Lumwana (Image: Barrick Gold)
Barrick Gold (ABX.T) announced this morning that operations at the Lumwana copper mine in Zambia will be suspended. The decision comes after the passing of new legislation that will increase the royalty rate from 6 to 20 percent.
The new royalty legislation is effective January 1st, 2015 and eliminates corporate income tax but puts a steep 20% royalty in place on 'open pit' mines. Glencore and First Quantum are two other large mining companies with open-pit mines in Zambia.
Barrick is taking moves immediately to start the process of moving the mine to care and maintenance. The company expects major layoffs in March 2015 and a complete shut down by the end of the second quarter unless the law changes.
Barrick does remain hopeful that the government of Zambia will reconsider its options and come up with a solution that works for both parties.
The Lumwana mine produced 260 million pounds of copper in 2013 at C3 fully allocated cash costs of $2.97 per pound. Production has declined in 2014 with totals for the first 9 months of the year coming in at 138 million pounds of copper with C3 fully allocated costs of $2.98 per pound.
Reserves at the mine were 6.6 billion pounds of copper at the end of 2013 with multi decades of mine production left.
With high cash costs and the new royalty the mine would be unsustainable at current copper prices.
Barrick will be forced to take an impairment charge on the mine in the fourth quarter.
"The introduction of this royalty has left us with no choice but to initiate the process of suspending operations at Lumwana. Despite the progress we have made to reduce costs and improve efficiency at the mine, the economics of an operation such as Lumwana cannot support a 20-per-cent gross royalty, particularly in the current copper price environment," said co-president Kelvin Dushnisky.
Barrick stock is currently trading at 3 year lows as investors are worried about high debt levels. Other issues hitting the share price include a falling gold price, cost over runs, and environmental issues at the Pascua-Lama project.
Also factoring into the decline in share price is the Lumwana mine. Barrick purchased the mine in 2011 for $7.3 billion from Equinox Minerals. Since the acquisition performance at the mine has been dismal and costs have doubled.
Zambia is a one of the most copper prospective areas of the world. It will be interesting to see how the Zambian government responds as the Lumwana mine is an important part of the economy there. The mine supports 4000 direct jobs and purchased nearly $400 million in goods and services from Zambian suppliers in $2013.
A presidential election is scheduled for Jan 20,2015 after the passing of the populist president Michael Sata this past October.
Symbol: ABX.T
Share price: $12.75
Shares outstanding: 1.16 B
Market cap: $14.8 B
Read: Barrick to Suspend Operations at Lumwana Following Passage of New Mining Royalty
I have no position in any of the stocks mentioned. This is not investment advice. As always please do your own due diligence.
