Barrick/Goldcorp remove overhang in Pueblo Viejo deal, but at a cost – by Peter Koven (National Post – May 9, 2013)

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When the Pueblo Viejo mine entered commercial production early this year, it took about 20 seconds for politicians in the Dominican Republic to demand a bigger piece of the pie from the two Canadian owners (Barrick Gold Corp. owns 60% and Goldcorp Inc. owns 40%). Negotiations ensued and a revised agreement was announced Wednesday night.

After taking some time to chew it over, analysts weighted in on Thursday morning. Their views are decidedly mixed: the deal is positive in that it removes the political overhang, but negative in that it takes substantial benefits away from shareholders and hands them to the government. Also, payments to the government will be brought forward.

A number of changes were made to the Pueblo Viejo agreement, including the elimination of a 10% return embedded in the initial capital investment before a 28.75% tax kicks in, an extension to the period in which the miners recover their capital investment, a delay in the application of tax deductions, and a reduction in depreciation rates.

Barrick calculated that the total economic benefit to the government will rise by US$1.5-billion in this agreement, assuming a US$1,600 gold price. The Dominican was already expected to receive more than US$10-billion from the mine.

J.P. Morgan analyst John Bridges previously expected that the Dominican government would begin to receive its 28.75% net profits interest tax in 2019. Now, he noted, the miners will pay 50% of the cash flows between 2013 and 2016 to the government (expected to be US$2.2-billion).

As a result of this change, Credit Suisse analyst Anita Soni expects that Barrick’s cumulative operating cash flow between 2013 and 2016 will drop 6%, while Goldcorp’s will drop 6.2%.

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