Customs hold-up has Barrick investors on edge

Gold from Barrick Gold’s (ABX-T, ABX-N) recently baptized Pueblo Viejo mine is being held up by customs in the Dominican Republic, but it appears a resolution is at hand.

Dominican authorities halted the shipment of 6,000 oz. of gold and 30,000 oz. of silver valued at close to US$12 million demanding more information from the company before the metal would be released.

The situation had investors on high alert considering that the Dominican President Danilo Medina recently said the existing contract between the government and the mine owners was unacceptable and must be changed. Medina said if changes weren’t made a windfall tax could be slapped on production.

Pueblo Viejo cost $4 billion to build, an investment that included extensive environmental clean-up of Placer Dome’s former mine. The mine is owned by Barrick and Goldcorp (G-T, GG-N) in a 60/40 partnership. Barrick holds the majority stake.

For its part Barrick says it has now provided Customs with the additional information requested and is seeking confirmation that the shipment can resume.

Information on why the shipment was held in the first place is murky.

The Dominican Today, an English language news outlet from the country, reported that the Customs Agency director, Fernando Fernandez, claimed responsibility for halting the shipment at an airport on Wednesday and that he did not act on instructions from president Danilo Medina, as other local media reports suggested.

“I proceeded according to Dominican law, for now until the shipments are verified, there’ll be no shipments, not only from Barrick, but from all mining companies,” the official said on local TV.

Fernandez alleges that Barrick executives refused to allow the verification of the shipment, a situation that was corrected by the company. The debate allegedly centred around the fact that Barrick insisted that seals on the shipments couldn’t be broken until the metal arrived at its final destination.

BMO Capital Markets analyst David Haughton had labeled the news “potentially negative” when the hold-up was first announced. Haughton estimates that the mine will account for roughly 8.3% of Barrick’s company-wide production for the year and 14.7% of Goldcorp’s.

Using the spot prices for gold and a 10% discount rate Haughton calculates that Pueblo Viejo represents roughly 10.5% of Barrick’s project NPV and roughly 11.2% of Goldcorp’s project NPV.

The news comes just weeks after Medina gave a speech to the Dominican Congress in which he said the government’s contract with the miners needs to be revised to provide more benefit to the Dominican people. If it isn’t modified, he said, he would get behind legislation to increase taxes on export earnings of mineral companies.

“For every $100 of gold exports, Barrick will receive $97 and the Dominican people $3,” Medina said. “That is simply unacceptable.”

The contract was negotiated in 2009 but Medina says the profits to the companies are too substantial. In addition to the $4 billion already invested, the mine is expected to contribute $7 billion over its 25-year life to the government coffers. The country is currently suffering under a large national deficit.

Barrick says that while its contract with the government is legally binding it has been engaging in good faith discussions with the government.

The Pueblo Viejo mine sits 97-km north of the capital of Santo Domingo and reached commercial production last month. Barrick expects to ramp-up production to name-plate capacity in the second half of the year.

Guidance for this year’s production from the mine is 830,000 to 1.08 million oz. of gold at costs of US$525–575 per oz.

BMO’s David Haughton wrote that the project’s 25-year mine life is constrained more by tailings capacity rather than resource size.

“Recent noise that the Dominican Republic wishes to revisit the PV fiscal agreement is a worry. Barrick is clear that there is no scope for unilateral change to the agreement, but they are open to discussions with the government,” Haughton wrote at the time.

That news sent Barrick shares down 9% to $29.19 before recovering slightly leading up into the latest development. In Toronto on March 14, the company’s shares finished the day flat at $29.22 on 4.42 million shares traded.