Barrick tries spinning copper into gold

April 25, 2011

By Lisa Lee
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Barrick Gold has taken a shine to copper. The Canadian firm jumped into the battle for Equinox, with a $7.7 billion bid that trumps one from China’s Minmetals. It’s a rich offer for a copper miner from a company that mainly touts its gold credentials. Barrick’s shift as the prices of both metals soar may not be the best use of resources.

It was gold that helped make 2010 Barrick’s most profitable year in its 27-year history. That followed heavily trumpeted efforts in the second half of 2009 to position the company as a bigger wager on the yellow metal. It was then the gold producer tapped shareholders for $3 billion to remove its hedges, including by paying off fixed price contracts.

But copper has been on an even bigger tear. The price of gold has approximately doubled over the last two years as investors fret over inflation, political turmoil, currency risks and U.S. debt. Copper, meanwhile, has become a proxy investment on industrializing China and India, leading the price to roughly triple over the same span.

Barrick sees more room for copper to run. Buying Equinox would double its production of the reddish-brown metal and its percentage of non-gold revenue to a fifth. The 30 percent premium Barrick is offering Equinox shareholders only looks justifiable if the market is “understating” copper assumptions as much as Barrick boss Aaron Regent thinks it is.

The miners don’t claim any cost savings from uniting. And Equinox already has enjoyed the full spoils of the metal’s boom, with the company’s shares keeping pace with the rise in copper prices. To overtake the rival Equinox bid, Barrick is offering a rich valuation compared to other recent mining deals of 7.1 times EBITDA. Minmetals could yet come back with an even higher price, which Barrick is allowed to match.

With the price of gold at a nominal historic high, Barrick may be feeling flush. But copper prices are also at a peak. Barrick shareholders kicked in a year and a half ago when the company wanted to become a purer, unhedged play on gold. Returning that cash would have let them decide for themselves whether they were ready to change the bet.

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