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Detained Barrick Gold shipment seen as shot across the bow

A Dominican customs worker takes measurements of a shipment of gold belonging to Barrick Gold that was detained for four days.

REUTERS

Barrick Gold Corp. managed to get its shipment of gold out of the Dominican Republic this week, but that may not spell the end of travails in the Caribbean country that is demanding a greater share of profits from its newest gold mine.

In the latest incarnation of resource nationalism in the hemisphere, Barrick is being asked by the government to renegotiate how it shares profits from the $3.7-billion Pueblo Viejo gold mine with the impoverished state.

Barrick argues that its current contract is legally binding, and will see 50 per cent of net cash flow – or some $11-billion – go to the government over the 25-year life of the mine, jointly owned by fellow-Canadian miner Goldcorp Inc.

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"They are going to have to come up with some sort of compromise that will allow Barrick to continue to operate the mine profitably and allow the government to really save face on this, because the government has put a lot of political capital into what they've said they are going to do," said John Gravelle, Canadian mining leader for consultancy PricewaterhouseCoopers.

Dominican President Danilo Medina said in speech to the nation in February that the current deal with Barrick was "unacceptable" and threatened to impose a windfall tax on profits if no deal is reached.

"Up to now we have been patient, but patience has its limits," Mr. Medina said during the Feb. 27 speech where he also pledged firm commitment to a stable legal framework for foreign investment.

In what many regard as a shot across the bow, Barrick saw a gold shipment from the mine held up for four days over the past week due to an error on the customs declaration form. The errors occurred despite nearly 20 other shipments sailing through customs since commercial production began in January.

The Pueblo Viejo talks come as mining companies face a wave of resource nationalism that is sweeping the world as governments and populations seek larger shares of profit amid booming metals prices.

Mr. Medina's government, facing a fiscal shortfall, argues that when the Dominican Republic first agreed to allow Pueblo Viejo to go ahead in 2002 – when it was owned by Placer Dome – gold was trading at less than a fifth of where it is today.

Gold is trading at near $1,600 (U.S.) an ounce these days, but that's well down from record highs of $1,900 an ounce in 2011. At the same time, massive cost run-ups across the industry are making mining a lot more expensive than it was a decade ago.

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"The current contract is legally binding and can't be changed unilaterally, but we've been open to discussions with the Dominican government in good faith," Barrick spokesman Andy Lloyd said on Tuesday. "These discussions have been ongoing since long before his [Mr. Medina's] speech … for a period of months."

Under the terms of the current agreement, the government earns a 3.2-per-cent net smelter royalty on Pueblo Viejo gold, plus 25-per-cent corporate income tax. Once Barrick has recovered its capital investment it will also earn a 28.75-per-cent net profits tax. But the last part of the payback is expected to kick in within four or five years, which does not help the Medina government's fiscal shortfall today.

"It's impossible to handicap the situation right now, but it appears that Mr. Medina is attempting to take a hard line," said Jorge Beristain at Deutsche Bank Securities Inc. in New York, who visited Pueblo Viejo shortly after Mr. Medina's speech marking the 169th anniversary of the Dominican Republic's independence.

"Some of the options that have been floated out there have been to accelerate some of the potential payments that the Dominican Republic could receive in future years to today's years, but at the end of the day those would not change the economic take of the project."

Pueblo Viejo will produce about 1 million ounces of gold per year and will be one of Barrick's largest and lowest-cost producers.

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About the Author
Mining Reporter

Pav Jordan is a mining reporter for the Report on Business. More

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