Barrick suspends Zambian copper mine after royalties more than tripled

Following the Zambian government’s new legislation hiking the royalty rate on open pit mining operations from 6% to 20%, Barrick Gold Corporation said on Thursday it would start procedures to suspend operations at the Lumwana copper mine.

The new royalty legislation is expected to come into force on January 1st, 2015. It eliminates corporate income tax and replaces it with a 20% gross royalty on revenue, regardless of profitability, the company informed.

Barrick Co-President Kelvin Dushnisky said:

“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 percent gross royalty, particularly in the current copper price environment.”

Co-President Jim Gowans said:

“We sincerely regret the impact this will have on our people, as well as the communities and the businesses that depend on Lumwana, and we remain hopeful that the government will consider an alternative solution that will allow the mine to continue operating.”

Barrick Lumwana copper mine

Barrick’s Lumwana copper mine is a major driver of the local economy.

Meanwhile, Barrick said it would commence procedures to transition the mine to care and maintenance.

Major cuts to the local workforce are scheduled to start in March 2015, following the legally required period of notice.

The company expects to complete the transition to care and maintenance in Q2 2015.

$1bn impairment charge

If the new royalty legislation is not modified, Barrick said it expects to record an impairment charge related to the mine’s suspension in Q4 2014 of about $1 billion, which is Lumwana’s current net carrying value.

The Lumwana mine, located in the Northwestern Province, employs about 4,000 people directly. It is a major driver of the local economy and bought goods and services worth $400 million from local suppliers in 2013. It has also supported several community projects in health care, training, education and literacy.

The mine produced 138 million pounds of copper at C3 fully allocated costs of $2.98 per pound in the first nine months of 2014. On December 31, 2013, the mine was estimated to hold about 6.6 billion pounds of copper.