Barrick Gold cannot continue to grow through gold alone, the world’s biggest producer of the yellow metal acknowledged while agreeing to buy a second-tier copper producer for C$7.3bn ($7.6bn).
The admission of Peter Munk, chairman, has repercussions for a mining industry that may now see Barrick as a cash-rich competitor for the world’s best copper assets. At the same time Barrick could find it harder to justify the premium valuation accorded to “pure” gold miner, according to mining industry insiders.
“It is very difficult to offer unlimited growth when you are a company our size,” Mr Munk told the Financial Times. “In gold it is difficult to find any acquisitions that could be immediately accretive to earnings. It is really important to expand our copper earnings and copper production.”
“To move the dial is quite an undertaking,” he added, for a company that far surpassed gold-mining rivals by selling 7.7m gold ounces last year and achieving net profits of $3.3bn.
Mr Munk said Barrick was not trying to become a diversified miner like Rio Tinto or BHP Billiton, saying copper is the only non-gold metal where it desires significant expansion. “We are not in that mode of diversification,” he said, referring to Rio.
A closer analogy may be Freeport McMoran, the US copper and gold producer. Freeport sold 3.9bn pounds of copper last year and 1.9m ounces of gold. That represents a more balanced portfolio than Barrick, which sold 7.7m ounces of gold and 391m pounds of copper.
Barrick’s move into the copper market, however, comes at a time when Rio, BHP, Freeport, and other multinational miners are hunting for growth in copper. The metal’s high price reflects a stagnating supply base amid expectations of rising demand for years to come.
Minmetals, the Chinese state-owned miner, was among the multinationals targeting copper assets.
Barrick has gatecrashed Minmetals’ bid for Equinox with its C$7.3bn agreed deal. The competition for Equinox – whose value is based around a single mine in Zambia – is one sign that the metal is taking on an aura traditionally reserved for gold.
“It’s a big call to go against the Chinese in African copper,” said a veteran banker to multinational mining companies, adding it was not at all certain that Minmetals would cede the contest.
The banker outlined dangers to Barrick’s rating if it becomes a more balanced copper and gold producer: “Barrick is a gold company, and its multiple relies on investors trusting that it is heavily weighted to gold.”
When Minmetals unveiled its bid for Equinox, some mining analysts questioned whether the Chinese miner was overpaying and basing its investment on rosy assumptions about the long-term copper price.
Industry advisers suggested that Barrick was paying above the 6 to 8 times earnings before interest, tax, depreciation and amortisation that copper assets tend to fetch.
Analysts at GMP Securities said in a research note that the offer represented an 8.6 times multiple of forecast ebitda for 2011, versus a historical average of 6.5 times for purchases of base metals companies.
Aaron Regent, Barrick’s chief executive, defended the price that is 16 per cent higher than Minmetals’ offer. He pointed to the potential for growth in the Zambian copper belt, saying that Africa had the best potential for copper mining after Latin America, where Barrick already has sizeable interests.
Brazil’s Vale has also signaled its interest in the copper belt – the copper and cobalt-rich region that runs along the border of Zambia and Democratic Republic of Congo – with its recent $1.1bn bid for Metorex.
Barrick’s agreed offer has not yet succeeded. But Barrick, with cash of $4bn last year, has suggested this could be the first of several acquisitions.
“In stock markets where your stock [value] is all about growth more than size, growth becomes important. But it is increasingly difficult to achieve. That means you have to keep acquiring,” Mr Munk said.
Additional reporting by Helen Thomas in New York
Get alerts on Vale SA when a new story is published