Here’s How Much the Dispute in Acacia Has Impacted Barrick Gold (Part 1)

November 29th, 2017 by Trefis Team

Barrick Gold (NYSE:ABX), which owns 63.9% of Acacia Mining (LON:ACA), has significantly been impacted by the export ban imposed by the Tanzanian government in the African country. Shipment volume in Q3 ’17 for Acacia was down by 36% Y-O-Y, which in turn, has negatively impacted Barrick’s revenue by 15% for the September quarter end.

The ban on export of unprocessed ore in the African country was imposed in March 2017 in an effort to boost the development of gold smelters within the country. The government intends to export processed value added products from Tanzania rather than exporting only raw materials. [1] The issue has become further complicated for Acacia, as an investigation initiated by the Tanzanian government has detected Acacia under-reporting its output for several years and has consequently been accused of evading taxes. The assessment claims a total of $190 billion, which is comprised of $40 billion in alleged unpaid taxes and a further $150 billion of penalties and interest owed, to be paid by Acacia to the Tanzanian government.

These developments have had serious repercussions on Acacia’s shipment volumes and the company’s consequent inability to sell has resulted in the reduction of its production volume as well.

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Barrick’s African operation accounts for around 6% of the company’s gold reserves and around 10% of its shipments volume (both on an equity interest basis). [2] Thus, a hit to Acacia’s shipment volume has significantly impacted the shipment volume of Barrick, as illustrated by the below graph. You can view our base case for Barrick Gold here and create different scenarios using our interactive platform.

Barrick has initiated negotiation of its terms with the Tanzanian government and aims to resolve the issue by mid-2018. As per the ongoing discussions, the Tanzanian government would take a 16% stake in Acacia’s assets and benefit from a 50% share of the mine’s revenue. In addition to that, Acacia would most likely pay an additional 300 million to the government towards the reservation of outstanding tax disputes. ((Barrick Gold (ABX) Q3 2017 Results – Earnings Call Transcript, Seeking Alpha)) Barrick’s third quarter net income was significantly impacted by a tax provision of $172 million reported as an outstanding claim against Acacia.

These negotiations, once confirmed, would require an agreement from Acacia’s shareholders in order to take final form. How and when these negotiations are actually implemented would have significant implication on Barrick’s future operations. We shall be discussing the probable upside/downside to Barrick’s revenue for the upcoming year in our following article.

We have a $16 price estimate for Barrick Gold’s stock, which is 15% above the current market price.

Have more questions about Barrick Gold? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Barrick Gold

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Notes:
  1. UPDATE 2-Acacia Mining: Tanzania ban costs $1 mln daily in revenue, Reuters [↩]
  2. Barrick Gold’s 2016 40-F, SEC [↩]