Barrick Seen Trumped as Equinox Belies Top Valuation: Real M&A
Barrick Gold Corp. (ABX)’s agreement to buy Equinox Minerals Ltd. (EQN) for the most expensive valuation in a copper mining takeover still isn’t high enough, according to traders who profit from mergers and acquisitions.
Equinox is trading 2.7 percent above Toronto-based Barrick’s C$8.15-a-share offer that trumped an unsolicited proposal of C$7 from Minmetals Resources Ltd. (1208), signaling investors expect a sweetened bid. The C$7.32 billion ($7.67 billion) offer from the world’s biggest gold company values Perth, Australia-based Equinox at 13.5 times earnings before interest, taxes, depreciation and amortization, a record level for a copper takeover, according to data compiled by Bloomberg.
Barrick, which more than doubled its cash to almost $4 billion in the past two years, is now pursuing its second- largest deal to gain control of a copper deposit in Zambia that can be mined for 37 years. Minmetals, a unit of state-owned China Minmetals Group, offered C$6.04 billion for Equinox three weeks ago to shore up access to copper, which is used in plumbing and wiring for buildings, after demand from China drove the metal to a record this year.
“There’s a giant copper mine here for sale and two bidders,” John Maysles, an event-driven analyst at Elevation LLC, said in an interview from Los Angeles. “Minmetals definitely had more in its pocket to pay for Equinox. Now the question is, do they want to get into a competitive situation with a company like Barrick that has in the past shown that they can be pretty aggressive bidders?”
Equinox Chief Executive Officer Craig Williams wasn’t available for comment, said William Belonio, an assistant at the company’s Toronto office.
Minmetals “notes the announcements by Barrick and Equinox and will comment further when we have had the opportunity to study it in detail,” Martin McFarlane, head of investor relations for the company, said in an e-mail.
Equinox surged 86 cents, or 11 percent, to C$8.37 yesterday in Toronto, surpassing Barrick’s bid by 2.7 percent. Barrick said before trading opened it had agreed to acquire Equinox for $7.67 billion including net debt, valuing the company at 13.5 times Ebitda of $570.2 million last year, data compiled by Bloomberg show.
“The market has Equinox trading through the C$8.15 offer,” said George Topping, a Toronto-based analyst at Stifel Nicolaus & Co. “It’s assuming Minmetals may come back with a higher bid.”
Barrick’s all-cash offer represents a 17 percent premium to Equinox’s 20-day trading average before the announcement. It’s 54 percent higher than the stock’s average before the unsolicited bid from Minmetals on April 3, data compiled by Bloomberg show.
Barrick is valuing Equinox’s equity at 28 times net income, also the highest for an acquisition in the industry and topping the 24 times multiple that’s underpinning Minmetals’s proposal.
“There continues to be a very high level of interest for these mineral companies,” said Keith Moore, an event-driven strategist at MKM Partners LP in Stamford, Connecticut. “Barrick is a very deep-pocketed acquirer.”
The boards of Barrick and Equinox both agreed to the combination, which still requires approval from two-thirds of Equinox’s shareholders, according to the statement yesterday.
Zambia, Saudi Arabia
Barrick and Minmetals are seeking access to Equinox’s Lumwana project, which is Zambia’s biggest capital investment and is designed to process more than 20 million metric tons of ore per year over a mine life of 37 years, according to the company’s website. Equinox also bought the biggest copper deposit in Saudi Arabia in January, and its first production is expected in 2012.
“It’s rare when you have mines of this size and caliber in the market place,” Barrick CEO Aaron Regent said in a telephone interview yesterday. “We are securing a very large, attractive resource that I think will generate significant value for our company for many, many years.”
Barrick still slumped 6.7 percent yesterday, the most since December 2009, because shareholders are concerned the combined entity’s stock would represent a bigger bet on copper prices, according to Timothy Parker, who oversees $8.5 billion in natural-resource stocks at T. Rowe Price Group Inc. in Baltimore, part of the firm’s $509.9 billion under management globally. The C$3.57 drop in Barrick’s shares to C$49.50 in Toronto gave the company a market value of about C$49.4 billion.
While copper slid 4.8 percent from a record on Feb. 15 through last week, gold for immediate delivery climbed to an all-time high of $1,518.32 an ounce yesterday in London.
Barrick generated 12 percent of its $11.2 billion in total revenue from its copper mines last year, data compiled by Bloomberg show. Buying Equinox would boost its copper reliance to about 20 percent of sales, based on 2010 results.
Barrick’s CEO Regent said there’s compatibility between gold and copper production.
“In times of global distress gold tends to outperform copper and during times when the world is feeling really good about itself copper tends to outperform gold,” he said in the interview. “The combination brings increased stability to our earnings and makes it a better contrarian investment.”
Copper would have to continue to trade for at least $3.40 a pound to justify paying C$7.32 billion for Equinox, according to Stifel Nicolaus’s Topping. He expects copper prices to fall below that level by 2015 to $2.50 a pound.
Minmetals and Barrick are bidding for Equinox after copper for delivery in three months on the London Metal Exchange traded at a record $10,190 a ton, or $4.62 a pound, on Feb. 15. The metal will average $9,760 a ton this year and $10,350 in 2012, the median of analysts’ estimates compiled by Bloomberg show.
Barrick’s offer was 16 percent higher than the C$7-a-share bid from Minmetals, a Hong Kong-listed unit of China’s biggest metals trader. Minmetals owns the world’s second-biggest zinc mine and other assets in Australia, Laos and Canada.
The Equinox offer by Minmetals was already China’s largest ever proposed takeover of a mining company, and the 32 percent premium over the 20-day trading average would have been the most a Chinese company has paid for a mining deal greater than $500 million, according to data compiled by Bloomberg.
“There’s still a reasonable chance that Minmetals makes a competing bid, having identified this supposedly over a year ago as a target,” MKM’s Moore said. “Money shouldn’t be an issue for Minmetals.”
Barrick said its deal is already fully financed, including access to almost $4 billion in cash and equivalents, an existing $1.5 billion credit facility and an additional $5 billion from a bridge loan and revolving credit facility from RBC Capital Markets of Toronto and New York-based Morgan Stanley.
Adding $5 billion of debt to Barrick’s long-term borrowings may reduce the company’s credit rating by two steps to A1, the sixth-highest level of investment grade, according to Bloomberg’s Company Credit Ratings, which analyze borrowers based on indebtedness, profitability and other financial ratios.
Moody’s Investors Service placed Barrick’s Baa1 rating, three steps above junk, on review for a possible downgrade.
Barrick’s largest acquisition, including net debt, was the $9.93 billion purchase of Placer Dome Inc. five years ago to create the world’s biggest gold producer after sweetening its offer.
As part of yesterday’s agreement, Equinox said it will withdraw its C$4.6 billion unsolicited bid for Toronto-based Lundin Mining Corp. (LUN) Barrick’s proposal includes a C$250 million breakup fee if Equinox accepts a deal with another bidder. Barrick also has the right to match superior proposals.
“The bottom line here is people are expecting a higher offer,” said Sachin Shah, a special situations and merger arbitrage strategist at Capstone Global Markets LLC in New York. “Minmetals’s source of capital is essentially unlimited.”
Overall, there have been 7,735 deals announced globally this year, totaling $745.4 billion, a 22 percent increase from the $609.3 billion in the same period in 2010, according to data compiled by Bloomberg.