VANCOUVER
For Barrick, a golden opportunity to expand
BRENDA BOUW, DAVID EBNER
RTGAM






VANCOUVER - Peter Munk has heard the howls of protest from Bay Street before.

The founder and chairman of Barrick Gold Corp. was lambasted in 1994 when he paid $1.7-billion (U.S.) for gold miner Lac Minerals to expand outside of North America, and then again in 2006 when he took out rival gold producer Placer Dome for $10-billion, picking up 12 new mines to secure the company's position as the world's largest gold producer.

But the cries were particularly shrill this week after Barrick surprised the mining industry with a $7.3-billion (Canadian) bid for Equinox Minerals Ltd., a copper producer with operations in Africa and Saudi Arabia. Even as gold prices hit new highs this week, Barrick shares dropped 9 per cent since the deal was announced Monday.

Investors quickly voiced a number of concerns about the deal, from the rich premium paid, to increased political risk. But their biggest beef centres around the shift in strategy. Barrick, the world's largest gold producer, is betting a bundle on a different class of metal: copper.

The Equinox deal, critics charge, will tarnish Barrick's golden sheen.

The 83-year-old Mr. Munk, who arrived in the gold business by way of stereos, hotels and restaurants, and oil and gas, scoffs at the idea that he has sullied the company he built into a global mining leader over the past 28 years, largely through acquisitions.

"I have been through that and I was given hell every single time. But you know the guy who laughs last, that is the best laugh," Mr. Munk said in an interview.

Barrick is a remarkable success story. The Toronto-based miner was built from the acquisition of a single Northern Quebec mine nearly three decades ago into a $50-billion company today with 25 gold mines across five continents producing about 10 per cent of the world's supply of gold.

Much of that growth, however, happened in a less-euphoric era for commodities. Today, high prices for gold and other metals, driven by the emerging-markets story, have created a frenzy among investors for mining stocks. Mid-sized companies that can show growth are especially in demand, and carry high valuations.

Those are exactly the sort of companies that large, multinational mining companies like Barrick want to buy - and indeed, its leap at Equinox can be seen as a response to one of the major challenges confronting virtually all of the world's mining giants.

Flush with cash, but unable to find new deposits large enough to generate growth, they have little choice but to turn to the acquisition market, where they are seeing prices that were once unthinkable. As gold surpassed $1,500 (U.S.) a ounce this month, the value of gold miners keeps rising: companies that have yet to produce a single ounce of the precious metal are worth billions of dollars.

So any way they approach it, the biggest miners are being forced to take more risk - either by paying a high price for an unproven asset, as Kinross Gold did for Red Back Mining, or by buying a company that isn't a perfect fit with their strategy, as Barrick did this week.

For Barrick chief executive officer Aaron Regent, the challenge is to find growth that will move the needle at such a massive company.

"This transaction does that," Mr. Regent said. "It adds another big source of earnings and cash flow."

Copper's future

Copper is used in everything from electricity and telecommunications to cars and construction. Market watchers joke that "Dr. Copper" has a PhD in economics since it's a reliable indicator of global economic activity.

At nearly $4.20 (U.S.) a pound currently, copper prices are near all-time highs of about $4.60 set in February and point to strong global demand.

Barrick says prices are set to stay strong for years, as China continues to gobble up supplies amid roaring economic growth.

But Barrick's rosy outlook for copper stands in sharp contrast to a growing view that a ground shift in the market is brewing, where new mine supply hits the market and weighs heavily on prices in coming years.

The consensus among mining industry analysts is that copper will fall steadily to about $2.50 or lower by 2015, as new production catches up with relentless demand.

Analyzing the Equinox deal, "copper would have to sustain at around $3.70 a pound before the benefit of the asset addition outweighed the cost," said GMP Securities analyst George Albino, noting "this copper price is a far cry from the consensus long-term forecast of $2.25 a pound."

If analysts are right about copper's future, even Barrick concedes the Equinox deal will be a bust.

"If copper is going to be $2.50 a pound, this isn't going to feel like a good investment," Mr. Regent allows.

But Barrick believes its bullish copper forecast is more reliable since it's based on a worldwide rolodex of mining experts and experienced operators at its various mines around the world, as opposed to models developed on computer spreadsheets.

In particular, Mr. Regent says Barrick has accumulated "good insight" into expected supply disruptions likely to result from higher production and operating costs as well as startup delays at unproven new mines, particularly in emerging areas of South America and Africa.

In fact, Mr. Regent believes the real challenge for the copper industry will be providing enough supply to meet growing demand from resource-hungry countries such as China, the world's largest consumer of the metal.

And Mr. Regent points to current prices above $4 a pound being paid on average for copper to be delivered over the next five years.

"To me, that's a much better indicator of what the likely price will be because people are transacting on that. It's not a theoretical exercise ... When you put money on the table, your pencil gets sharpened a lot better. We see that supported for good reasons."

Barrick, Mr. Regent noted, also has the option of hedging or locking in prices for some of its future copper sales to protect the company from any market drop. (Barrick eliminated its gold hedging program two years ago, but still hedges some of its current copper production.)

