Goldcorp Squeezes Out Barrick, Joins New Gold At El Morro


Goldcorp (G-T, GG-N) and New Gold (NGD-T, NGD-X) have crushed Barrick Gold’s (ABX-T, ABX-N) plan to buy control of a major copper-gold project in northern Chile, leaving at least one analyst wondering how Barrick let this deal get away.

It seemed like everything was said and done last fall when Xstrata (XSRAF-O, XTA-L) agreed to sell its 70% interest in the advanced El Morro project to Barrick for US$465 million, even though 30% partner New Gold held a right of first refusal for the project.

But New Gold plans to exercise that right with Goldcorp’s help. Goldcorp will advance New Gold US$463 million so it can buy the majority stake in El Morro from Xstrata.

Once that transaction is complete, Goldcorp will buy the 70% stake in El Morro from New Gold, plus pay it $50 million in cash and amend the joint venture agreement so that New Gold will save US$225 million in development costs.

Patrick Chidley, a senior mining analyst at Barnard Jacobs Mellet in Stamford, Conn., says the Goldcorp twist is a surprise.

“Personally I thought that Barrick had already done their deal on this whole thing and had almost included this project in their forecast,” Chidley says. “That’s a bit of a slip-up for them, I suppose.”

Vince Borg, Barrick’s vice president of corporate communications, says the company was aware of the risks.

“We saw it as an attractive opportunity but it’s not the kind of end of the world deposit that you must have no matter what,” Borg says. “We would have preferred to have the seventy percent but we’ll look at the agreement to see if the right of first refusal was appropriately executed.”

El Morro has measured and indicated resources of 8.3 million oz. gold and 6.3 billion lbs. copper. A feasibility study completed in 2008 put a US$2.5-billion price tag on development, but Borg says that number would likely rise north of US$3 billion.

“These are big projects and you don’t want to overpay for them,” Borg says, pointing out there’s a lot of copper in the deposit.

But El Morro is located close to Barrick’s 100%-owned Pascua- Lama and 50%-owned Cerro Casale projects in Chile, and the company had hoped to take advantage of the synergies between all three.

The deal is especially good for New Gold, and Trevor Turnbull, an analyst with Scotia Capital, says it proves New Gold’s potential as a growing company.

“It’s creative thinking and it demonstrates they are capable of doing more than picking up small, inexpensive assets,” Turnbull says.

He says New Gold was in a strong negotiating position to make sure it got everything it wanted from Goldcorp.

“Barrick could either take it or leave it, they didn’t have to buy out New Gold,” Turnbull says.

Goldcorp stresses it will start working on El Morro as soon as the transaction is closed, and it must start construction within 60 days of receiving permits and approvals.

El Morro has been on Goldcorp’s radar but the company didn’t try to buy it at the time Barrick made its deal with Xstrata.

“It’s a very large project in a very good mining jurisdiction and certainly we had a file on the project,” says Goldcorp’s vice-president of investor relations, Jeff Willhoit.

Willhoit says Goldcorp has never done a deal like this before. “Not to my knowledge,” he says, adding that the company is “reasonably comfortable” with the US$2.5-billion capex.

Under the new deal, New Gold’s portion of development will be 100% carried and the interest charged on carried funding will be significantly lower — about 5.2% at current rates compared to 12.1% under the Xstrata joint venture.

There a few interesting overlaps in this story: New Gold chairman Randall Oliphant was Barrick’s president from 1999-2003; Goldcorp chairman Ian Telfer is on New Gold’s board; and Barrick and Goldcorp are partners on the Pueblo Viejo gold project in the Dominican Republic.

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