JP Morgan Comments On Barrick Gold, Equinox Following Recent Bid

Barrick Gold ABX has announced an agreed bid for Equinox at C$8.15 per share in cash. This is a little surprising to Barrick's largely gold investors and led to a 6.8% selloff in the stock today, while the gold index retreated just 2.6%. Investors' concerns seem twofold: the price appears full for a copper producer, and there is a concern that current strategy could take Barrick into a no-mans-land with base metal contributions too high to attract gold investors and base metals production too low for base metal investors. While JP Morgan sees base metals as a boon for gold miners, it sees revenues exceeding the 25% level as a real concern, but easily solved. Barrick can use its skills to develop and advance base metals projects as it has with Xstrata at Kabanga nickel but then trade these assets for cash or gold production to maintain the gold component of revenues/earnings at levels attractive to gold investors. Base metals offer a natural hedge, which can be very helpful now that investors are wary of financial hedges on gold sales. JP Morgan feels there is almost a virtuous circle that generates additional value since at modest levels, base metal cashflows can achieve a “gold” multiple. JP Morgan has a $66 PT and Overweight rating on ABX ABX closed Monday at $51.86