You can take Aaron Regent out of copper mining, but you can’t take copper mining out of Aaron Regent.
The former chief financial officer at copper and nickel producer Noranda Inc. (NYSE:NOR) was named chief executive officer of Barrick Gold Corp. (NYSE:ABX) at the end of 2008. Since then, he has started a major strategic shift that was driven home when Barrick announced its first big copper-driven acquisition – a $7.3-billion agreement to purchase Equinox Minerals (OTC:EQXMF).
For a company long concerned with protecting its image as a pure-play gold miner, doing an (almost) unapologetically copper-driven deal is a big admission about the relative futures of the two metals. After years of playing down copper as a byproduct, Barrick now says it wants “leverage” to the metal.
So why the change of heart? In part, copper is a cash flow machine that will help fund Barrick’s gold projects. Another reason may be that gold has run a lot further than copper, and Mr. Regent’s view is that markets are underestimating the upside in copper.
Mr. Regent contends that, because Barrick is paying cash, there’s no diminution of Barrick’s gold production per share. While that’s true, that’s not the full story.
There is an opportunity cost. Barrick could have put that money to work buying a gold deposit and adding to gold production per share, but instead it’s going for copper. It’s a big statement on which metal has more opportunity right now.
It’s also a long way from where Barrick was in 2006. At that point, under a previous CEO, Barrick was sitting on a large copper pipeline, thanks to its recent acquisition of Placer Dome Inc., which brought with it projects like the Zaldivar copper mine.
But Barrick, producer of a metal with sex appeal, wasn’t exactly committed to a metal used for plumbing and wires and other such plebeian pursuits.
It set about hedging its copper production late in 2006. The company sold forward about $1 billion of copper, or a third of its production, at $3.08 through a bond offering that the company was able to repay in copper. At that point, gold was about $600 an ounce.
Last year, with gold moving toward $1,300 and copper back to around $3 after a big crash during the financial crisis, Barrick was warming to copper but still hardly seemed excited about it. Barrick was buying a bigger stake in the El Morro project, which has significant copper and gold, and the line from Mr. Regent was “We don't mind copper,” but the real focus was the gold.
Mr. Regent’s position had been that Barrick would consider projects that have 50-50 splits in sales from gold and other metals, because shareholders would accept a little bit of other metal from polymetallic deposits.
Buying more copper for copper’s sake is nowhere to be found in Barrick’s year-end list of things to do for 2011, laid out in the company’s annual report.
Barrick’s reticence about copper isn’t much of a surprise, given that copper for all its headlines of late still doesn’t produce the big valuations that gold miners get.
Yet here we are, with copper at $4.32 a pound and gold about $1,500 an ounce, and Barrick is buying what is really a pure-play copper producer. Already, it’s taking a toll on Barrick’s valuation. On a day when gold hit a record, Barrick stock slumped almost 7 per cent.
It’s not that Barrick is throwing gold under the bus. Mr. Regent expects that it will still produce four-fifths of the company’s revenue in coming years. But when asked by an analyst whether in 10 or 15 years Barrick could be a diversified metals producer and not a predominantly gold company, Mr. Regent did not say no.
Instead, he suggested that it was a “fair question.” In all metals, he said, it’s getting tougher to find good deposits, and that’s something all mining companies face. So when a choice asset comes up for sale, as Equinox did, it’s game on, with a goal of increasing what Mr. Regent called “total metal produced” at Barrick.
Total metal produced sounds a lot less sexy than gold. But the reality of mining these days, along with Mr. Regent’s history with copper at Noranda and Barrick’s history of underplaying its copper interests, suggest this gold company may well move further into the cheaper metal.