Editorial: Is Barrick tired of gold?

We keep getting surprised by the latest developments in the fate of newbie copper miner Equinox Minerals.

On April 25, Barrick Gold shocked the market with a friendly, all-cash $8.15-per-share bid for Equinox, zooming past Minmetals Resources’ hostile $7-per-share all-cash bid, which was tabled in early April and then terminated on April 27. Minmetals’ bid, in turn, had killed Equinox’s hostile bid for Lundin Mining, which had once planned its own merger of equals with Inmet Mining.

If successful in its $7.3-billion bid, Barrick will get Equinox’s wholly owned, 3-year-old, low-grade Lumwana copper mine in Zambia and its global resource of 322 million measured and indicated tonnes at 0.73% copper and 561 million inferred tonnes at 0.63% copper. Lumwana is slated to produce 145,000 tonnes of copper in concentrate this year despite a rocky first quarter.

Equinox’s other asset is a 70% stake in the smaller-scale Jabal Sayid copper mine under construction in Saudi Arabia. Reserves there stand at 24.4 million tonnes grading 2.4% copper and around 0.3 gram gold per tonne. The mine is expected to crank out 57,000 tonnes copper in concentrate annually once production starts next year.

In the years ahead, Barrick would wind up getting roughly 80% of its revenue from gold and the rest from copper production at the Equinox assets, its Zaldivar copper mine in Chile, and its Cerro Casale copper-gold mine, also in Chile. Right now, it’s a 90-10 gold-copper revenue mix.

It was downplayed by the company at the time, but it’s notable that at one point after the 2006 acquisition of Placer Dome, which brought in the Zaldivar asset, Barrick was pulling in roughly half of its company-wide profits from Zaldivar – it’s only major non-gold producing mine. And that’s why Barrick managers always smiled and changed the subject whenever gold analysts would ask them to sell Zaldivar to make Barrick a purer gold play.

Barrick is the gold industry’s leader in gold production, gold reserves, balance sheets and market capitalization, so this expensive purchase of a copper miner has caused much consternation among its shareholders. Barrick shares dropped $5.45, or 10.3%, in the days following the news, lopping a cool $5.5 billion off the company’s market cap. But at least there will be no dilution!

Barrick says the acquisition is in line with its stated goal of “growing its goal and copper reserves through exploration and acquisitions.” Perhaps it should have stated “gold or copper reserves” to be clearer that copper-only assets were fair game.

Is this a sign that Barrick’s management thinks gold prices have peaked? For gold purists, it looks like the bad old days of 2001-07 all over again, when Barrick’s managers seemed to believe less in gold’s prospects than its own shareholders, and doggedly held on to the company’s share-depressing, money-losing gold-hedging positions that had become obsolete after gold prices definitively reversed their secular downtrend in mid-2001.

At Barrick’s annual general meeting on April 27, CEO Aaron Regent kept tripping over his words as he sombrely read from a prepared statement that repeated much of his earlier conference-call presentation touting the Equinox deal.

Chairman Peter Munk had more zest, saying, “Hear me loud and clear: this company has been built on creating the greatest gold company ever, in reserves, in balance sheets, in profits, in cash flow, in production, and in future prospectivity… Do not think that something we have worked for, for 28 years like we have, and for something we are as proud of, as committed to… and is part of my legacy, is going to be given up.

“…On the other hand, it would be equally foolish to fall into the trap of many companies that were riding high but refused to change, to have their eyes open, and had shutters on their eyes… We have copper, and copper requires the same skills, the same know-how… Gold and copper go hand in hand.”

Still, Barrick’s bid for Equinox has a rushed feel to it, and perhaps it was in order to be ready for the AGM. Barrick personnel were only on the ground at Lumwana for a couple of days and didn’t visit little-known Jabal Sayid. In describing the deal, Barrick stated that Lumwana “is located in the highly prospective Zambian copper belt,” when in fact it’s 220 km west of the Zambian Copperbelt (and yes, it’s one word and capitalized, as people living there know).