VANCOUVER — Barrick Gold’s (TSX: ABX; NYSE: ABX) senior management is preparing for negotiations over an evolving sociopolitical situation in Tanzania that could lower its gold production from the country. The company holds a 63.9% equity stake in Acacia Mining (LON: ACA), which was spun out seven years ago as a subsidiary named African Barrick Gold.
Acacia is the largest gold producer in Tanzania with operating mines: Bulyanhulu, Buzwagi and North Mara. The company expects to produce between 850,000 and 900,000 oz. in 2017, at all-in sustaining costs (AISCs) ranging from US$880 to US$910 per ounce. Barrick’s share of production would equate to 450,000 oz. gold.
Machines in the pit at Acacia Mining’s North Mara gold mine in Tanzania. Credit: Acacia Mining.
Acacia has been negotiating with the Tanzanian government over a halt on concentrate exports that President John Magufuli instituted on March 3. The measure was reportedly enacted over regulatory concerns surrounding valuation on mineral exports.
“Kelvin Dushnisky and I were in Tanzania,” Acacia CEO Brad Gordon said during a June 2 conference call. Dushnisky serves as Acacia’s chairman, as well as president at Barrick.
“We are receiving support from Barrick through this situation. On the ground this is the first time Kelvin has been with me during senior-level meetings in country. So we largely drove it ourselves until this point, but [they are] ready to assist in any way they can.”
The Buzwagi mine started commercial production in 2009 and has produced over 1 million oz. to date. Credit: Acacia Mining.
In 2016, Acacia’s concentrate sales accounted for 45% of revenue at Bulyanhulu and 55% at Buzwagi. Concentrates were 30% of Acacia’s total revenues.
BMO Capital Markets analyst Andrew Breichmanas calculates the suspension of exports results in “an average loss of over [$1 million] per day.”
The situation worsened on May 24 after a presidential committee of “academics and industry professionals” claimed that the value of minerals within Acacia’s inspected containers was “more than 10 times the amount declared.”
The committee claims that “277 containers, representing production in January and February, hold between 250,000 and 425,000 oz. gold,” versus a declared amount of 26,000 ounces.
The operations jointly generated 450,000 oz. in 2016, with 205,000 oz. reporting to concentrate.
Acacia noted that the findings indicate that Bulyanhulu and Buzwagi each produce more than 1.5 million oz. gold per year. This would imply the operations are the second and third largest gold mines in the world after Muruntau in Uzbekistan, and that Acacia on its own is the world’s third-largest gold producer.
“The first committee was of a technical nature, and looked purely at the contents of the containers of concentrate at the port. The report from that committee delivered results we can’t reconcile, and we’ve requested a copy of that report and an independent review,” Gordon said.
The Bulyanhulu gold mine commenced commercial production in 2001 and has produced over 3 million oz. to date. Credit: Acacia Mining.
“A second committee has been assembled for the economic and legal aspects of concentrate exports going back to the beginning of the mines. We’ve been hosting them at site over the past few weeks and they are close to finalizing a report.”
Barrick said it was “offering Acacia its full support” in a May 25 press release, though the gold major reportedly contemplated selling its stake in Acacia in mid-2016. Barrick said it would “evaluate any necessary adjustments to its full-year outlook if Acacia determines a revision to its own 2017 guidance.”
Acacia had first-quarter production of 219,670 oz. gold at AISCs of US$934 per ounce. The company has been stockpiling its concentrate inventory during negotiations, and reported it has “the capacity, if need be, to store the concentrate for a period beyond the containment storage.”
On May 31, the company reported 85,000 oz. gold, 4 million lb. copper and 50,000 contained oz. silver within unsold concentrate.
“We expect to engage with the senior levels of government after the second committee releases its report in the next one to two weeks. We can’t continue this way forever in terms of operation and capital,” Gordon added.
“If we get to a point, after the release of a second report, where we see an impasse in dialogue with the government, we’d put the Bulyanhulu operation on care and maintenance. Likewise, we might put the mine under care and maintenance if our cash position decreases to a certain level,” he said.
The North Mara gold mine hit commercial production in 2002 and has produced over 2 million oz. to date. Credit: Acacia Mining.
Scotiabank analyst Tanya Jakusconek says that putting Bulyanhulu on care and maintenance would cost Acacia “$30 million for retrenchments and breaking contracts, plus another $2 million to $3 million per month.”
