Negotiations between Barrick Gold Corp (TSX: ABX)(NYSE: ABX) and the Tanzanian government are dragging on, but the latest news from Tanzania concerning Barrick‘s London listed subsidiary, Acacia Mining Plc point to a partial closure of Acacia’s most affected flagship operation.
Acacia Mining announced on Monday, September 4, that it will be laying off workers and suspending underground operations at its Bulyanhulu Gold Mine in Tanzania, placing the mine under care and maintenance in hopes of a positive out come of the currently ongoing closed door meetings where Barrick hopes to salvage investment value.
Understandably, Acacia has to stop the massive cash bleed induced by the unprocessed mineral export ban imposed in March this year by the African government.
Continued operations have become unsustainable as the current export ban, together with a deterioration in the current operating environment have resulted in Acacia generating negative cash flows of approximately US$15 million per month at Bulyanhulu.
Tanzania is pushing Acacia to construct a local smelting plant for gold and copper concentrates in the country so as to add value to its mineral exports.
The biggest question investors may wish to get answered as early as possible is: Will the largest gold miner in the world successfully weather this Acacia Mining storm? Rather, will Barrick successfully disarm the Tanzanian mine-field without losing an arm or leg during the process?
Tanzania slapped Acacia mining with a US$190 billion tax bill late July, accusing the country’s biggest gold producer of grossly under-declaring the value of its unprocessed mineral exports.
The Tanzania Revenue Authority is demanding US$40 billion in alleged unpaid taxes, and US$150 billion of penalties and interest owed. This tax bill was slapped just days before the Tanzanian government would begin negotiations with Barrick Gold, which holds a 63.9% stake in Acacia.
Acacia has been denied a seat on the negotiating table, and is facing challenges processing work permits for its expatriate contractors who are engaged in mine development works, a sign the host government is not in the best of moods as far as the miner is concerned.
Now Acacia, which once claimed to be losing about a million dollars in revenue per day due to the mineral export ban, is closing one of its operating mines, and will continue incurring about US$3 million a month in care and maintenance costs at the mine.
The future doesn’t look so bad for now, as Acacia only revised its 2017 annual production guidance down by 100,000 ounces from its previous guidance range of 850, 000-900, 000 ounces and expects to become cash flow positive again in early 2018 while concentrating on producing gold bars.
However, my concern is that since Tanzania has already enacted new laws that enable the government to take up to 50% stake in a mining entity as compensation for taxes owed, and allow the state to renegotiate mining contracts while prohibiting international arbitration on any contentious issues, the market may be in for negative surprises from the ongoing negotiations.
Barrick Gold may end up ceding some of its stake to Tanzania, and be forced to construct an expensive smelting plant in the country while the host government converts the new controversial tax bill to a tax credit.
Earlier studies had indicated that Tanzania’s local concentrate production does not have the capacity to sustain and support local smelting as the local ore volumes are too low to keep the plant running, probably no winner here.
It is possible Barrick could limit Acacia’s bleeding and get the export ban lifted before year end, but a lot of blood is being lost and Acacia is bleeding profusely after reporting about US$265 million in concentrate inventory buildup since the export ban and is set to incur once off costs of US$20-25 million in winding down Bulyanhulu, in addition to the natural unwinding of around US$35-40 million of working capital.
Both sides do have a lot to lose.
Acacia possibly accounted for about 1.6% of Tanzania’s gross domestic product in 2016. Tanzania may struggle to attract needed foreign direct investment after sinking its top foreign owned mining operator while losing several millions in potential taxes and royalties from Acacia whose operations support about 40, 000 lives in the developing country’s communities.
Let’s watch how this drama plays out.
