Just two weeks after the Pueblo Viejo gold mine in the Dominican Republic entered commercial production in mid-January, joint-venture partners Barrick Gold (ABX-T, ABX-N) and Goldcorp (G-T, GG-N) face a potential squeezeplay from the government.
According to local media outlets in the Caribbean nation, the Chamber of Deputies is thinking about renegotiating its contract with the two major gold producers for “more favourable terms.”
In a research note, David Haughton of BMO Capital Markets surmises that “the major point of contention appears to be that windfall revenues to the government would only start after the company recovers all of its initial investment, with capital costs rising from US$1 billion in 2005 to US$3.7 billion more recently . . . a meaningful portion of that additional expenditure would have been injected into the local economy.”
He adds that “the contract is binding and cannot be changed unilaterally, but clearly some discussions of the issues may unfold.”
Barrick picked up the Pueblo Viejo project in its 2006 acquisition of Placer Dome and subsequently sold a 40% stake in it to Goldcorp.
The mine — about 100 km northwest of the capital city of Santo Domingo — is expected to support 1,500 direct jobs and nearly 10,000 indirect jobs throughout its more than 25-year lifespan. Barrick says that Dominicans are expected to make up 90% of the workforce.
In a prepared statement, Barrick said it is confident in the integrity of its agreement, and that the contract was approved in 2009 by both houses of congress and later ratified by the executive branch. “It is legally binding on both the company and the state and cannot be changed unilaterally by either party,” Barrick says. “However, Barrick views the government of the Dominican Republic as a partner and is always willing to discuss in good faith the circumstances of the company’s operations in the country.”
Barrick also noted that the contract “is very favourable to the state” and ensures that at least 50% of the economic benefit generated by the project flows to the government over the life of the operation through taxes and royalties — and that does not take into account substantial spending in the region on goods and services and the taxes paid by employees, contractors and other service providers.
The company says it has also committed $75 million to clean up legacy environmental damage left behind by a previous mining operation at the site, which had been a source of ongoing contamination.
Ramp-up to full production is expected in the second half of 2013, and over the first five years of operation Barrick’s share of annual production is forecast to average 625,000 to 675,000 oz. gold, with Goldcorp’s share expected to be 415,000 to 450,000 oz. gold.
Barrick notes that the project’s capital investment of $3.6 billion to $3.8 billion represents the largest foreign investment in the country’s history. It also notes that the mine would have the largest gold autoclave-processing facility in the world.
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