BOYD ERMAN
RTGAM
Minmetals Resources is pouring scorn on Barrick Gold Corp.'s bid for Equinox Minerals, saying it's "is above our most optimistic assessment of value."
How rich is the bid by Barrick for Equinox ? Very, judging by historical and current comparisons.
Either Barrick boss Aaron Regent is right in his assessment that copper is going to hold up better than anybody thinks, or he's paid a top of the market price for Equinox.
Mr. Regent knows the copper market, given his past at Noranda and Falconbridge, but then, so do the Chinese, given that China is the source of much of the demand that is supposed to drive prices. So who's right? Who knows. But what's clear is that Mr. Regent is willing to put his money behind his bet on the market, as the multiples on the deal show.
Let's start with historical acquisition multiples. There aren't many on the Bloomberg system, because as Mr. Regent pointed out Monday, producing copper assets don't come on the market often.
But there are a handful of deals from a small surge of mergers and acquisitions in 2007 and 2008. At that point, copper was trading around $3.50 (U.S.) a pound. These days, it's closer to $4.30.
Barrick's $7.3-billion (Canadian) bid for Equinox works out to 13 times earnings berfore interest, taxes, depreciation and amortization, 8.3 times revenue and 28 times net income, according to Bloomberg.
Compare that to Teck Resources' acquisition of AUR Resources in 2007, at 7.2 times EBITDA, 5 times revenue and 13 times net income.
Barrick's bid is also a big number compared to what other copper producers are fetching on the public market. Quadra FNX Mining Ltd. trades at 8.9 times Ebitda and 12 times net income. First Quantum Minerals garners multiples of 9.2 times Ebitda and 24.7 times net income.
On a price per pound of copper basis, BMO Nesbitt Burns estimated that Barrick is paying 49 cents (U.S.) a pound for the resources of Equinox, which the firm said is "a full price."
How can Barrick make it pay?
To make the deal work, copper is going to have to average $3.40 a pound over the long term, argues analyst George Topping of Stifel Nicolaus.
That means that copper prices have to hold up well in any economic downturn. During the financial crisis, copper, well, didn't. The metal bottomed out at $1.30 a pound in the panic, and didn't climb above $3 again for almost a year.
So it's going to come down to who has a better view on the copper market: Mr. Regent, the copper mining veteran at the head of a gold company, or the folks at Minmetals, a company controlled by the country that drives copper demand.
