Update: Barrick Gold Is Putting Pressure On The Zambian Government

| About: Barrick Gold (ABX)
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Summary

Barrick Gold will shut its Lumwana copper mine down in Q2 2015.

This is a surprise, as I didn't expect the Zambian government to have it in them to push a hefty royalty increase through.

The investment thesis will only be minimally impacted, but an impairment charge on the value of Lumwana could result in a book value decrease of $1/share.

Barrick Gold (NYSE:ABX) has announced it is shutting down one of its largest copper mines in Zambia. The Lumwana copper mine was on track to produce roughly 180 million pounds of copper this year at a C3 cost of $2.98/lbs. As you notice, the production cost was already high, so Barrick Gold was absolutely not amused when the Zambian government introduced a tax change whereby mining companies would have been hit hard.

The new legislation was proposing an increase of the gross royalty rate from 6% to 20%, and with Lumwana's cost structure, that would have been a burden which would be too high to carry. Even though the decision to shut the mine down came relatively fast after the announcement of the royalty hike, it looks like it was the only possible decision, as it wouldn't make any sense at all to keep Lumwana running at a huge loss per produced pound of copper. However, I would like to see a more detailed calculation first, as apparently the royalty scheme replaces the corporate income tax. Its employees have been notified, and the lay-offs will start in March of next year. The mine should be fully on care and maintenance somewhere in Q2 2015. This will obviously have a decent impact on the company's financial statements and balance sheet, as first of all, the mine generated in excess of half a billion dollars in revenue. Secondly, the asset carries a book value of $1B, so the mine's status of care and maintenance would continue for a prolonged period, and Barrick will be forced to take an impairment charge on the value of Lumwana.

There's little doubt the swift decision to put the mine on care and maintenance is just a strategy to force Zambia's hand, as the country will face the decision to either increase the royalty rate or to see a lot more mines being shut down, which will lead to the loss of tens of thousands of direct and indirect jobs. I wouldn't be surprised to see the Zambian government cave and reduce the royalty rate.

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