The second committee released its report on June 12, which Acacia management described as “disappointing” in a subsequent conference call. The findings alleged that the company had “under-declared revenues and tax payments, over a number of years, by tens of billions of dollars.”
As a result, the committee recommended a series of potential resolutions, including: more taxes and royalty payments based on historical inconsistencies, updated mineral development agreements, government ownership in the mines and extensions of the export ban.
The Tanzanian government “is looking for a fair return on the gold we mine in country, while from our side there are a number of issues around the operating environment in Tanzania that need to be addressed,” Gordon said on a June 15 conference call. “We need to address the lack of trust between ourselves and the government.”
Barrick reported that its executive chairman, John Thornton, had met with President Magufuli in what it called “constructive and open” discussions.
Shares of Acacia have dropped nearly 35%, or the equivalent of US$1.91 per share, on the London Stock Exchange since May.
BMO Capital Markets cut its price target on the company from US$7 to US$3.90 per share after the committee reports. Acacia reported net cash of US$196 million at the end of March.
“A discrepancy of such magnitude appears difficult to reconcile given that it would represent anomalous performance for well-established operations, indicate a significant failure of regulated export processes and require collaboration from numerous entities,” Breichmanas wrote.
“It appears that a near-term resolution to resume concentrate exports may be difficult to achieve, likely forcing management to consider the suspension or curtailment of operations,” he added.
BMO Research said that the current “impact on … estimates for Barrick have been negligible,” but noted that risks to production guidance remain if negotiations with the Tanzanian government deteriorate. Barrick expects to produce 5.4 million oz. gold this year.
“It’s early days in terms of negotiations and the situation is fluid,” Gordon said.
“There’s been no clear message … the president has been saying, for some time, that he’s keen Tanzania gets fair return on its assets. The mining industry is a significant part of that, and he feels strongly about smelting in the country. We’re happy to talk to him about it.”
The Tanzanian technical committee is probably using a handheld XRF unit to analyse Acacia’s gold concentrates. The spuriously high iridium, REEs and gold are characteristic of inappropriate use of a handheld XRF on mineral samples. For example, high gold reports are caused by the presence of arsenic which has K-lines that overlap and can be confused with the gold M-lines in the EDS spectra when peak fitting. Similarly, high iridium can be inappropriately reported by misidentifying peaks from other elements. Coincidentally, the Tanzania Ministry of Energy and Minerals put out a request in early 2016 for bids to supply hand-held XRFs for one of ifs departments.
Thanks Hardolph for your excellent thoughts. I’ve also seen first hand how green and overly enthused geologists can mistake gold hits in XRF data as actual values, but I certainly hope that’s not the case in this particular situation. I don’t know if I would laugh, or cry!
Lesley, Acacia put up a microwebsite to dispute the First Presidential Committee’s results http://www.acaciamining.com/export-ban-facts.aspx where they show assays by SGS compared to amounts claimed by the Tanzanian Ministry of Energy and Minerals. From a case I have seen elsewhere, the telltale sign of a portable XRF is the high Ir, claimed to be 320 ppm, and the Rh at 2 ppm both of which are assayed at < 1 ppb in the concentrate. These false Ir-Rh reports could be caused by peak fitting to interfering elements in arsenide minerals or matrix effects detected by the XRF. Bulyanhulu ore does have As, Pb, and W which might provide peak overlaps for Ir and Rh as well as gold. Gold analysis is one of the "holy grails" of the portable XRF industry, but except for metal analysis, nothing has changed in 10 years and gold analyses in ores by XRF are completely unreliable. Getting 1400 ppm Au by XRF in a sulphide ore would be easy, even if there was no gold at all.
The Li and Be that is claimed near 1000 ppm is odd because they are light elements that handheld XRFs generally do not detect so that suggests perhaps some other method was used as well. However, I cannot imagine why the Tanzanians would even look at those elements unless they came up in a general analysis like by ICP or on the screen of an XRF. The most confusing part is the copper analyses, which are generally fairly good by XRF, but here are reported as 26% vs the assayed 14% That could indicate incorrect operating parameters with an XRF, but you would think they would have figured out how to use an XRF before setting up their president to accuse Acacia of fraud. If the Tanzanians refuse to reveal how they did the analyses, I would suggest Acacia try to replicate the false analyses using various models of XRF in different operating modes.