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When Barrick Gold Corp., the world's biggest gold producer, decided two years ago to spend $7.3-billion (U.S.) to make a big slash into the copper business, investors openly questioned the wisdom. Now that Barrick has written off more than half of that purchase price, they've got their answer: The company took a bad idea and then overpaid for it.

At the time of Barrick's acquisition of copper producer Equinox Minerals Ltd. in the spring of 2011, the investment community immediately punished the stock. Chief among the concerns was the mixed signals Barrick was sending to mining investors: It had gone from being the biggest pure-play stock in one of the world's hottest commodities, gold, to being partly a gold stock, partly a copper play. Since gold is often popular in times of economic turmoil and copper typically thrives in times of economic harmony, the company saw it as a way to diversify its business, but investors saw it more simply as a source of confusion for their investment decision.

But investors had other concerns, too. They said Barrick was paying too high a premium for the assets, and that Equinox's operating base in Africa exposed the company to significant new political risk. And while Barrick trumpeted the rosy long-term outlook for copper, citing inevitable growing demand from China, critics countered that the world was becoming oversupplied with the metal and that prices were headed lower over the next several years. According to one Bay Street analysis, the acquisition's price tag implied that copper would need to average north of $3.70 a pound over the long term for the purchase to be a profitable one; that may have sounded okay at the time, when copper was trading at about $4.20, yet commodities analysts believed the long-term average was more like $2.50.

Fast-forward to today. Copper is trading at about $3.70 a pound, and has averaged about $3.60 over the past 12 months. Barrick has taken a closer look at the Lumwana copper mine in Zambia, the flagship asset in its Equinox acquisition, and determined that it has higher production and capital costs and lower production potential over the life of the mine than previously thought. Combine the reduced mine potential, higher costs and lower prices, and boom, and it adds up to a multi-billion-dollar writedown.

In fact, the immensity of Barrick's miscalculation in the Equinox purchase may be even worse than the $3.8-billion writedown figure suggests, because this is an after-tax figure. On a pretax basis, the charge is more like $5-billion.

In booking the writedown, Barrick is finally addressing what the market has been telling it all along. Indeed, my colleague Sean Silcoff wrote last month that the investment community was increasingly expecting a writedown of Lumwana from Barrick, as just one of many large global mining companies that needed to come to terms with pricey assets for which, in the light of current markets, they substantially overvalued.

The market spent nearly two years voicing its displeasure with Barrick's copper strategy – the stock's 40-per-cent fall since the Equinox purchase strongly illustrates that. On Thursday, the stock jumped nearly 4 per cent after the writedown news – evidence that investors had not only priced in the likelihood of a big asset writedown, but were pleased Barrick had recognized reality and removed that uncertainty from the stock.

Perhaps now, in tacitly acknowledging the errors of its copper foray, Barrick can finally win back some of the investors it alienated nearly two years ago. At least the ominous shadow of one big, bad decision has been cleared from its balance sheet.

David Parkinson is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights.

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Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 4:15pm EDT.

SymbolName% changeLast
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Barrick Gold Corp
+2.46%22.53

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