Profit-sharing deal with Barrick gives Papua New Guinea majority stake in Porgera gold mine

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Barrick Gold Corp. has hammered out a new profit-sharing agreement with the Papua New Guinea (PNG) government for its Porgera gold mine in which it makes major concessions in return for being able to restart operations after a year-long shutdown.

Under the pact announced on Friday, PNG’s ownership in Porgera will rise to 51 per cent from 5 per cent. Barrick and China’s Zijin Mining Group Ltd., which previously owned a combined 95 per cent stake, will see their shares fall to a combined 49 per cent. Toronto-based Barrick, the operator of the mine, will front the entire cost of reopening the site.

John Ing, analyst with Maison Placements Canada Inc., said while the new ownership agreement appears “draconian” at first sight for Barrick, being able to reopen the mine again at a time when the price of gold is elevated is a big positive. “Before it was adversarial, now there’s a working arrangement,” he said. “Part of a loaf is better than no loaf.”

In a note to clients, Josh Wolfson, analyst with RBC Dominion Securities Inc., said while the impact of the agreement was “mixed,” for Barrick, it brings “improved clarity to the mine’s prior highly uncertain outlook.”

While Porgera accounts for only about 5 per cent of Barrick’s annual production, the grade is rich and it is a relatively low-cost operation. The mine’s all-in-sustaining cost is about US$985 an ounce, meaning that with gold trading north of US$1,740 an ounce, it generates lots of cash. The mine has been in production since the 1990s, and Barrick acquired a stake in 2006, after it bought fellow Canadian gold miner Placer Dome Inc.

One year ago, Barrick suspended production at the site after the PNG government refused to renew its mining lease, alleging environmental infractions. PNG also accused Barrick of cheating it out of taxes, saying it underpaid by US$191-million. The dispute at Porgera wasn’t entirely unforeseen. PNG’s Prime Minister, James Marape, vowed before he was elected in 2019 to seek more lucrative agreements with foreign operators of the country’s resource assets.

The disagreement between Barrick and PNG strongly resembled an earlier dispute involving a Barrick subsidiary and the government of Tanzania in east Africa that took three years to settle. In 2017, Tanzania banned Acacia Mining PLC from exporting gold concentrate and demanded US$200-billion in back taxes. In 2020, the two sides reached agreement with Barrick agreeing to give a much bigger slice of the profits to Tanzania and to pay a US$300-million penalty.

Other Canadian gold miners, including Kinross Gold Corp. , and Eldorado Gold Corp. , have also duked it out with foreign governments over ownership rights and profit sharing agreements. Mr. Ing calls these kinds of geopolitical disputes between Western miners and frontier countries angling to get a bigger piece of the economic pie “a fact of life.”

But resource companies that operate in Canada aren’t entirely immune to the whims of government either. Bill Harris, portfolio manager with Avenue Investment Management, cited Alberta’s tax hikes on natural gas companies as an example. “It all depends on the commodity price,” he said. “You change all the rules when the commodity price changes, and we do it in Canada just as much as it happens in Papua New Guinea.”

A few years ago, Barrick pondered selling its stake in the Porgera mine. Under the new agreement, PNG has the right to acquire Barrick and Zijin’s share after 10 years at fair market value. Mr. Ing said that if that happens, Barrick could plausibly stay on as the operator, but would likely instead make payments to PNG for the right to mine the property, similar to a leasehold. Mr. Ing says more countries want to own their mining assets outright, and cited Indonesia as an example that has made pushes in this area.

Shares in Barrick closed at $26.57 on the Toronto Stock Exchange on Friday. Barrick, the world’s second biggest gold miner by production and market value, said it hopes to restart production at the mine later this year.

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