Barrick Gold Corp. is opening the door to a sale of its biggest copper mine as it faces higher taxes that threaten its profitability in Zambia.
In a statement on Monday, Barrick said the Zambian government has proposed tax increases for its Lumwana property that would “imperil the mine’s ability to sustain returns to all stakeholders.”
Barrick said reports that it had already sold Lumwana were untrue, but the Toronto-based company allowed that given the “challenging conditions,” it was considering “all options.”
The potential sale is an about-face for Barrick, which had previously designated its copper assets as “strategic” and not something it was planning to sell.
Barrick inherited the Lumwana mine in its $7.3-billion acquisition of Equinox Minerals Ltd. in 2011.
Over the past few years, African countries including Tanzania and the Democratic Republic of the Congo (DRC) have introduced punitive tax measures that have driven up the cost of doing business abroad for Canadian miners.
This is also the second African tax problem that Barrick has encountered in recent years. Acacia Mining PLC, in which Barrick has a stake of 64 per cent, has been subject to an export ban on gold concentrate in neighbouring Tanzania for the past 22 months, with the local government accusing the company of US$200-billion in tax fraud.
The Zambian government, which needs to cut its public debt, rolled out its proposed changes to the tax code in September.
While Barrick is “mindful that the government was under pressure to increase its revenue,” the tax measures would put Lumwana "in a challenging situation,” Willem Jacobs, the company’s chief operating officer for Africa and the Middle East, said in the statement.
Barrick said that it has proposed a compromise that would give Zambia an improved share of any profits made at Lumwana “without overburdening the mine,” and that it continues to engage with the government in the hope of finding a mutually beneficial solution.
In Zambia, mining companies pay royalty rates that fluctuate depending on the price of copper, but the maximum rate payable under the old system was 6 per cent. The new maximum is 10 per cent, but it is levied only if the price of copper trades above US$7,500 a tonne. The current copper price is just above US$6,000 a tonne, meaning that miners would be subject to a rate of 7.5 per cent, compared with 6 per cent previously.
Barrick is not the only Canadian miner to be negatively affected by the Zambian tax increases. Toronto-based copper company First Quantum Minerals Ltd. recently said it planned to lay off 2,500 workers in the African country as a result of the changing tax environment.
Even without the tax hikes, Barrick’s Lumwana property in Zambia had already been in a difficult spot. The company had been dealing with higher costs and lower production at the mine over the past year. Its all-in-sustaining-cost, a measurement of most of the costs of mining, was US$3.01 a pound in the third quarter, which made it Barrick’s highest-cost copper mine.
As for how much Lumwana could fetch in a sale, Desjardins Securities Inc. analyst Josh Wolfson pegs the net-asset value of Lumwana at US$814-million. However, in an e-mail to The Globe and Mail on Monday, he said the changing tax situation could affect any final sale price.
With its recent US$6-billion acquisition of Randgold Resources Ltd., Barrick increased its exposure considerably to Africa. While Randgold, under founder Mark Bristow (now Barrick’s chief executive), was known for building strong and relatively trouble-free relationships with host African governments, last year he was unsuccessful in attempts to push back against tax increases in the DRC.
Shares in Barrick rose by 1.6 per cent on Monday to close at $15.89 apiece on the Toronto Stock Exchange.
Niall McGee