By Tony D’Altorio
Barrick Gold (NYSE: ABX) is the world’s largest gold producer.
Last year, it mined net profits of $3.3 billion, but it wants more…
So it recently surprised the market with a $7.6-billion bid for Canadian-Australian copper mining company Equinox Minerals (OTC: EQXMF.PK).
Barrick expects to produce 300 million pounds of copper this year, along with about 7.8 million ounces of gold. And with the Equinox acquisition, that copper figure could quadruple.
The move might seem strange for a solid gold company. But Barrick wants to diversify, despite shareholder angst.
Barrick isn’t the only company interested in Equinox; China’s Minmetals Resources tried to acquire it, as well. So Barrick stepped in to offer a 16 percent premium to Minmetals’ bid.
Industry advisers suggest that the bid hits above the six to eight times EBITDA earnings copper assets usually fetch. And it does amount to 8.5 times Equinox’s 2011 EBITDA earnings.
But Barrick’s CEO, Aaron Regent, points to potential growth in the Zambian copper belt, the copper- and cobalt-rich region that runs along the border of Zambia and the Democratic Republic of Congo.
Regent thinks Africa comes second only to Latin America – where Barrick already has a sizable interest – when it comes to copper.
He isn’t the only one who thinks so, either. Along with China’s interest, other large global mining companies have made numerous purchases of African mining assets. That includes Brazil’s Vale (NYSE: VALE), which made a recent $1.1-billion bid for Metorex (OTC: MRXLY.PK).
Yet even with widely recognized potential, the question remains: Why not just stick with gold?
Barrick Gold and Copper
Barrick’s Chairman, Peter Munk, says that because of its size, the company can’t grow on gold alone. He states, “In gold, it is difficult to find any acquisitions that could be immediately accretive to earnings.”
Munk believes that the copper industry looks much more likely, due to growing supply constraints. He also points to returns on copper assets returning more than those for gold.
Therefore, he finds it “really important to expand copper earnings and copper production.”
He added that Barrick is not trying to diversify in the same way as BHP Billiton (NYSE: BHP) or Rio Tinto (NYSE: RIO). Indeed, a closer analogy shows it trending towards the same direction as Freeport-McMoRan Copper & Gold (NYSE: FCX).
Freeport sold 3.9 billion pounds of copper last year and 1.9 million ounces of gold. That’s a more balanced portfolio than Barrick’s, which produced 391 million pounds and 7.7 million ounces, respectively.
The mining world is already shifting its perception of Barrick.
With a pile of cash totaling roughly $4 billion, the company now looks like a predator for global copper. It’s more than likely that it’ll bump heads against the likes of Rio Tinto in its quest for increasingly scarce copper-rich assets.
Investors should expect Barrick to continue pushing for a balanced portfolio of gold and copper assets. Though in doing so, some investors may abandon it for pure-play gold companies instead.
Because of this, Barrick’s stock may lose some of the “premium” valuation it gets as a pure gold miner. But it seems quite willing to take that risk in order to continue growing.
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