By Andrew Willis
Barrick spent $465-million (U.S.) on Tuesday to buy a 70% stake in the El Morro property in Chile from Xstrata (OTC:XSRAF). The site is close to existing Barrick gold and copper mines, so the buyer should be able to achieve substantial cost savings on a project with a $1.4-billion budget. Debt-heavy Xstrata can pay down loans and focus its portfolio.
The other 30% of El Morro is owned by Canadian intermediate mining company New Gold, which has the right of first refusal on the Xstrata stake. From New Gold’s point of view, Barrick’s arrival is a positive development.
First off, the implied value of New Gold's stake is $199 million, and BMO Nesbitt Burns analyst Andrew Kaip said in a research report Tuesday that he had valued the stake at $103 million. That alone will help New Gold's stock price.
Looking ahead, Mr. Kaip said New Gold has a number of attractive options. “Barrick’s interest would provide New Gold with a committed, gold-focused partner for future El Morro development, “said the analyst. “Alternatively, BMO Research expects New Gold to consider divesting of El Morro either for cash or through an asset swap for one of Barrick’s non-core mining operations.”
New Gold is backed by a number of the top players in gold mining, with a board that includes Pierre Lassonde, Ian Telfer and former Barrick CEO Randall Oliphant. The company’s strategy is to grow by acquisition.
Judging from the press releases on Tuesday, Barrick and Xstrata cut this deal without investment bankers, as no advisors were named. Barrick is flush with cash after raising $4 billion in a stock sale, an underwriting earmarked for raising the capital needed to unwind Barrick's bullion hedging program.