uploads///Copper

Why Barrick might take impairment at its Lumwana mine

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Nov. 27 2019, Updated 6:46 p.m. ET

What’s happening at Lumwana mine?

Lumwana is located in Zambia’s North-Western Province and supports approximately 4,000 direct jobs.

In the first nine months of 2014, the Lumwana mine produced 138 million pounds of copper at fully allocated costs (or C3) of $2.98 per pound. The mine had 6.6 billion pounds of copper in reserves as of December 31, 2013.

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Announcement of mine closure

On December 18, 2014, Barrick Gold (ABX) announced it will initiate procedures to suspend operations at its Lumwana copper mine in Zambia. This comes in the wake of legislation that raises the royalty rate on the country’s open pit mining operations from 6% to 20%.

The new taxation regime eliminates corporate income tax but imposes a 20% gross royalty on revenue without any consideration of profitability.

Kelvin Dushnisky, Barrick’s co-president, stated, “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.”

Impairment charge

Barrick also reported that in the absence of modification to the newly adopted royalty regime, it expects to record an impairment charge related to Lumwana in the fourth quarter of 2014. Lumwana’s current net carrying value is approximately $1 billion.

If Barrick carries out its plan to close the mine, investors should keep a keen watch on impairment at its Lumwana mine and how much the company books.

We’ll talk about Goldcorp’s (GG) Cerro Negro mine impairment in a later part of this series. Newmont Mining (NEM) is also optimizing its portfolio.

The VanEck Vectors Gold Miners ETF (GDX) invests in the stocks mentioned above. The SPDR Gold Trust (GLD) is a physical gold-backed ETF. GG, ABX, and NEM form 10.7%, 8.1%, and 6.9%, respectively, of GDX’s overall holdings.

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