October 28, 2016 / 11:02 AM / 10 months ago

RPT-Chinese miners eyeing Barrick mine face regulatory morass

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By Susan Taylor and Luc Cohen

TORONTO/BUENOS AIRES, Oct 28 (Reuters) - Chinese state-owned miners considering buying into Barrick Gold Corp's operations in Argentina would take on assets that are under regulatory scrutiny and entangled in lawsuits and investigations.

China's Zijin Mining Group Co and Shandong Gold Mining Co have held separate talks to buy a 50-percent stake in the Veladero gold mine, one of Barrick's core mines, four sources with knowledge of the process told Reuters this week.

Barrick would like any buyer to also make an investment in its nearby Pascua-Lama gold and silver project, two of the sources said. On Thursday, Barrick's president said the company will consider offers to buy some or all of its core mines.

After two cyanide spills since last year, Veladero is the focus of multiple court cases, a provincial investigation, criminal charges against current and former workers and environmental protests. Pascua-Lama has been suspended since 2013 due to political opposition, labor unrest and weak gold prices.

In the four years to 2014, 68 percent of the 210 "regulatory actions and incidents" reported by Barrick were in Argentina, according to company disclosures, though it has 13 other mines in nine countries.

"To invest in that seems like a crazy thing to me," said Enrique Viale, a Buenos Aires-based lawyer representing a group of residents near the Veladero mine who are seeking its closure.

Viale said the mine, high in the Andes Mountains, violates a 2010 Argentine law that limits activity on glaciers, and that the two spills could have been avoided if that law was properly applied. Barrick says it is in full compliance with the law.

But the quality of the assets may make it enticing enough for buyers to look past those issues -- Veladero boasts large, proven deposits and is profitable thanks to its relatively low operating cost.

Located in Argentina's San Juan province on the Chilean border, Veladero lies on the mineral-rich El Indio belt about 6 miles (10 km) away from Pascua-Lama, which straddles the border.

"Any buyer is going to spend a lot of time understanding possible environmental issues, because the ramifications of getting it wrong can be huge," said Dan Denbow, portfolio manager at San Antonio-based USAA, which is an investor in Barrick.

"Especially if you are not going to have operational control, but be held responsible."

Given the global scarcity of large gold mines, Chinese buyers would not likely be deterred by the environmental incidents, said John Ing, president of brokerage Maison Placements Canada.

"The healthy competition for Barrick assets is because of quality and lack of meaningful (gold) ounces," he said.

Veladero, the biggest gold-producer in Argentina, is expected to produce between 530,000 to 580,000 ounces of gold this year, as much as some mid-sized gold miners produce from several mines.

The Chinese companies did not respond to requests for comment.

No Margin for Error

Argentina has a long history of mining and many companies operate in the country, including Barrick rivals Goldcorp and AngloGold Ashanti, but Barrick's subsidiary Minera Argentina Gold SRL has drawn frequent regulatory scrutiny.

Between 2011 to 2014, the unit was the subject of 143 environmental regulatory actions, excluding those linked to Pascua Lama, out of 210 for all Barrick's global operations, according to company disclosures.

Barrick spokesman Andy Lloyd credited the high number of regulatory actions to San Juan province's rigorous regulatory system, saying that many of the actions were related to minor incidents.

"Veladero is the largest mining operation in the province, and is therefore a natural focus of provincial regulators. The mine is inspected frequently, every two weeks," he said.

"San Juan province has a robust and well-developed regulatory framework for mining, and that's a good thing because it provides assurance to people that the industry is well regulated."

The highest profile incident at Veladero was a September 2015 spill that sent more than a million liters of cyanide-contaminated liquid into a nearby river. Barrick paid a $10 million fine to the San Juan mining authority and earlier this year a provincial court approved criminal negligence charges against nine current and former employees, which are still pending.

Last month, after a second incident involving cyanide-contaminated liquid, the mine was shut by regulators for nearly three weeks. Barrick said the incident had no environmental impact, citing extensive water monitoring, and that it was confined to its property.

It was ordered to raise the height of barriers around a processing area to get the suspension lifted.

San Juan's mining authority is investigating the 2016 incident, and a provincial prosecutor has started a criminal investigation.

The very concept of mining in San Juan's mountains is controversial in Argentina, where environmental groups fear development could damage glaciers that supply drinking water when rain is scarce. A 2010 law restricts mining and petroleum exploration and production on glaciers and semi-glacial land.

Lawyers representing Jachal No Se Toca, a group of residents in Jachal, a town close to the mine, have brought two court actions seeking to halt production at the mine.

Last month, a federal judge asked the environment ministry to look into their claim that Barrick was operating illegally on glacial land and publish a national list of glaciers.

The ministry has since asked San Juan province to update an audit it conducted in 2013, which found Barrick's operations had no impact on glaciers.

Barrick has long maintained that previous government approvals give it the right to operate both projects, and that they have no impact on glaciers.

Last month, San Juan Governor Sergio Unac was asked what would happen if there was a third spill at Veladero.

"The company does not have any more margin for another grave error," he said, according to La Nacion newspaper. (Additional reporting by Allison Martell in Toronto and Nicole Mordant in Vancouver; editing by Stuart Grudgings.)

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