Mining Royalty Rate Hike To Adversely Impact Barrick Gold’s Zambian Copper Mining Operations

December 18th, 2014 by Trefis Team

Zambia’s parliament has approved the government’s proposal to hike mining royalty rates in the country. Starting in 2015, corporate income taxes on mines will be replaced by increased royalties. The new regulations will result in an increase in the current royalty rate of 6% for all mines to 8% for underground mines and 20% for open-pit mining operations. [1] This increase in royalty rates will threaten the viability of Barrick Gold Corporation’s (NYSE:ABX) Lumwana open-pit copper mining operations, which would be subject to the revised royalty rates of 20%. [1] As reported by Bloomberg, the company is considering the suspension of its copper mining operations in Zambia. [1]

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Proven and probable reserves at the Lumwana copper mine attributable to Barrick Gold stood at 594 million pounds  at the end of 2013, which accounted for around half of the company’s attributable reserves at the end of 2013. [2] The Lumwana mine accounted for around 57% of the company’s overall copper production in Q3 2014. [3] Barrick’s copper mining operations accounted for around 13% of its overall revenues in 2013. [4]

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Changes in the regulatory environment are major risks for mining companies, especially for their international operations. A similar development impacted Freeport-McMoran Inc. (NYSE:FCX) and Newmont Mining (NYSE:NEM) earlier this year. As part of new regulations governing mineral exports from Indonesia, the Indonesian government imposed an export duty of 25% on exports of copper concentrate from the country, which would have progressively risen to 60% by 2016. [5] As per their respective investment agreements with the Indonesian government, neither Freeport nor Newmont were supposed to pay any export taxes on mineral exports from Indonesia. [2] The introduction of these regulatory changes proved to be the cause of an eight month long standoff between major international mining companies and the Indonesian government, which resulted in the suspension of mineral exports from Indonesia by both Freeport and Newmont. Ultimately a compromise was reached, which enabled Freeport and Newmont to resume normal operations under revised terms, including revised export duties of 7.5% on the exports of copper concentrate. [6]

Despite parliamentary approval to the hike in mining royalty rates, Barrick Gold will most likely be hoping for a compromise with the Zambian government, similar to that between the Indonesian government and Freeport and Newmont. Otherwise, the viability of Barrick’s Zambian copper mining operations could be under threat. [1] The company’s profitability is already under pressure due to the environment of subdued gold prices. Realized gold prices for Barrick Gold have fallen nearly 11% year-over-year in the first nine months of this year. [4] Barrick Gold’s adjusted net earnings , which exclude the impact of one-time items, fell nearly 62% in Q3 2014. [4]

Barrick has divested a number of non-core assets over the last year or so, in order to lower its average production costs. Since mid-2013, the company has reduced its portfolio of mines from 27 to 19. [7] The company also sold off its oil and gas business, namely Barrick Energy, in 2013. The combined proceeds of these asset sales total approximately $1 billion. ((ref:6)) Given Barrick’s track record of taking decisive action in response to adverse business conditions, if the Zambian government does not alter its decision to sharply raise mining royalty rates, it would not be surprising to see the company suspend its Lumwana mining operations.

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Notes:
  1. Barrick Said to Plan Suspending Zambian Mine After Tax Changes, Bloomberg [↩] [↩] [↩] [↩]
  2. Barrick Gold’s 2013 40-F, SEC [↩] [↩]
  3. Barrick’s Q3 2014 Earnings Report, SEC [↩]
  4. ref:1 [↩] [↩] [↩]
  5. PTNNT Suspends Operations At Batu Hijau, Newmont News Release [↩]
  6. PTNNT to Resume Operations and Copper Concentrate Exports, Newmont News Release [↩]
  7. Barrick Gold’s Q4 2013 Earnings Presentation, Barrick Gold Website [↩]