[Update] Barrick, Acacia embroiled in political turmoil in Tanzania

VANCOUVER — Barrick Gold‘s (TSX: ABX; NYSE: ABX) senior management is getting directly involved in an evolving sociopolitical situation in Tanzania that could materially impact its annual gold production. The company holds a 63.9% equity stake in Acacia Mining (LON: ACA), which emerged via the spin out of its subsidiary, African Barrick, seven years ago.

Acacia is the East African state’s largest gold producer thanks to a trio of mines, namely: Bulyanhulu, Buzwagi and North Mara. The company expects to produce between 850,000 oz. and 900,000 oz. in 2017, at all-in sustaining costs (AISC) ranging from US$880 to US$910 per oz. Barrick’s share of production would roughly equate to around 450,000 oz.

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.

The North Mara gold mine hit commercial production in 2002 and has produced over 2 million oz. to date. Credit: Acacia Mining.

“Kelvin Dushnisky and I were in Tanzania last week,” 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’d been largely driving it ourselves up until this point, but [they are] ready to assist in any way they can,” he elaborated.

In 2016, the company’s concentrate sales accounted for around 45% of revenue at Bulyanhulu and 55% at Buzwagi. Overall, concentrates represented 30% of total revenues. Furthermore, 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 ten times the amount declared.”

The committee claims that “277 containers, representing production in January and February, hold between 250,000 oz. and 425,000 oz. gold,” versus a declared amount of around 26,000 oz.

The operations jointly generated 450,000 oz. in 2016, with around 205,000 oz. of that reporting to concentrate.

The Buzwagi mine started commercial production in 2009 and has produced over 1 million oz. to date. Credit: Acacia Mining.

Acacia noted that the findings would indicate that Bulyanhulu and Buzwagi each produce more than 1.5 million oz. gold per year. This would imply the operations are the two largest gold mines in the world and that the company 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 explained.

“A second committee has been assembled for the purpose of looking at the economic and legal aspects of concentrates exports going back to the beginning of the mines. We’ve been hosting them at site over the past few weeks and believe they’re close to finalizing a report,” he continued.

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 the East African miner in mid-2016. Barrick said it would “evaluate any necessary adjustments to its full-year outlook should Acacia determine a revision to its own 2017 guidance.”

Acacia had first-quarter production of 219,670 oz. gold at AISC of US$934 per oz. The company has been stockpiling its concentrate inventory during the negotiations, and said it has “the capacity, if need be, to bulk store the concentrate for a period beyond the containment storage.”

On May 31, the company reported 85,000 oz. gold, 4 million lbs. copper and 50,000 oz. silver contained 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.

Bulyanhulu is an underground mine with shaft and ramp access, which is transitioning to long-hole as its principal mining method. Credit: Acacia Mining.

“If we get to a point, following 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.

Scotiabank analyst Tanya Jakusconek estimates that putting Bulyanhulu on care and maintenance would cost Acacia roughly “$30 million for retrenchments and breaking contracts, plus an additional $2 million to $3 million per month.”

Shares of Acacia dropped nearly 35%, or roughly US$1.91 per share, on the London Stock Exchange following the news. BMO Capital Markets cut its price target on the company from roughly US$7 to US$3.90 per share following 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.

“Regardless, it now 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 concluded that the current “impact on … estimates for Barrick have been negligible,” though noted that risks to production guidance remain if negotiations with the Tanzanian government deteriorate further. Barrick expects to produce around 5.4 million oz. gold this year.

“One positive aspect in the past couple days has been statements made by senior government people, in particular by Prime Minister [Kassim Majaliwa]. There’s been some concern in-country on potential damage to its reputation in terms of international investment,” Gordon explained.

“Ultimately there’s really been no clear message and we don’t know. The president has been saying, for some time, that he’s keen that Tanzania gets fair return on its assets. The mining industry is a significant part of that, and he obviously feels strongly about smelting in country. We’re happy to talk to him about it,” he concluded.