"Believe me, we are not bad business people ... We care much," said Mr. Munk, saying there's more at stake than shareholder value: "I'm not an employee. It's my legacy, it's my life. I live this company."

The Equinox bid

Investors in gold companies have long been jarred when miners step beyond the bailiwick of the yellow metal. While copper is often intermingled in gold deposits, investors rarely are keen to see a gold miner go head-first into copper as Barrick has done with Equinox.

In the early 1990s, Vancouver's Placer Dome Inc. rattled investors when it decided to spend $100-million to buy a 50-per-cent stake in a Chilean copper deposit called Zaldivar, followed by a further $500-million to get production going.

Placer Dome had to repeatedly insist that while it liked the future of copper, it was, at heart and always, a gold company. The company ramped up the assurances after it bought the rest of the mine years later. Zaldivar, first considered a marginal project, proved to be a wise bet, as it remains a prolific copper producer under the ownership of Barrick, which bought Placer Dome in 2006.

Although Barrick has been producing copper for years, investors weren't prepared for the move on Equinox.

Investors criticized the 30-per-cent premium Barrick is paying for a company that was on few radar screens until it made a hostile bid for Lundin Mining Corp. in February. Barrick's bid was swift and powerful, with the intent of blowing out a hostile $6.3-billion bid for Equinox tabled earlier this month from China's Minmetals Resources Ltd.

The $8.15 (Canadian) a share that Barrick is paying became an even bigger concern when Minmetals pulled its bid within hours of Barrick's friendly offer, calling it too rich.

Rating agencies warned that they might downgrade Barrick's strong credit ratings because of the extra debt the company is taking on to finance the Equinox acquisition.

"We can't help but worry why a gold company is looking to lever up their balance sheet to acquire copper assets," noted Adam Graf, an analyst at Dahlman Rose & Co. in New York.

Another worry is that Barrick's growing mix of copper will diminish the coveted premium that gold producers enjoy for their share price valuations.

Rival companies Goldcorp Inc. and Newcrest Mining Ltd. have worked to maintain their gold premium by buying other gold producers, while Barrick appears to be moving in the opposite direction.

To Andrew Martyn, a Barrick investor, the move into copper has forever changed Barrick's complexion.

"Some investors will permanently abandon this company. New shareholders will have to come in, at a lower price," said Mr. Martyn, president of Toronto money manager Falcon Asset Management, who also sees the sunken stock as a buying opportunity.

But the Equinox deal doesn't mean Barrick will shed its focus on gold, predicts Scotia Capital analyst David Christie.

"The value in the gold assets and cash flow this company will generate should offset the loss in faith investors may have with respect to the Equinox acquisition," he said, believing the copper purchase is a "one-time excursion" for Barrick from its core gold business.

John Ing considers the widespread market skepticism to Barrick's copper buy as a "brouhaha, a red herring."

"They'll always be a gold company, it's their DNA," said Mr. Ing, president of Maison Placements Canada Inc., a long-time Barrick shareholder.

"Barrick has had a history of good acquisitions and I think Regent is shaping the company where it'll be a very big cash flow generator. He's a bean counter by background. I can see this as the first of many acquisitions coming, there'll be gold too," Mr. Ing said.

Both Mr. Munk and Mr. Regent admit to being caught off guard by the negative reaction to the Equinox move. Sure, they expected some criticisms on aspects of the deal, but not to their commitment to gold, the metal upon which the bullion behemoth was built.

"This childish, absolutely inane talk that we are exiting the gold business .. when we are No. 1 in the business ... we would have to be suicidal or crazy," Mr. Munk said.

"I think our track record speaks for itself. We are not the Oppenheimers. We were not born into the gold business. It's not that easy to be No. 1 in and industry that is as old as the gold industry."

Barrick says Equinox was an opportunity for it to immediately increase cash flows at a price the company was comfortable spending, even if the product is copper.

"When you are not prepared to look at new things because you are stuck in your own success because the commodity is going up, that is when danger occurs," Mr. Munk said.

"Isn't that what business is all about, to take advantage of opportunities when they arise?"

Mr. Regent is more cautious in his assessment of the reaction to the Equinox offer, his biggest acquisition as head of the company to date.

"I think the reaction is in part the fact that this is a pure copper asset and I think people didn't necessary team with us buying a pure copper asset," Mr. Regent said.

To some, Barrick's mistake was not better preparing investors for the Equinox acquisition, then talking up the prospects of copper, a metal it still sees as a distant second to its core gold business.

And because Minmetals was circling Equinox, Barrick had to act quickly.

"It was a competitive situation that we had to respond to," Mr. Regent said.

Equinox will push Barrick's revenue from copper to about 20 per cent from 10 per cent, a worrisome level for some investors. Barrick argues it's still within the ratio of its industry peers.

"It puts the company in a better position," Mr. Regent maintains. "With this we secure another high-quality asset ... [But] there are still things on the gold side that interest us."

Falcon Asset Management's Mr. Martyn was rattled by Barrick's move on Equinox. But he stands by Barrick, with a caveat.

"I've made lots of money with them, I like the management team," Mr. Martyn said. "Love you guys: But, please, remind yourself to make the next acquisition gold."