Barrick Gold Corp. (ABX) founder and Chairman Peter Munk said his company’s “unorthodox” C$7.3 billion ($7.6 billion) acquisition of copper producer Equinox Minerals Ltd. (EQN) was necessary to fund new gold mines.
Barrick, the largest gold producer, would need to buy a rival company producing 1 million to 2 million ounces a year “to move the needle,” Munk said yesterday at the Bloomberg Canada Economic Summit in Toronto. Such a deal would require Barrick to pay with stock, diluting its gold earnings, he said. Buying Equinox was the only deal that could add as much as $1.5 billion of net cash flow, which can be used to develop new gold mines, he said.
“I know it’s unorthodox,” said Munk, 83. “But if you keep on doing orthodox things then all you do is you’re part of the herd.”
Barrick shares have fallen 17 percent since it announced the deal amid concern the gold miner is moving away from its focus on the metal and further diversifying into copper. David Haughton, a Toronto-based analyst at Bank of Montreal, cut his rating on Barrick to “market perform” from “outperform” on April 25. Copper miners trade on a smaller multiple of earnings than gold companies, he said in a note.
Acquiring Equinox, which is based in Perth, Australia, gives Barrick control of the Lumwana copper mine in Zambia and Saudi Arabia’s biggest deposit of the industrial metal. Barrick’s friendly, all-cash offer trumped an unsolicited bid from China’s Minmetals Resources Ltd.
The deal would be the second-largest acquisition by Toronto-based Barrick, after its $10.2 billion purchase of Placer Dome Inc. in 2005, according to Bloomberg data.
Gold mines now sell for about seven times what they did 10 years ago, Munk said.
“Gold-company valuations have been driven up very high,” Munk said. “To do today an acquisition in gold, to buy a junior, is very hard to justify.”
Barrick is proposing to pay 13 times Equinox’s earnings before interest, tax, depreciation and amortization, according to data compiled by Bloomberg. That compares with the 6.8 time Ebitda that Teck Resources Ltd. paid for Aur Resources Inc. in 2007 and the 6.7 multiple paid by Aurubis AG for Cumerio NV/SA in 2008.
The cost of developing gold mines has jumped in the past two decades, Munk said. Fuel and labor costs have climbed, while fewer discoveries are being made by exploration companies.
“One of the surprising things is how few large deposits have been found,” Ian Telfer, chairman of Vancouver-based Goldcorp Inc. (G), the world’s second-largest gold producer by market value, said in an interview at the summit yesterday.
Barrick may be able to discover more gold in Africa because of the Equinox acquisition, Munk said.
“The Equinox assets in Zambia happen to be in world’s second-most prolific gold-producing belt,” Munk said. “In the next five to 10 years, we’ll be able to find, hopefully, more and more gold.”
Barrick dropped C$1.77, or 3.9 percent, to C$43.82 at 4:15 p.m. in Toronto Stock Exchange trading. The shares have declined 6.5 percent in the past year, compared with a 22 percent advance in the price of gold for immediate delivery.
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