Barrick Gold Corporation (NYSE:ABX) suffered a setback with its Pakistan plans after the Supreme Court of the country declared that the mining lease granted to the company in the Baluchistan province is not in accordance with laws. The lease in question pertains to the Reko Diq copper-gold project. It is being run by the Tethyan Copper Company, in which Toronto-based Barrick Gold and Chilean copper giant Antofagasta Minerals each own a 37.5% stake. The remaining 25% is owned by the government of Baluchistan. The Tethyan copper belt, where the project is located, is estimated to be the world’s fifth largest deposit of gold and copper. 
While the Supreme Court in Pakistan has given its ruling, the matter is still pending in arbitration forums. Although an interim verdict has gone in Pakistan’s favor, the whole picture can only become clear once the arbitration panels give the final verdict. 
If the project eventually doesn’t go through, it will have implications for Barrick Gold’s future growth but financial damages on account of a writedown will be minimal.
On February 15, 2011, the project company, Tethyan Copper Company Pakistan (Private) Limited (TCCP), submitted to the Government of Baluchistan(GOB) an application for a mining lease in respect of the Reko Diq project. On November 15, 2011, the Baluchistan government rejected the application to convert the company’s exploration license to a mining lease license. The TCCP then sought arbitration against the federal government at the The International Centre for Settlement of Investment Disputes(ICSID), and against the government of Balochistan at the International Chamber of Commerce. It sought a penalty of $10 billion on the Balochistan government for its refusal to grant it the Reko Diq mining lease.
Cases were simultaneously filed by various parties in Pakistani courts and finally reached the Supreme Court for consideration. The full background of the dispute can be found in the Supreme Court’s order here.
Is The Adverse Ruling A Setback For Barrick Gold?
At the end of 2011, Barrick’s share of “Measured” and “Indicated and Inferred” gold resources stood at 9.5 million ounces and 6.4 million ounces respectively, and its share of “Measured” and “Indicated and Inferred” copper resources stood at 11.7 billion pounds and 8.4 billion pounds respectively. 
According to the latest available annual report, Barrick’s feasibility study indicated pre-production capital requirement of approximately $3.3 billion (on a 100% ownership basis) for a 120,000 tonnes per day processing plant, which is capable of future expansions. Barrick estimated that its share of average annual production for the first five full years will be between 90,000 and 100,000 ounces of gold and 150 to 160 million pounds of copper. 
Having stated the above, it is very important to note that since the nature of the project is still early-stage, Barrick doesn’t include Tethyan in the statements of its reserves. This can be verified from the company’s annual report for 2011. 
There is a distinction between reserves and resources. The classification of assets as reserves indicates that the inherent economic value of resources can be captured. This requires necessary legal permissions to be in place. The classification of assets as resources merely indicates their presence, it may or may not be possible to get them out of the ground. 
The carrying value of Barrick’s investment in Reko Diq is only $121 million. Therefore, if Barrick has to take a writedown on the project, from an immediate financial standpoint the damage will be minimal. Also, since the resources have not yet been classified as reserves so far, the valuation of the company will not suffer. Since mining companies, including Barrick Gold, explicitly state that mineral resources not classified as mineral reserves do not have demonstrated economic viability, investors take this into account when valuing mining companies.
While the financial damage on Barrick’s balance sheet and its valuation is likely to be minimal, one cannot ignore the fact that it deprives the company of a significant growth opportunity in the future. The Reko Diq project was supposed to give Barrick access to one of the world’s richest copper-gold deposits. Barrick has already been facing interminable delays and cost escalations at its Pascua Lama project in South America, causing investors to punish the company’s stock value. 
If the arbitration proceedings go against TCPP, the project will almost certainly have to be terminated. If not, the final outcome will depend on how the government and the Supreme Court of Pakistan react to the arbitration panel’s ruling. We will have to wait and watch for the time being.
We have a Trefis price estimate of $51 for Barrick Gold. We will update our estimates once the fourth quarter earnings are out early next month.Notes:
- Supreme Court declares Reko Diq agreement void, Dawn [↩]
- Balochistan govt allowed to carry out Reko Diq mining, Dawn [↩]
- Reko Diq, Barrick Gold Website [↩]
- 40-F 2011, SEC [↩]
- Pakistan Declares Barrick Venture Lease Invalid, WSJ [↩]
- What is the difference between resources and reserves?, British Geological Survey [↩]
- Barrick Gold Earnings: Profit Nosedives As Capital Expenditure Soars, Trefis [↩]