Engineering & Mining Journal

Barrick Gold announced on September 10, 2009, that gross proceeds from a sale of its shares would total about $4 billion, most of which will be used to eliminate forward gold sales contracts (hedges), and subsequently announced on September 23 that the deal had closed. Barrick’s initial announcement on September 7 called for sale of $3 billion in shares; however, an increase in shares bought by the public and by the underwriting syndicate led by RBC Capital Markets, Morgan Stanley, J.P. Morgan Securities and Scotia Capital, increased the total to $4 billion. Thomson Reuters reported that, according to its data, the Barrick transaction was the largest single sale of a company’s stock in Canadian history.

In its September 7 announcement, Barrick said it will use $1.9 billion of the net proceeds to eliminate all of its fixed priced (non-participating) gold contracts within the next 12 months and approximately $1 billion to eliminate a portion of its floating spot price (fully participating) gold contracts. The fixed price contracts will be eliminated through purchase of gold in the open market and/or delivery of gold from Barrick’s production. No activity in the gold market is required to settle the floating contracts. The company will record a $5.6-billion charge to earnings in the third quarter of 2009 as a result of a change in accounting treatment for the contracts.

Barrick said it is closing out its hedges to gain full leverage to the gold price on all future production “due to an increasingly positive outlook on the gold price and continuing robust gold supply/demand fundamentals.” The company expects that global monetary and fiscal reflation will be necessary for years to come, resulting in an increased risk of higher inflation and a future negative impact on the value of global currencies.

Also, Barrick President and CEO Aaron Regent said, “The gold hedge book has been a particular concern among our shareholders and the broader market, which we believe has obscured the many positive developments within the company. As a result of today’s decision, we have addressed that concern and maintained our financial flexibility. With the industry’s largest production and reserves, Barrick provides exceptional leverage to the gold price, which we expect will be further enhanced as we build our new generation of low-cost mines.”

Barrick’s current development projects include Buzwagi in Tanzania, Cortez Hills in Nevada, Pueblo Viejo in the Dominican Republic, and Pascua-Lama in Chile and Argentina. When these projects reach full production, they will collectively add about 2.6 million oz to Barrick’s annual production at lower total cash costs than the current Barrick profile.

Eldorado Gold Set to Acquire Sino Gold for $2B

Eldorado Gold and Sino Gold announced plans in late August 2009 for an agreed, all-share acquisition of Sino by Eldorado that values Sino at about C$2 billion. At the time of the announcement, Eldorado already held a 19.8% interest in Sino.

Assuming completion of the transaction, the combined company will have four operating gold mines, three in China and one in Turkey, that are expected to produce a combined total of about 550,000 oz of gold in 2009. Two new mines, one in China and one in Turkey, are expected to lift production to about

850,000 oz in 2011, and project development combined with expansion at existing operations offers the opportunity to increase production to more than 1 million oz/y by 2013. The combined company will have proven and probable reserves of 12.7 million oz.

Eldorado is headquartered in Vancouver, British Columbia; Sino is headquartered in Sydney, Australia. Eldorado plans to establish an Australian listing for its shares, which would allow Sino shareholders to hold their newly acquired Eldorado shares on the Australian Stock Exchange. The company will also maintain an important regional office in Sydney. The transaction is expected to close in December 2009.

Eldorado currently produces gold from the Kişladağ mine (100% owned) in Turkey and the Tanjianshan mine (90% owned) in China. Kişladağ is an open-pit mine that began production in July 2006 and that is forecast to produce 230,000 to 240,000 oz in 2009. Tanjianshan is an open-pit operation based on two separate deposits that began commercial production in February 2007 and that is forecast to produce 95,000 to 100,000 oz in 2009. In June 2008, Eldorado initiated construction of its underground Efemçukuru mine in Turkey, with startup planned for late 2010 at a designed production rate of 112,000 oz/y. Other Eldorado development assets include its Perama Hill gold project in Greece and its Tocantinzinho gold and Vila Nova iron ore projects in Brazil.

Sino Gold has current gold production from its 82%-owned, open-pit/ underground Jinfeng gold mine in Guizhou province, southern China, with current production of about 151,000 oz/y, and from its 95%-owned, underground White Mountain gold mine in Jilin province, northeast China, where commercial production began in January 2009, targeting design capacity of 65,000 oz/y. Sino is nearing a construction start at its open-pit/underground Eastern Dragon project in Heilongjiang province, northeast, China, with production planned at about 90,000 oz/y, and it is assessing the potential of its Beyinhar project in Inner Mongolia to be developed as an open-pit, heap leach gold operation.

