Publish in Special Reports - Monday, February 4, 2013
The $3.8 billion Pueblo Viejo gold mine in the Dominican Republic, a joint venture between Barrick Gold and Goldcorp, is the largest foreign investment in the country. (Photo: Barrick Gold)
Dominican President Danilo Medina is considering revising a contract with Barrick Gold, a move that is being strongly criticized by business leaders. (Photo: Dominican Presidency)
A possible Dominican revision of a 2009 contract with Barrick Gold is being criticized by foreign investors.
BY JOACHIM BAMRUD
COTUI, Dominican Republic – Surrounded by one of the poorest provinces in the Dominican Republic, Canada-based Barrick Gold recently started production on its $3.8 billion joint venture gold mine Pueblo Viejo. Barrick manages the mine and owns 60 percent while Canada-based Goldcorp owns the remaining 40 percent.
The mine is the largest foreign investment ever in the Dominican Republic and is expected to have a significant impact on the country’s future exports and GDP, helping diversify and strengthen an economy that traditionally has been dependent on tourism revenues and remittances.
The Pueblo Viejo mine is expected to account for 15 percent of the value of Dominican exports and 2.9 percent of its GDP within the next decade, according to a recent report from Centre for Social Responsibility in Mining at Queensland University’s Sustainable Minerals Institute. By comparison, all mining activity in the Dominican Republic only accounted for 0.4 percent of GDP in 2010, according to the United Nations Economic Commission for Latin America and the Caribbean (ECLAC).
However, the government of President Danilo Medina is now considering revising the country’s 2009 contract with Barrick, the world’s largest gold miner, in an effort to raise more money as it faces a major fiscal crisis. The crisis led it to implement a series of new and widely unpopular taxes, which business leaders say will likely lead to a 25 percent drop in retail sales during the first half. They also criticized that the government raised taxes without making any significant cuts in public spending. The Dominican Republic ranks last worldwide among 144 nations when it comes to government waste, according to the latest Global Competitiveness Report from the World Economic Forum.
The possible revision of the Barrick contract is being criticized by foreign investors and is seen as a dangerous signal for future investments. “The rules of the game cannot be changed,” says Salvador Demallistre, executive director of the Dominican Association of Foreign Investors (ASIEX). Companies need long-term stability when they make their investment decisions, he says.
William Malamud, executive vice president of the American Chamber of Commerce in the Dominican Republic, agrees.
“This sends a very negative signal to current and potential investors in the Dominican mining sector, as can be seen in the stock price of Barrick and Goldcorp.,” he says. “Barrick’s Pueblo Viejo mining project is tremendously important for the country.”
First of all, it is effectively managing the remediation of a significant environmental liability that was left when the mine was bankrupted by the Dominican government, Malamud says. Barrick has invested more than $375 million to clean up waste left behind by Rosario Dominicano, a state mining company that in 1999 abandoned the mine where Pueblo Viejo is now operating, leaving a trail of massive pollution.
Second, the project provides significant employment and technology transfer, as well as generating much needed foreign exchange, thereby bolstering macroeconomic stability at a time when the Dominican Republic has been running growing fiscal and current account deficits, Malamud points out.
Third, there is are significant mineral deposits on the island that are in early stages of development, and if the signal by the government is that contracts on major projects are not binding, then this would raise the perception of risk and thereby dissuade future investment in the sector – especially investment by the more responsible players in the sector, he argues.
Fernando Gonzalez Nicolas, president of the Roundtable of Commonwealth Countries in the Dominican Republic, also criticizes the possible Barrick revision. "To review recently formalized contracts could indicate a lack of institutionalism, formalism and continuity of government,” he said during the Energy Forum hosted by the Institute of the Americas last week, according to a report in local newspaper Hoy.
When the Dominican government reached its original deal with Barrick in 2009 it was seen as the best possible one for the country and also one of the best any country, including mining veteran Peru, had ever negotiated, Demallistre points out.
The possible revision isn’t Barrick’s only headache.
The company has had to face a wave of local protests – often violent – by demonstrators demanding jobs at the mine.
“Most of the young people are unemployed [and are demanding] that they are given a share [of jobs at Barrick],” says Sadoki Duarte, who has led several of the protests in Cotui.
Consesar Hernandez, president of the government-appointed Council for Managing Mining Funds (Fomisar) agrees. “The employment creation was not what was expected,” he says. “Most of the jobs went to people that were from outside the province.”
During the original construction phase, Barrick employed as many as 11 000 people, but now that number dropped to less than 2,000 as the mining company started normal production last month.Barrick has also had to face mismanagement of funds by a local politician. Cotui mayor Rafael Molina Lluberes spent money the city received from Barrick to pay his own legal expenses although the funds were specifically earmarked for community expenses. The move caused widespread anger at the mayor, who also has been criticized for mishandling negotiations with Barrick over how funds should be distributed.
However, the real money will come once the area starts receiving 5 percent of the government’s Barrick payments. The original contract between Barrick and the government stipulated that 5 percent of the government’s income would be paid to the local communities around the mine, but it didn’t specify how the money will be managed or who would do so. Locals hope Barrick will be able to distribute the funds directly to the local communities rather than through the central government.
“If Barrick’s money is sent to the government we won’t see anything,” Duarte says.
Similar sentiments are shared by Hernandez and Emerito Paulina, the mayor of Angelina, a town near the mine. Paulina has submitted various proposals to the central government asking that the funds be paid directly to the Commonwealth of Southern Cibao, which groups all the cities around the mine except for Cotui.
Behind the skepticism against the central government is a combination of factors. First of all, the government’s fiscal crisis may tempt it to use the 5 percent to cover its own needs, locals fear. Second, is a history of government waste in using public funds.
Despite the signals from both the government and legislators, it is unclear how and even if the Barrick contract will be revised.
“We are very confident in the integrity of the agreement we have in place,” Barrick spokesman Andy Lloyd told Bloomberg. “It is legally binding on both the company and the state and cannot be changed unilaterally by either party.”
The Dominican Republic has so far enjoyed a relatively good image among foreign investors, but a revision of the Barrick contract will clearly ruin that.
News of the possible revision has already hurt the country’s image. “The market may be starting to re-evaluate its mild preference for the ruling party after the taste it seemed to show for resource nationalism this week,” the Financial Times wrote on Thursday.
“Amcham hopes that the Dominican government will carefully weigh the costs and benefits of capriciously changing the terms of long-term capital intensive projects, and instead focus on providing a secure and transparent investment climate that will facilitate responsible investment in this strategic sector of the economy,” Malamud says.
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