2023-03-17 05:46:54 ET
Summary
- Many investors in gold miners are focused solely on the price of gold.
- There are numerous harbingers of risk on the horizon for Barrick Gold.
- The impact of these perils may well be severe and sudden.
Preamble
Back in February this year, I wrote an article titled; " Banking Sector: Storm Clouds Are Gathering ", in which I recommended; "Investors may wish to err on the side of caution and review their investments in the banking sector." I'll be honest, I didn't expect this prophecy to come to pass so quickly. On this occasion, consideration of the multiple risks and uncertainties facing Barrick Gold ( GOLD ) will be explored, the consequences of which could be equally as dramatic as the current chaos in the banking sector.
Barrick Gold
Barrick Gold is a gold and copper producer which operates through a variety of geographical segments: Africa, South America and the Middle East. It is true that the company has a couple of mines in more stable jurisdictions (Canada and the US) but the thrust of this article is that the specific mines listed have the potential to become less profitable for a host of geopolitical reasons and US specific causes.
South America
By now, investors are aware that the BRICS nations (Brazil, Russia, India, China and South Africa), and those that are keen to join this group, are amongst the world's powerhouses in the mining sector. Apart from the fact that these nations have ample untapped resources, they do not suffer in the same way as many western jurisdictions from the struggle with high overhead costs and complex regulatory regimes. As a consequence, countries such as Brazil, South Africa and Argentina have become a magnet for international investment.
However, there is a relatively new mantra amongst the BRICS nations, and of those that wish to join this club, which could impact the pockets of investors quite severely. There is a call, led primarily by China and Russia, for " a fairer world order ," which I assume means that BRICS countries will seek a larger share of the pie, so to speak.
A recent example of this concerns Canada listed miner, First Quantum Minerals Ltd ( OTCPK:FQVLF ). One of the company's key assets is a copper mine located in Panama, and has been producing copious quantities of copper since 2019. Everything was rosy in the garden until the Panamanian government commenced discussions on the renegotiation of the mining concession at the end of 2021. The government decided to seek a review of the long-term deal that they regarded as too generous for First Quantum.
In December 2022, the company released a communique which expressed disappointment that the contract had to be revisited, given that the company had, no doubt, invested considerable sums to get the mine into production. From the text of the message; "We are disappointed by the Government's actions. The Government seeks a refreshed concession contract that does right by the country, its people and its economy", that is to say, Panama wanted a bigger slice of the pie.
This month, the negotiations between the Panamanian government and First Quantum were concluded, and so mining operations can continue, but under significantly worse terms for the company. According to the terms of the agreement , the First Quantum will pay far, far more royalties than previously under the old contract. It is understood that the new contract apparently assures a minimum $375M in yearly income to the government, which is hardly a positive for stock holders. For comparison, First Quantum paid $61 million in royalties to Panama's government back in 2021.
Argentina is a country with well-known financial problems. There is the collapsing Argentinian Peso, inflation rate of more than 100%, not to mention the country's continuing efforts to renegotiate international loans . It seems to me that the country may well be taking note of events that have taken place in Panama and see an opportunity to alleviate some of problems that plague their financial system. Given that gold seems to be on an upward trajectory, gold miners with operations in the country may soon find themselves in the government's crosshairs. A factor that could potentially accelerate revisions to concession contracts is the country's application to join the BRICS club .
One of Barrick's flagship mines is the Veladero complex, which is a joint venture with Shandong Gold. The mine is situated in the province of San Juan, Argentina.
Africa
Several hazards are becoming more obvious for miners hoping to exploit the continents riches, the first of which is exemplified by actions taken in Ghana. This African country shares some similarities with Argentina; a plummeting local currency and rocketing inflation. As a means to resolve some of these serious issues facing the country, in November, it was reported that the country would begin paying for oil in gold bullion, rather than dollars. In order to expedite this plan; "The gold to be purchased by the Bank of Ghana and the PMMC (Precious Minerals Marketing Company) will be in cedis (Ghanaian local currency) at spot price with no discounts."
Whilst this concerning development is bad, the West's influence amongst African nations appears to be waning at a breakneck pace. Last month French troops were invited to leave Burkina Faso , which was a onetime African ally. This departure comes hot on the heels of their departure from Mali in August 2022. In an attempt to bolster support in Africa, President Macron of France visited The Democratic Republic of the Congo, where he was advised The West is not the only game in town. The French are not the only ones getting short shrift on the continent. A high ranking German politician received a chilly response when he confronted the Namibian leader on the subject of Chinese working in the country.
These circumstances ought to trouble Barrick investors given that the company has gold mines in; Tanzania, The Democratic Republic of Congo, Mali and Côte d'Ivoire. There is also the copper mine in Zambia to consider.
The Middle East
Barrick have a joint venture with Saudi company Ma'aden, which has operations at Jabal Sayid. And in January, it was confirmed that there are new joint venture agreements with Ma'aden in place for two prospective exploration projects comprising the Jabal Sayid South and Umm Ad Damar license areas. However, even in Saudi there are plentiful omens of uncertainties for Barrick ahead.
First and foremost is the interest Saudi has in joining BRICS , and decisions are expected to be taken this year according to some. So, if the kingdom takes on board one of the key tenets of the BRICS nations, contract renegotiation of Barrick's concession could be on the cards in due course.
Apart from the application to join BRICS, we have seen in recent months the lukewarm welcome reception President Joe Biden received on arrival in Saudi versus the regal welcome with which Xi Jinping was greeted. Little wonder that the Chinese premier was treated to such pomp and ceremony given the nation's role in brokering a peace deal with long time foe, Iran. There has also been the suggestion that Saudi will at some point in the future begin accepting Yuan for oil . And let us not forget Saudi military cooperation with Russia , which begs the question; how long before the US is invited to leave the kingdom?
A historical perspective
I suspect many readers are convinced that the various US military bases around the globe will serve to protect the interests of Barrick Gold. Without a doubt, there are quite a number in Africa and South America , and so could conceivably act to prevent investments losing value. But, to counter this notion, there is a lesson from the past, which seems pertinent as we continue through 2023.
For those unfamiliar with the history of India, the Indian subcontinent was governed by the British crown from 1858 to 1947. It is widely believed that the peaceful protests of Mahatma Gandhi led to the British leaving the country. However, the reason is that the UK was broke in 1947 and could no longer afford to maintain its military presence to administer the then colony.
Given the enormous debts of the US, it is by no means guaranteed America will continue to maintain the huge number of military bases located in various countries.
Summary
It is clear that there is a growing list of emerging threats to the profitability of Barrick Gold, specifically in Africa, South America and the Middle East. This being so, it may be wise for investors to seek out miners that have operations in safer jurisdictions.
As always, this does not constitute advice and investors ought to carry out their own due diligence.
For further details see:
Barrick Gold: Emerging Risks