Barrick Gold Corp. 's bid for Equinox Minerals Ltd. has drawn the wrath of its shareholders, who have taken $5.3-billion out of the gold miner's market capitalization in only two days.
Chief executive officer Aaron Regent will have a chance to ease shareholders' fears today at the company's annual general meeting in Toronto. His task won't be easy, given that China's Minmetals Resources Ltd. withdrew its rival bid for Equinox less than a day after the new offer surfaced, saying that Barrick's proffered deal "is above our most optimistic assessment of value."
Investors and analysts have three main concerns about the proposed deal: that adding copper resources will dilute the premium investors pay for gold stocks such as Barrick; that copper prices are overheated; and that Barrick's offer is flat-out overpriced.
Historically, stock prices of gold producers trade at a premium to their base-metal peers. When Barrick's deal was first announced Monday, BMO Nesbitt Burns Inc. calculated that copper miners were trading at an average of 0.6 times their net present value, while gold stocks were trading at an average of 1.2 times their net present values.
Gold miners are loath to lose such a hefty premium. BMO analyst David Haughton noted the desire to add more gold assets drove deal-making in 2010, encouraging Goldcorp Inc. to buy Andean Resources Ltd. for $3.6-billion and Newcrest Mining to scoop up Lihir Gold for $9.5-billion (Australian). More recently, Canadian miner New Gold Inc. bought fellow B.C. company Richfield Ventures to assure investors New Gold was still focused on gold after a string of copper deals.
Barrick's management will have to persuade its shareholders of the same thing. The company's stock dropped 3.5 per cent on Tuesday, closing at $47.75, reducing its total market capitalization to $48-billion.
Analyst David Christie at Scotia Capital Inc., however, believes Barrick will not lose its premium if the deal goes through. "We do not view [less than]30-per-cent non-precious metals as an issue for a gold producer to retain its gold multiple," he said.
If the Equinox takeover bid is successful, about 20 per cent of Barrick's total revenues will come from sources other than gold. That's lower than mining peers such as Yamana Gold Inc., which will generate 32 per cent of its 2011 revenues from non-gold metals, according to Scotia's estimates.
Still, the market is nervous because Equinox is a pure copper deal, and its acquisition would double Barrick's copper production to about 600 million pounds annually.
The price of copper is another point of contention. When Equinox first bid for Lundin Mining Corp. in February, observers berated Equinox for tacking on substantial debt to finance the deal, given that copper prices are widely expected to drop after new South American supply comes on-stream around 2015.
Barrick has more cash available for its bid, but Mr. Regent is equally under fire for his belief that current copper prices are sustainable. On a conference call Monday, he pointed out that mining grades are falling, which means miners' operating costs will rise. "I think that is going to end up translating into the need to have higher long-term prices to incentivize new production," he said.
As for Barrick's valuation of Equinox, few analysts believe $7.3-billion will be topped. Although there have been few comparable copper takeovers, when Teck Resources bought AUR Resources during the market runup in 2007, it paid 7.2 times AUR's earnings (before interest, taxes depreciation and amortization) and five times its revenues. Barrick is paying 13 times and 8.3 times, respectively. Moreover, major copper producers such as Quadra FNX Mining Ltd and First Quantum Minerals currently trade at lower multiples.
Still, Mr. Regent has a solid background for forecasting the direction of the copper market, given his past as CEO of Falconbridge Ltd. On the other hand, China is driving current demand for the metal, so Minmetals management could still have a better grasp of the fundamentals.
With files from reporter Brenda Bouw