Barrick Gold lost its 'social licence' in Papua New Guinea. This is the price it's paying to earn it back

Financial Post

New binding deal shows a path for building a mining company ‘acceptable to future generations,’ CEO says

By: Gabriel Friedman

Mining executives often talk about the importance of having a ‘social licence’ to operate, yet it’s rare to hear them acknowledge when they don’t have one.

Barrick Gold Corp.’s chief executive Mark Bristow says it happened to his company in Papua New Guinea, where its Porgera mine had been pumping out gold for nearly three decades, even as a spate of accusations about human rights and environmental abuses in the surrounding communities have festered.

Ultimately, last April, Barrick was forced to put the mine on care and maintenance, essentially ceasing operations, when the government declined to renew its permit. Since then, Bristow has made countless trips to the island nation to meet with Prime Minister James Marape, including four since December. Earlier this month, the company announced a new binding deal: it will increase Papua New Guinea’s stake in the entity that owns the mine from five per cent to 51 per cent and make Barrick a minority owner in the mine it operates there.

Bristow, who took the helm of Barrick in 2019, acknowledged in an interview with the Financial Post the company had neglected its relationship with the community — although he never commented on the accusations of abuses — and stressed that he wants to build a mining company “that’s acceptable to future generations.”

He said the terms of his new partnership framework in Papua New Guinea show the path, even though many people remain skeptical that he or anyone could ever win back trust in the community.

“Generally, you can operate in the majority of mineral-endowed countries in the world, provided that you’re prepared to recognize and build a licence to operate,” Bristow told the Financial Post. “And what happened in Papua New Guinea is, we lost that.”Porgera, a high-elevation open pit and underground mine that produced 598,000 ounces of gold in 2019 at an all-in sustaining cost of US$1,002 per ounce, according to Bristow has the potential to continue for another two decades, and is a “world class asset.”

Since Barrick acquired the mine in 2006, it has developed a notorious reputation. In 2009, Norway’s sovereign wealth fund said it was divesting its roughly US$184-million position in Barrick because of the environmental problems associated with the mine.

For years, activists have shown up at the company’s annual meeting to decry the conditions around the mine. They say the company dumps mine tailings laden with mercury and other toxins into a local tributary, which has contaminated fresh water, destroyed local agriculture, and lead to brutal encounters with private and public security forces when impoverished local residents crossed the river, or panned for gold in the tailings.

“This is a wild place,” said Bristow, who declined to comment on the accusations, but added, “If we stepped away from this, it would quickly degenerate into something too ghastly to imagine.”

His new partnership agreement comes at a time when gold prices are elevated, at US$1,735 per ounce, and governments in many countries with emerging economies are demanding greater returns from foreign extractive companies.

Bristow says Barrick is looking to build back trust, and that the new deal will do that in several ways. It raises Papua New Guinea’s ownership stake — which includes various stakeholders including the national and provincial governments, as well as some landowners and others — to 51 per cent, while Barrick and its joint venture partner, China’s Zijin Mining Group Co Ltd., will see their respective stakes in the Porgera mine decline to 24.5 per cent each, from 47.5 per cent each.

In addition, Bristow said Papua New Guinea’s stakeholders would receive 53 per cent of the economic benefits; and that the government is guaranteed tax payments, even as Barrick and Zijin prepare to invest close to US$1 billion to improve the mine in the next few years.

If we stepped away from this, it would quickly degenerate into something too ghastly to imagine


“There’s not many countries that you get away with more than 50 per cent of the economics no matter what you own,” said Bristow, adding, “That’s a paradigm that the market is going to have to get its head around.”

There is some precedent in the gold sector: In 2018, U.S.-based Freeport-McMoran Inc. struck a deal that gives Indonesia a roughly 51 per cent stake in its Grasberg mine, one of the largest copper and gold mines in the world.

But Bristow insisted that the deal he struck in Papua New Guinea differs as it guarantees that the government would receive tax revenues, regardless of whether or not the costs of capital improvements to the mine have been recouped.

Too often, he said miners strike deals that allow them to defer paying taxes until they’ve paid down the capital costs of building or improving a mine.

“In many countries … you get a permit, you promise all sorts of things and actually you don’t deliver against your assumptions,” said Bristow, “and so you build this big tax shield and the government gets nothing.”

Not all the details of the economic agreement with Papua New Guinea have been released yet, though, and Bristow said there are still several steps remaining before the mine can be reopened and the deal can be implemented, all of which could take months.

So far, many financial analysts have given scant attention to the Porgera deal, in part, because the mine accounts for a tiny fraction of Barrick’s overall net asset value, estimated between one and two per cent.

In a brief note to investors, Josh Wolfsen, director, global mining research at RBC Capital Markets, wrote “our preliminary analysis outlines no impact to our Barrick net asset value.”

Still, Bristow maintains that since he took over in 2019, his geologists have spotted new potential in Porgera and that it has the potential to continue operating for an additional 20 years, a rarity among gold mines which generally don’t last quite so long.

He also emphasized that the deal gives Papua New Guinea the right to buy the mine outright at the end of 10 years at fair market value if Barrick fails to win back trust.

“So there’s an agreement, if we can’t build a strong partnership with the Papua New Guinea people and their government, and they want to take us out, there’s a mechanism to do it,” said Bristow. “They’ve got to write us out a cheque on a fair market basis.”

But Catherine Coumans, research coordinator for Mining Watch Canada, who has been an outspoken critic of the company, expressed skepticism about the deal, saying the landowners she has spoken to were not consulted.

“It doesn’t address the groundswell of anger and frustration coming up from the people who have to live with this mine,” said Coumans.

Of all the mines I’ve ever seen, this place is like a nightmare. It's horrible


She said the country’s Prime Minister James Marape, whose term began in 2019, faces strong political pressure about Barrick’s role in the community.

Coumans also questioned the 10-year option, asking who would pay for remediation and clean up of the mine if Barrick exits. She noted researchers at Columbia University’s Earth Institute, among others, have written about the water contamination around the mine.

Plus, there are countless grievances, beyond environmental concerns, that remain unresolved, Coumans said. This includes claims by local residents of sexual assault by security forces who patrol the river tributaries where tailings are dumped, critical injuries by mining trucks, and also residents who say their drinking water is contaminated, ruining their agricultural livelihood among other claims, according to Coumans.

“Of all the mines I’ve ever seen, this place is like a nightmare,” she said. “It’s horrible.”

Bristow, who insists that building a mining company that’s acceptable to future generations is at “the core of everything we do,” acknowledged the company has work to do, and said that many of the problems pre-dated his tenure at Barrick.

And while the company remains in litigation with Papua New Guinea for failing to renew its licence, both in the country and at international arbitration tribunals, Bristow said those cases are effectively suspended while negotiations about restarting the mine continue.

He said Barrick’s latest deal would be win-win for everyone, and that the mine would help upskill the workforce and deliver real money to the country’s economy and show how mining can play a powerful role in an emerging economy.

“More and more the opportunities to discover and develop and manage world class assets is going to trend toward the developing world,” said Bristow. “So you’ve got to be prepared to be more creative in the way you cut deals with countries.”

Originally published in the Financial Post