Gold delay worries Barrick investors

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. gold and 30,000 oz. 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: the country’s president Danilo Medina recently said that the existing contract between the government and the mine owners was unacceptable, and should be changed. Medina added that a windfall tax could be slapped on production if changes weren’t made.

Pueblo Viejo cost $4 billion to build, and the investment included extensive environmental clean-up of Placer Dome’s former mine there. The mine is owned by operator Barrick and Goldcorp (G-T, GG-N) in a 60/40 partnership.
Barrick says it has provided customs with the additional information it requested, and is seeking confirmation that the shipment can resume.

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

Dominican Today, an English language news outlet from the country, reported that customs agency director Fernando Fernandez claimed responsibility for halting the shipment at an airport on March 13, 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 will 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 verify the shipment, but Barrick insists that seals on the shipments couldn’t be broken until the metal arrived at its destination.

BMO Capital Markets analyst David Haughton said the news was “potentially negative” when the hold-up was first announced. Haughton estimates that the mine would 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 10.5% of Barrick’s project net present value (NPV), and 11.2% of Goldcorp’s project NPV.

The news comes a few 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 government coffers. The country is currently battling 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 is located 97 km north of the capital of Santo Domingo and reached commercial production last month. Barrick expects to ramp-up production to nameplate capacity in the second half of the year.

Guidance for this year’s production from the mine is 830,000 to 1.1 million oz. gold, at costs of US$525 to US$575 per oz.
BMO’s David Haughton wrote that the project’s 25-year mine life is more constrained by tailings capacity than resource size.

“Recent noise that the Dominican Republic wishes to revisit the Pueblo Viejo 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 writes.

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.