Barrick Gold Corp. (NYSE: ABX), the world's biggest gold company, announced a big bet on copper yesterday (Monday) with a $7.68 billion ($7.3 billion Canadian) offer for copper producer Equinox Minerals Ltd. (ASX: EQN; TSE: EQN).
Copper prices are up about 15% in the past year on higher demand from China and other developing economies.
Equinox owns two key sources of copper production: the Lumwana mine - Africa's third largest by production - in Zambia's rich copper region; and most of Saudi Arabia's Jabal Sayid project, the country's biggest deposit of the metal. At full capacity, Lumwana is expected to account for 20% of Zambia's copper production.
"The acquisition of Equinox would add a high-quality, long-life asset to our portfolio and is consistent with our strategy of increasing gold and copper reserves through exploration and acquisitions," Barrick's President and Chief Executive Officer Aaron Regent said in a statement. "It's very rare that assets like this come on the market. If you look at the top 20 mines in the world, this is the only one that's actually available."
The deal will double Barrick's copper position. Barrick already produces copper at Chile's Zaldivar mine and Cerro Casale project.
Regent, like many commodities followers, is bullish on long-term copper prices.
"Directionally, I would say that most of the long-term copper price assumptions that are being used right now are understating what's going to happen," Regent said.
Barrick's offer is 1.39 times Equinox's enterprise value, higher than the average multiple offered for similar deals over the past few years, according to Bloomberg News.
"It really shows how few junior companies are available for acquisition by the major gold companies," John Stephenson, a senior portfolio manager at First Asset Investment Management Inc., told Bloomberg.
Out of the 17 deals Barrick has completed since its start in the early 1980s, this deal would be the company's second-largest after a $10.2 billion purchase of Placer Dome Inc. in 2005.
Barrick is trying to diversify its gold focus to compete with global mining giants like BHP Billiton Ltd. (NYSE ADR: BHP) and Rio Tinto Plc (NYSE ADR: RIO). Barrick currently relies on gold for 80% of its revenue.
Equinox shares are up 37% this year and rose 11% on the Toronto Stock Exchange on news of the Barrick deal. The bid vales Equinox at $8.15 Canadian a share, 16% higher than a previous bid by China's Minmetals Resources. Minmetals offered $6.5 billion ($6.3 billion Canadian) on April 3, and Equinox called the bid a "lowball price."
"For Equinox shareholders, this is a great deal," John Goldsmith, a Toronto-based fund manager at Montrusco Bolton Investments Inc., told Bloomberg. "There won't be another bid higher than this. It more than fully values Equinox."
Equinox made an offer on Feb. 28 for Canadian copper and zinc producer Lundin Mining Corp. (TSE: LUN), but will drop the bid.
Commodity Prices Make for Ambitious Mining Sector
The materials sector, which includes mining, has already seen $133 billion in deals this year, more than double the $57.5 billion for the same period in 2010. This latest venture highlights how mergers and acquisitions and expansion projects are heating up in the mining sector as commodities prices continue soaring.
Gold settled at a record $1,509.10 an ounce Monday on the New York Mercantile Exchange, and hit an intraday record of $1,519.20 an ounce. Silver rallied 2.4% to close at $47.14 an ounce.
If commodities continue to climb, the deals that companies like Barrick are now making will seem like a steal compared to how high prices for mining assets could go.
"In a world where commodities are trading at ever new highs, and you're looking at [the Zambian] project and the cash flow generated, the reality is today's prices may well be cheap in tomorrow's world," John Ing, an analyst at Maison Placements, told Reuters.
Mining companies are also sitting on a lot of cash, and hungry to score more assets in key producing regions.
"As de-leveraged companies compete for shrinking resources, we expect merger and acquisition activity to continue to pick up, characterized by larger deals and bolt-on acquisitions," Michael Lynch-Bell, global mining and metals transactions advisory leader at Ernst & Young, told Reuters.
Some of the biggest mining players like BHP Billiton, Rio Tinto and Xstrata Plc (LON: XTA) said instead of takeovers they are looking to spend billions on expansion efforts.
BHP said it expects to spend $80 billion on growth over the next five years.
"As one looks at a buy versus build equation, the clear opportunity for us is to continue to invest money in our organic portfolio," BHP CEO Marius Kloppers told analysts earlier this year.
Mining companies are also venturing into more politically risky regions like Papua New Guinea and Mongolia.
"If you are looking for new projects, new assets, then you have to go to those countries that are perceived to be riskier," said Lynch-Bell.
Lynch-Bell also said initial public offering (IPO) activity in the metals and mining sector should pick up in 2011 as well.
"We are certainly busier than we've been for a long time in terms of preparing companies for IPO: it's iron ore, it's coal, it's platinum," he said.
News and Related Story Links:
- Money Morning:
Buy, Sell or Hold: Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX) is a Mining Play with a Major Upside
- Bloomberg News:
Barrick to Buy Equinox for $7.69 Billion, Topping Minmetals
Barrick bids $7.68 billion for Equinox, tops Minmetals
- The New York Times:
Barrick Gold to Buy Equinox Minerals for $7.8 Billion
- Commodity Online:
'M&A key theme for mining and metals industry in 2011'
Global mining M&A set to accelerate in 2011: report