Barrick's Difficulties Highlight Risks
BMI View: The Dominican Republic's Congress recently announced it will review and potentially seek to modify the country's contract with Barrick Gold Corp to develop the Pueblo Viejo gold and silver mine. This development is the latest manifestation of mining-related resource nationalism, an issue which we've highlighted in other mining jurisdictions, and one which may increase operational difficulties and reduce profitability for mining firms in the country.
Efforts by The Dominican Republic's Congress to modify Barrick 's contract echo developments in Latin America and other mining destinations , such as Mongolia , Guinea and South Africa where government s are seeking graeter control of their respective mining sectors . As we have written previously ( see our online service, 'Latin America - Regulatory Themes 2012', January 9, 2013 ), we expect countries will seek to increase regulations , as well as tax and royalty rates, to e nsure a greater share of industry value is distributed domestically. This will decrease operational flexibility for international firms and increase costs. Such developments may become more likely though , with metal prices remaining elevated by historical standards even as prices weaken and demand slows. The Dominican Republic is facing a significant fiscal deficit and slowing economic growth , two possible factors driving the Congress to renegotiate the contract. We estimate that the country's fiscal deficit in 2012 was 3.9% of GDP, one of its largest deficits in recent history. However, the country has sought to attract an increasing amount of foreign direct investment in recent years and shows no signs of reversing investment-friendly policies.
The Pueblo Viejo project, 60% owned by Barrick and 40% owned by Goldcorp, is projected to cost US$4bn, though it offers high rewards. Production is estimated to reach up to 1moz (million ounces) per year, with commercial sales possibly hitting US$2bn. Though the government is currently projected to bring in about US$11bn over the mine's 25-year lifespan, it may decide the current tax and royalty scheme is too generous towards Barrick. Thus, foreign firms will watch the negotiations closely to gauge the country's business environment.
|The Dominican Republic - Current Gold Projects|