Barrick betting on the red metal with Equinox bid

Share

The world's biggest gold producer sees a shining future for copper.

Barrick Gold Corp.'s ABX-T $7.3-billion all-cash bid for Equinox Minerals Ltd. EQN-T is a big bet that global economic growth will fuel years of strong demand for the industrial metal, used in everything from telecommunications to plumbing.

With Equinox, Toronto-based Barrick aims to immediately double its copper production and find long-term growth by further diversifying its metals production. Buying Equinox would change Barrick's revenue mix to about 80 per cent gold and 20 per cent copper, compared with about 90 and 10 per cent today.

The move, coming alongside record-breaking prices for both gold and copper, highlights the intensifying fight for the dwindling number of world-class mining projects as companies battle to secure reserves to fuel future production. For Barrick, the opportunity to win over Equinox was too important to pass up.

"This move speaks louder than words. We are optimistic on the outlook for copper. We think its demand fundamentals are quite strong," said Barrick chief executive officer Aaron Regent, calling the Equinox assets a "unique" opportunity.

"It is very rare that assets like this come on the market. … Most major copper mines tend to be tied up by major producers."

Barrick becomes the fifth player in a heated bidding war for Canadian-based copper producers with its $8.15 per-share bid for Equinox, which endorsed the offer. Equinox has a producing mine in Zambia and another in Saudi Arabia set to begin production next year.

Barrick's bid is a bet that the voracious appetite for copper in China and other emerging economies will continue for years as they build out their infrastructure.

Mr. Regent said he expects copper demand will continue to outpace supply, particularly as the challenges of higher costs and lower grades of new copper projects squeeze out smaller players down the road.

But some industry experts say copper prices are bound to retreat eventually, pointing to signs of rising inventories and supply of the metal as China raises interest rates and takes other measures to cool its overheating economy.

Stifel Nicolaus analyst George Topping estimates Barrick is using a long-term copper price of about $3.40 (U.S.) per pound, well above most industry estimates.

Most analysts are forecasting prices of between $3 to $4 over the next five years, then falling to about $2.50 as new mines come into production. Copper is currently trading at around $4.30 per pound.

"You would really have to believe that supply is never going to catch up [to demand]for a $3.40 long-term price," Mr. Topping said.

"Given enough time, there will be enough supply to push the price back down."

Recently Barrick has focused on developing its massive Cerro Casale gold-copper deposit in Chile, including buying a majority stake last year, and increasing production at its Zaldivar copper project in the same country.

Equinox will give it exposure to another prolific gold-producing region in Africa.

"If you are a global mining company you need to have a presence in this part of the world," Mr. Regent said.

The company's growing interest in copper doesn't change its overall strategy, he said.

"It doesn't compromise or take away from our strategy of building out our gold mining opportunities," Mr. Regent said. "We should have a stronger growth profile in terms of total metal produced."

In supporting Barrick's bid, Equinox has agreed to cancel its own hostile takeover bid for Lundin Mining Corp., which Lundin had rejected as having too much debt and geopolitical risk.

That Equinox bid was in part to blame for the death of a friendly merger between Lundin and Inmet Mining Corp. Soon after, Minmetals launched its $7-per-share hostile bid for Equinox, which Equinox criticized as too cheap.

Equinox said the Minmetals bid put it in play, and it chose a proposal by Barrick after seeing interest from a few players.

Barrick had "clearly done their homework" and presented a better offer, Equinox CEO Craig Williams said Monday.

Barrick, which owns 2 per cent of Equinox shares, has a right to match any competing offers and would receive a $250-million (Canadian) break fee if Equinox accepts a different proposal.

While there is potential for other bidders to come forward for Equinox, analysts played down the possibility Monday given the rich premium Barrick is paying.

"Minmetals' response to the Barrick offer will be watched keenly as an indicator of underlying demand for securing copper supply," BMO Nesbitt Burns analyst David Radclyffe said.