Alchemy in Reverse, Copper the New Gold...
Wednesday, 27 April 2011

Soaring global demand for copper makes the metal a better bet than gold and explains a surprise bid by Barrick Gold Corp, the world's No. 1 bullion producer, for copper miner Equinox Minerals.

Barrick's $7.68 billion offer for Equinox trumped one by Minmetals Resources, a unit of China's largest metals trader.

Minmetals on Tuesday bowed out of the battle for the copper miner, which has been involved in takeover tussles of its own with smaller miners, saying Barrick's bid was too rich.

The move signals a shift by Barrick away from a near-pure gold play into a more diversified mining company, highlighting the positive demand outlook for industrial metals in an improving global economy.

"Perhaps copper is the new gold. The long-term prospects for base metals look good," Pinaki Rath, managing director of Gold Matrix Resources, said.

He noted that the risk of rising interest rates as world economies shift from the highly accommodating monetary policy adopted during the global financial crisis to more normal conditions could cap the upside for gold, while industrial appetite for copper would support prices.

Both copper and gold prices have hit record highs this year -- copper on the London Metal Exchange touched an unprecedented $10,190 a ton in February, while spot gold rallied to a record $1,518.10 an ounce as recently as Monday.

And demand growth from emerging economies like China, which currently consumes 40 percent of world copper output or around 8 million tons, will keep prices firm, while miners struggle keep up.

Estimates vary, but analysts see demand for copper, where its ductility and conductivity make it an essential input in electrical products, wiring and in tubing, outstripping supply by between 300,000 tons to almost 1 million tons this year.

"For at least the next three years we are still very bullish on copper as the market will remain in deficit over that period, even under the most conservative global demand forecasts," said Judy Zhu, analyst at Standard Chartered Bank in Shanghai.

"And there is a possibility that this deficit could be more prolonged if demand grows faster than expectations. Copper is highly exposed to Asia, and urbanization in China and India will provide upside momentum for at least the next 10 years and perhaps as long as 20 years."

Equinox's prime asset is the Lumwana mine in Africa's rich Zambian copper belt, which produced around 147,000 tons of copper in concentrate last year, 1 percent of global mine supply. Equinox also owns a mine project in Saudi Arabia.

"ALCHEMY IN REVERSE"

The acquisition would more than double Barrick's copper output, seen at less than 150,000 tons in 2011, Reuters Metal Production Database shows.

At current prices, the merged entity's annual copper output would be worth $3 billion, while its gold output is worth around $11 billion. The takeover would reduce Barrick's exposure to gold to 80 percent from 90 percent currently.

"It's alchemy in reverse -- turning gold into base metals -- but increasing exposure to industrial metals is probably a smart move if you expect the global economy to return to pre-crisis levels," said a trader in Singapore.

"In that scenario, the upside to gold is likely to be capped, while the potential for gains in copper are greater. They have a lot of cash, but it is telling they went for a copper play, and not another gold miner."

 


  

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