Why Barrick Gold is Pursuing Copper

June 24th, 2011 by Trefis Team

Barrick Gold (NYSE:ABX) successfully completed its offer to acquire Equinox Minerals Limited at a 30% premium based on Equinox’s closing share price on the Toronto Stock Exchange in February. The acquisition gives Barrick Gold access to Equinox’s 5.7 billion pounds of copper reserves, including 4.5 billion pounds at Lumwana and 1.2 billion pounds at Jabal Sayid plus an additional 5.5 billion pounds of inferred copper resources at Lumwana. Barrick Gold, primarily a gold producer, received complaints from its shareholders on its decision to invest in copper reserves, shifting its focus away from gold. We analyze the reasons behind the aggressive bid by Barrick Gold to acquire copper reserves. [1] It competes other mining companies such as Newmont Mining (NYSE:NEM), AngloGold Ashanti Ltd. (NYSE:AU), Goldcorp Inc. (NYSE:GG) and Freeport McMoran Copper (NYSE:FCX).

Our $59 price estimate for Barrick Gold is roughly 15% ahead of market price.

Rallying copper prices and industrial demand for copper…

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Copper price has seen more than 25% rise in the last two years. Although the growth rate has slowed in the past few months when copper crossed $4 per pound, we believe there is still significant upside for copper prices through the end of the year. [2]

China, the largest consumer of copper with more than 40% of copper demand, or 8 million tons annually, has been aggressively buying the metal for the past two years to stock up its inventory and hedge against any kind of short-supply and price rise in the future. Both copper and gold have hit their record highs this year on the London Metal Exchange. Industrial demand for copper is the single most significant driver for its prices, outstripping supply by 300,000 tons to almost 1 million tons this year. Rapid industrialization in the growing Asian economies will likely sustain demand for at least 10 to 20 years.

…. make Equinox acquisition valuable …

The Equinox acquisition will more than double Barrick’s copper output contributing as much as $3 billion to the company’s revenues while the company’s gold output would be worth $11 billion in 2011. This move will reduce Barrick’s exposure to gold to 80% from the existing 90%. The upside to gold may be capped if the global industrial output rises and the uncertainty declines, whereas the potential gains in copper may be higher. Hence we believe it’s a smart move by the company to go for a copper miner over a gold miner in the scenario of increasing industrial demand.

…But China dependent

The recent drop in demand from China owing to high prices and inventory build-up has arrested the rise in copper prices. [3] Although the demand decline may be temporary and could pick up by year end when the demand-inventory deficit widens, the dependence on China is alarming. Some reports claim that the entire demand for copper in China is manipulated. [4]

See our complete analysis for Barrick Gold

Notes:
  1. Barrick bid suggests copper will be the new gold, Reuters [↩]
  2. Copper to rise by 2011 end as deficitwidens, CommodityOnline [↩]
  3. Copper Imports by China Slump to Two-Year Low on Ample Supplies, Prices, Bloomberg [↩]
  4. China’s Doctored Copper Demand, WSJ [↩]