also pointed out that the big capital cost increase should not be a surprise, given that the last estimate was made almost three years ago.

Kinross is now conducting a feasibility study, which should be completed in the third quarter. After that, a decision will be made on whether to proceed with the project.

Cerro Casale contains reserves of more than 21 million ounces of gold and five billion pounds of copper. It is considered one of the world's biggest undeveloped resources, but the low grade has always been a concern.

Kinross holds a 49% stake in the project, while Barrick owns 51%.