TORONTO - Barrick Gold Corp's move to cut its oil bill by buying a small oil producer suggests a radical shift in thinking for miners facing soaring costs, and for junior energy companies it may present a whole new source of suitors.
Barrick, which along with other miners has struggled with rising costs for energy and industrial supplies, said on Monday it will bid C$354 million ($350 million) to take over Cadence Energy, an acquisition that would allow it to hedge a quarter of its oil consumption at $20 a barrel.
The move represents a longer-term view than simply buying future oil production, and underscores the degree to which the mining industry is suffering under oil prices that topped $144 a barrel on Monday, analysts said.
"This, in the gold sector, is the first of the real clear strategy of 'let's get in there and manage' it as opposed to just going out and hedging," said gold analyst Barry Allan of Research Capital in Toronto.
Barrick, the world's top gold producer, has already made several somewhat unusual moves to control rising costs, including investing $40 million in wind farms in Chile, and signing a $200 million agreement with Yokohama Rubber to secure supply of oversized truck tires, whose prices have soared amid a worldwide shortage.
But with energy costs representing a quarter to a third of overall mining costs, other larger players may be tempted to follow Barrick's lead, particularly if mining companies' cash flows continue to be padded by strong metals prices.
"The higher the price of gold or oil or the longer the current prices stay at these levels, the more likely other companies will follow suit," said Ian Nakamoto, director of research at MacDougall, MacDougall & MacTier.
Goldcorp, the world's No. 2 gold miner by market capitalization, wouldn't comment on the Barrick offer or energy acquisitions specifically, but spokesman Jeff Wilhoit said the company is always looking for ways to reduce its exposure to high oil prices.
Barrick's C$6-a-share bid comes as Cadence has already agreed to an all-stock offer from Daylight Resources Trust. Barrick said it will file a formal offer as soon as possible, contingent on due diligence.
Barrick said the acquisition is expected to form a long-term strategy to hedge oil exposure at lower rates. Cadence produces about 3,600 barrels of oil equivalent a day, and has a reserve life of about 13.8 years, Barrick said.
"On the surface it's a logical thing to do," said Martin Molyneaux, an energy analyst at FirstEnergy Capital Corp, who said the deal caught him by surprise.
CHEAP ENERGY SHARES
Molyneaux said energy shares have lagged the runup in oil prices of late, making smaller players more attractive to cash-rich majors.
However, he said he was cautious about the idea of a mining company managing an oil producer, a concern echoed by others.
"A lot of companies will say they're good at something, they'll focus on that, and their suppliers can focus on what they do best," said David Whetham, a resource manager at Scotia Cassels.
"If they do this, should Westjet Airlines be buying an oil and gas company? They use a lot more oil than Barrick."
However, while companies such as airlines may have a need for oil, they have neither the resource expertise nor the financial might to make such a bold move, Nakamoto said.
"Barrick's in a unique position where the price of what they're selling is at an all-time high, so they have the balance and cash flow to do something like this," he said.
Barrick, which along with other miners has struggled with rising costs for energy and industrial supplies, said on Monday it will bid C$354 million ($350 million) to take over Cadence Energy, an acquisition that would allow it to hedge a quarter of its oil consumption at $20 a barrel.
The move represents a longer-term view than simply buying future oil production, and underscores the degree to which the mining industry is suffering under oil prices that topped $144 a barrel on Monday, analysts said.
"This, in the gold sector, is the first of the real clear strategy of 'let's get in there and manage' it as opposed to just going out and hedging," said gold analyst Barry Allan of Research Capital in Toronto.
Barrick, the world's top gold producer, has already made several somewhat unusual moves to control rising costs, including investing $40 million in wind farms in Chile, and signing a $200 million agreement with Yokohama Rubber to secure supply of oversized truck tires, whose prices have soared amid a worldwide shortage.
But with energy costs representing a quarter to a third of overall mining costs, other larger players may be tempted to follow Barrick's lead, particularly if mining companies' cash flows continue to be padded by strong metals prices.
"The higher the price of gold or oil or the longer the current prices stay at these levels, the more likely other companies will follow suit," said Ian Nakamoto, director of research at MacDougall, MacDougall & MacTier.
Goldcorp, the world's No. 2 gold miner by market capitalization, wouldn't comment on the Barrick offer or energy acquisitions specifically, but spokesman Jeff Wilhoit said the company is always looking for ways to reduce its exposure to high oil prices.
Barrick's C$6-a-share bid comes as Cadence has already agreed to an all-stock offer from Daylight Resources Trust. Barrick said it will file a formal offer as soon as possible, contingent on due diligence.
Barrick said the acquisition is expected to form a long-term strategy to hedge oil exposure at lower rates. Cadence produces about 3,600 barrels of oil equivalent a day, and has a reserve life of about 13.8 years, Barrick said.
"On the surface it's a logical thing to do," said Martin Molyneaux, an energy analyst at FirstEnergy Capital Corp, who said the deal caught him by surprise.
CHEAP ENERGY SHARES
Molyneaux said energy shares have lagged the runup in oil prices of late, making smaller players more attractive to cash-rich majors.
However, he said he was cautious about the idea of a mining company managing an oil producer, a concern echoed by others.
"A lot of companies will say they're good at something, they'll focus on that, and their suppliers can focus on what they do best," said David Whetham, a resource manager at Scotia Cassels.
"If they do this, should Westjet Airlines be buying an oil and gas company? They use a lot more oil than Barrick."
However, while companies such as airlines may have a need for oil, they have neither the resource expertise nor the financial might to make such a bold move, Nakamoto said.
"Barrick's in a unique position where the price of what they're selling is at an all-time high, so they have the balance and cash flow to do something like this," he said.
