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Posts Tagged ‘plurimetallic portfolio’

26
Apr

BARRICK RETURNS TO AFRICA

   Posted by: Mr. Gold    in Uncategorized

It is hard to fathom the rationale behind Barrick’s juicy premium for EQN. It was only 18 months ago that Barrick, with much fanfare, “left Africa”, leaving behind a limping offshoot (African Barrick), unloved by the London market, deprived of any growth story, plagued with 70% overhang on the stock, hemorrhaging talent and serving few fund managers except those seeking a proxy for “Tanzania risk”.

So now, Barrick is back on the black continent and in search of copper (well, much is being said about copper, but there is uranium there too). Barrick’s Zaldivar and Cerro Casale projects provide a significant copper element to the stable, even though the impact is less visible than in the case of, say, Newcrest or even Newmont. But Lumwana? Granted, EQN will increase production from its flagship operation by about 100kt of copper between now and 2014, but the new owner will have to throw in $0.5bn in capex over and above the $7bn plus in cash splurged on the Australian/Canadian listed producer. Barrick also gets access to the dubious charms of Jabal Sayid – a 60ktpa early stage development project in Saudi Arabia. One wonders if Barrick’s portfolio risk is not getting a little too exposed to a region plagued by uncertainty and (at least perceptions of) instability. The company is already involved in Reko Diq project in Pakistan – sharing the burden with the most unlikely of guests, Chile’s Antofagasta.

True, EQN will spit out $1.3bn in Ebitda as early as 2013, assuming the nominal copper prices around $4/lb. Should the USD continue on its trajectory post FOMC meeting in June, this looks like a great USD hedge, but the real value of the red metal may not shine so brightly for anyone whose wealth is denominated in stronger currencies than the USD.

This rationale is probably the only common thread between the gold and copper markets. The red metal is driven by a completely different set of drivers, some of which are of discretionary, administrative nature. One could even argue that after years of guesswork on central banks’ intentions regarding gold reserves, it is now copper that suffers from increased opacity. Any attempts to penetrate the great wall of secrecy regarding copper hoarding at China’s State Reserve Bureau are bound to be frustrated. And even the estimates of unregistered stocks in bonded warehouses range from 0.5mt to over a million tonnes – a significant range in a 19mtpa market. Barrick’s move represents therefore a leap of faith, as no meaningful due diligence can be made regarding the distant future of the copper market, beside the well worn (and still valid) argument of China’s copper deficiency. But industrial metal demand growth rates could be past their peak and it is illustrative that no base metal producer tried to dislodge Minmetals’ original bid.

Andrew Michelmore – Minmetals’ CEO had seen worse times at OZ Minerals and it is difficult to disagree that walking away was the most rational of options. But from a broader perspective, this adventure amounts to yet another failure of a Chinese-funded entity to secure a stake in a Western-operated mining venture. In certain quarters of Chinese metal value chain, belligerent calls intensify. China’s steel association’s vociferous attacks on Western governments’ (!) monopoly in iron ore production is an unfortunate example of just how political the quest for “equity” participation in offshore commodity production has become. Chinese entities are still light years behind the hugely successful, long-term metal bets Mitsubishi and other Japanese shosha companies engineered in Australia and South America four decades ago.

This leaves us with the Barrick’s murky rationale (the sale could not possible premeditated on doing in the hapless African Barrick, there are cheaper ways to do this). The company’s speedy due diligence may reflect as much its nimble approach to growth as an unwelcome rashness. Or maybe Peter Tomsett – EQN’s chairman had ulterior motives? Here’s the guy to six years ago successfully brought Placer Dome’s history to its end. When Barrick made the initial approach, Tomsett remained open to an alternative bid. Newmont and AngloGold Ashanti embarked on an in-depth due diligence of PDG’s assets, until AngloGold’s visit to Porgera went badly wrong. Barrick digested Placer Dome awright and has thrived since.

Smell a revenge?

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