HardAssetsInvestor

Written by Brad Zigler  |

April 28, 2011

Ladies And Gentlemen, Meet Barrick Copper Corp.

Details

Real-time Monetary Inflation (last 365 days): 3.4%

Ah, earnings season! When an investor's fancy turns to thoughts of free cash flow and book value.

In honor of the season, we looked at the top and the bottom of the gold miners food chain—those that are in the Market Vectors Gold Miners ETF portfolio (NYSE Arca: GDX), at least—in recent columns (see The Year's Best Gold Miner Bet" and "Some Gold Miners Are Real Losers").

One of GDX's middling issues just released its first-quarter results. Well, maybe it's not fair to call Barrick Gold Corp. (NYSE: ABX) middling. After all, at 14.3 percent, it's the weightiest issue in the GDX portfolio.

With that kind of heft, it shouldn't be surprising to see Barrick's performance reflected in GDX's. More on that in a minute. Back to earnings.

Barrick reported adjusted EPS of $1.01 for 2011's first quarter, in line with analysts' consensus estimate. That's a significant increase from the year-ago result of 78 cents, and is primarily due to higher gold and copper prices. Operating cash flow increased 27 percent year-over-year to $1.44 billion. Gold production for the quarter was 1.96 million ounces—ahead of guidance—at a total cash cost of $437 an ounce.

Barrick Management maintains its 2011 guidance of 7.6 million to 8.0 million ounces of gold at a cost between $450 and $480 an ounce.

Barrick's bigger news, however, was the announcement of its friendly, all-cash offer for Equinox Minerals. Equinox, which has one large producing copper asset located in Zambia, would receive C$7.3 billion, or C$8.15 per share, for the deal. The acquisition would boost Barrick's copper exposure to nearly 20 percent of revenues.

Barrick's buy, contingent upon approval by 67 percent of Equinox shareholders, would be funded by a combination of cash on hand together with bridge and revolving financings.

With the move, Barrick will lever its balance sheet to gain copper assets. The deal tells us about the company's view on the future of the world economy. Diversifying its revenue stream further could be a good thing in a world market driven by emerging market demand.

The consequence of the deal—assuming it's consummated—is also greater copper exposure in GDX. Maybe that's a good thing, too. We'll see.

Barrick Gold Corp. (ABX) Vs. Gold Miners ETF (GDX)

One-Year Comparative Performance: ABX Vs. GDX