Rio Tinto Comments on Recent Decisions in Mongolia

Rio Tinto said it “welcomed” the Mongolian Parliament’s recent approval of amendments to four laws that should clear the way for finalization of the investment agreement for the Oyu Tolgoi copper-gold complex in Mongolia’s South Gobi region. Rio Tinto and Ivanhoe Mines Ltd., the development partners for the project, expect to formally sign the agreement with the government of Mongolia in the near future.

Rio Tinto also noted that investment in the Oyu Tolgoi project through its shareholding in Ivanhoe Mines is consistent with its strategy of focusing on large-scale, long-life, low-cost assets. Production is expected to begin as early as 2013 with an approximate five-year ramp-up to full production. Average production capacity of the mine over its lifetime is expected to be 450,000 mt of copper per year and 330,000 oz of gold.

Under the terms of the agreement, the government of Mongolia will hold 34% of the shares of Ivanhoe Mines Mongolia. Key terms include a stable and operational tax environment in relation to the development and operation of the Oyu Tolgoi project and certainty as to the term of the investment. Rio Tinto initially spent $303 million for a 9.95% share in Ivanhoe Mines in October 2006 and at that time agreed to invest $388 million for a further 9.95% holding at the conclusion of a long-term investment agreement with the Mongolian government. Payment of this second tranche is automatically triggered once the conditions precedent to the signed investment agreement have been satisfied.

In September 2007, Rio Tinto agreed to provide Ivanhoe with a convertible credit facility of $350 million for interim financing for the project. This agreement raised both Rio Tinto’s fixed price conversion and warrants from 33.35% to 42.2% and restrictions on total Ivanhoe share acquisitions from a maximum of 40% under the October 2006 transaction agreement to 46.65%.

Report Reveals Long-Term Benefits of Gold Mining to Developing Economies

A report issued in mid-September by the World Gold Council (WGC) in partnership with the International Council on Mining & Metals (ICMM) and Oxford Policy Management claims that large-scale gold production has been found to be a major factor in bolstering the economies of developing countries.

The study, The Golden Building Block: Gold Mining and the Transformation of Developing Economies, authored by Maureen Upton, sustainability advisor to World Gold Council, considers the macroeconomic benefits of gold production in developing countries, taking into account the much-debated “resource curse” theories, and examines evidence of actual contributions through a case study of Tanzania and the effects of gold mining on its economy over a 40-year period.

The report also reviews case studies undertaken within the ICMM’s Resource Endowment initiative, analyzing the costs and benefits of mineral extraction in Chile, Ghana, Peru and Tanzania. The final section offers observations on policy approaches and conditions likely to positively impact the economic contribution of gold mining more generally across other developing countries.

Commenting on the report, Aram Shishmanian, CEO of the World Gold Council, said: “Tanzania provides the perfect test case to conduct such a comprehensive assessment of both gold mining’s contribution to date and its potential future contributions to the economy over the life cycle to mine closure. The findings of the study uncovered that the most significant contribution that gold mining provides to Tanzania’s economy is its effect on foreign direct investment (FDI) which has been enabled by the mining law reforms introduced over the past 12 years.”

According to the report sponsors, the Tanzania case study employs a life-cycle assessment (LCA) of gold mines over their entire lifespan, from construction to closure, utilizing WGC’s access to the world’s largest producers’ data for nearly all major gold mines in the country. The study, undertaken in the spring of 2009 collaboratively by World Gold Council and Oxford Policy Management for the ICMM, is claimed to be the first of its kind, according to the sponsors, as the approach “ensures that long-term benefits are captured, by way of both historical data and projections through to mine closure in a key producing country.”

Capturing some 120 specific metrics across the planned 40-year operating period of large-scale gold mining in the country (1995–2034) from World Gold Council members Barrick Gold, Anglo-Gold Ashanti and Iamgold, the aggregated figures were used to present to Tanzanian government officials at an

ICMM Workshop in May 2009.

The findings of the study reveal that the most significant contribution that gold mining provides to Tanzania’s economy is its effect on FDI. In the early 1990s, prior to large-scale gold mining, Tanzania would have appeared near the bottom of rankings of African countries as a destination for FDI. Today however, the country is now in the upper-middle rankings, with over $2 billion (nearly two-thirds) of the surge in FDI after 1998 shown to have come from the five gold mines surveyed in the LCA alone.

The report sponsors said that, contrary to critics’ views that the gold mining industry in Tanzania provides relatively low tax receipts, the study shows that the two producers surveyed, Barrick and AngloGold Ashanti, are currently among the highest single taxpayers in the country. In addition, export earnings from gold mining are already $770 million, but are estimated to more than double by 2016.

Job creation, although not typically among the greatest benefits of large-scale mining due to its capital-intensive nature, is in fact an important direct benefit of gold mining in Tanzania, with the industry employing more than the country’s utility sectors combined, including gas, electricity and water, with the resulting wages injected in to the Tanzanian economy an equally important metric.