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.

Golden Opportunities?
The Dominican Republic - Current Gold Projects

Reassessing The Dominican Republic?

This development may also lead to a reassessment of our view that The Dominican Republic is a potentially high-growth frontier mining market for gold, as well as for silver and copper. Given our view that gold prices will remain elevated in the medium term due to lose global monetary policy, we expect both junior and large miners to continue exploration and development of gold reserves. The Dominican Republic has multiple mining projects seeking to exploit the country's precious metal reserves. However, miners across the world are increasingly sensitive to resource nationalism policies given that the mining industry is still facing rising costs in developing and extracting minerals. Firms are becoming increasingly conservative in deploying capital and will be less likely to finance large, risky projects. Thus, should negotiations between Barrick and the government become particularly drawn out and acrimonious, exploration and development activities could slow in the country.


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