The Barrick Effect helps out New Gold

Now that Xstrata (XSRAF-O, XTA-L) has agreed to sell its 70% interest in the El Morro copper-gold project, in northern Chile, for US$465 million, the value of New Gold‘s (NGD-T, NGD-X) minority 30% stake has grown by leaps and bounds.

 Xstrata announced on Oct. 12 that Barrick Gold (ABX-T, ABX-N) is buying its stake in the project. The US$465-million price tag prompted Trevor Turnbull, an analyst with Scotia Capital who covers New Gold, to increase his El Morro valuation fivefold to US$150 million from a meagre US$30 million.

“We just didn’t have a lot of faith that Xstrata would develop it quickly — in the next two or three years — or that a buyer was going to come in,” Turnbull said in an interview. “We knew the project had a lot of value in it but we just didn’t think it was going to be unlocked in the near term.”

El Morro, operated by Xstrata subsidiary, Xstrata Copper, has measured and indicated resources of 8.3 million oz. gold and 6.3 billion lbs. copper. A feasibility study projected a Barrick-sized US$2.5-billion capex to build a mine that would produce 310,000 oz. gold and 150,000 tonnes of copper per year.

But the Barrick-Xstrata deal isn’t cut and dried. New Gold has right of first refusal for Xstrata’s 70% interest and the company will be able to keep analysts and investors guessing until Jan. 11, 2010.

Melanie Hennessey, New Gold’s vice president of investor relations says the company will spend the next couple of months mulling potential deals with Barrick, be it selling out, trading in its interest for one of Barrick’s smaller producing mines or keeping the gold stream and selling the copper as a royalty.

“There are a number of opportunities that we’ll be looking at, all of which are beneficial to New Gold shareholders,” Hennessey says. “And there will be no dilution given that the market attributed very little value to the project (until now).”

Turnbull doesn’t expect New Gold to buy out the entire project because of the long and costly development road ahead. “Probably the best thing for them to do would be to trade in their 30 percent interest to Barrick for one of Barrick’s small non-core mines,” Turnbull says.

He says a small producer would be more meaningful to New Gold because it would be able to realize a return more quickly.

But Patrick Chidley, a senior mining analyst at Barnard Jacobs Mellet in Stamford, Conn., says there’s still a possibility to that New Gold could opt for taking on the entire El Morro project.

“It would be the sort of asset that would put them on the map,” Chidley says. “New Gold is not really that big but having said that they would appear to have the potential to finance such a project if they were very ambitious in terms of financing the acquisition. But to compete with Barrick would be difficult.”

Hennessey points out that with New Gold’s 30% interest, the funds needed to see the project through to production aren’t that onerous. New Gold is only responsible for 9% of the development costs; about US$225 million.

The deal dates back to when a predecessor company, Metallica Resources, optioned El Morro to Noranda, which became Falconbridge and then Xstrata.

On top of that, Hennessey points out that New Gold and Barrick already have a great relationship given that executive chairman Randall Oliphant used to be the president and CEO of Barrick.

Also of note, Barrick’s current president, Aaron Regent, was the president of Falconbridge before Xstrata took over.

El Morro is located close to Barrick’s 100%-owned Pascua-Lama and 50%-owned Cerro Casale projects in Chile. The company hopes to take advantage of construction and operating synergies with all three but first it plans to optimize Xstrata’s feasibility study and explore the large land position around the project. The El Morro project is on a land package spread over 800 sq. km.

New Gold shares rose 19¢, or about 4%, on the news to $4.63 a share in Toronto on a trading volume of 6.2 million shares.