NEM - Why Is The Reko Diq Project A Gamble For Barrick Gold?

2023-08-03 19:26:52 ET

Summary

• Barrick Gold Corporation has been unsuccessful in its attempts to find a partner for its copper mining.
• The company's attempts to merge with Freeport-McMoRan Inc. and acquire First Quantum Minerals were both unsuccessful.
• Barrick Gold is now focusing on its Reko Diq project in Pakistan, which is a $7 billion copper-gold project.
• However, I give Mark Bristow the benefit of the doubt.

Barrick Gold: Searching for a partner is a challenging endeavor

Barrick Gold Corporation (GOLD) is one of the main gold and copper producers worldwide and is shifting to copper mining. Barrick has put much effort into increasing its copper production through acquisitions for the past few years. Unfortunately, this challenging exercise was not successful.

First attempt: Barrick Gold merger with Freeport-McMoRan

The company can be compared to Freeport-McMoRan Inc. (FCX). Both miners produce gold and copper, with one fundamental difference.

Barrick Gold is the world's second gold producer. At the same time, Freeport McMoRan is predominantly a Copper producer, which owns 48.76% of the Grasberg gold and copper mine in Papua New Guinea, producing over 400K Au ounces quarterly.

Below is the quarterly production per metal history for FCX until 1Q23.

As we can see, gold production is not negligible, even if copper production is the main source of revenue for FCX.

Thus, a merger between Barrick and Freeport-McMoRan would have made a lot of sense, especially considering that Barrick's CEO, Mark Bristow, has spoken publicly about his wish to grow Barrick's copper segment.

On March 1, 2021, Mark Bristow said a merger with the copper miner Freeport-McMoRan "had a lot of logic to it," even though a deal between the companies could not be achieved.

Second unsuccessful attempt: Acquisition of the Canadian miner First Quantum Minerals

A couple of years later, CEO Mark Bristow tried to acquire a large copper producer but was again unsuccessful.

On June 15, 2023, Barrick Gold attempted to acquire the Canadian miner First Quantum Minerals (FQVLF), a $19 billion copper miner. The offer was flatly rejected.

Barrick made overtures to First Quantum in the last few months as part of its search for ways to expand in copper, the people said. First Quantum indicated it wasn’t keen on a combination and declined to enter any substantive talks, according to the people.

Barrick Gold became trapped by its weakening gold production, and this strategic shift was seen as a more pressing issue for the company, which estimated that copper was becoming more attractive due to the increasing demand for electrification worldwide, which is still not obvious.

The copper price hasn't cooperated in 2023, and the short-term outlook is quite neutral due to China's disappointment.

Analysts have pared price forecasts for copper and other industrial metals as supply expands while demand in top metals consumer China remains muted, a Reuters poll showed.

Copper prices have been range-bound in recent months after a January slide from their highest in more than seven months and a May rebound from a slump below $8,000 a metric ton.

Upbeat sentiment on the post-pandemic reopening of China propelled gains early in the year, but investors later dumped industrial metals after tepid economic progress by the world's second-biggest economy.

2 - What is Barrick Gold gold and copper production?

Barrick Gold reported first-quarter production for gold of 952K Au ounces (sold 954K Oz). A multi-year low. GOLD reports its second-quarter results on August 8, 2023.

And 88M Cu Lbs (sold 89M Cu Lbs). From three different mines.

The copper segment is small compared to the Gold segment.

3 - Barrick Gold is not alone in its pursuit of copper opportunities.

A few examples come to mind involving Barrick's peers.

First, Newmont Corporation ( NEM ) is about to complete the acquisition of Newcrest Mining ( NCMGY ), which is a large copper and gold producer. I strongly recommend reading my article about the merger by clicking here.

Newcrest Mining's historical production in gold and copper will help Newmont Corp.:

Second, Agnico Eagle ( AEM ) announced on September 22, 2022, that it acquired a 50% interest in Minas de San Nicolás, S.A.P.I. de C.V., a wholly-owned Teck Resources ( TECK ) subsidiary that owns the San Nicolás copper-zinc development project located in Zacatecas, Mexico. As a result of the Transaction, Teck and Agnico Eagle will become 50/50 joint venture partners at San Nicolás.

San Nicolás is the largest undeveloped volcanic-hosted massive sulfide deposit (“VHMS”) deposit in Mexico and is one of the largest undeveloped VHMS deposits globally. As at December 31, 2021, Teck estimated San Nicolás to contain 105.2 million tonnes of proven and probable mineral reserves at average grades of 1.12% copper, 1.48% zinc, 0.4 g/t gold and 22 g/t silver, or more than 2.0% on a copper equivalent basis

4 - Why is the Reko Diq project in Pakistan a "somewhat good" alternative?

After several unsuccessful attempts discussed above, CEO Mark Bristow turned to other alternatives.

Bristow has also spoken openly about copper exploration in both Zambia and Congo. The company is currently in talks with the Congolese government about potential exploration projects, according to people familiar with the matter.

Barrick is also studying an expansion at its Lumwana copper mine in Zambia while exploring new deposits Worldwide.

This new focus seems to justify why Bristow invested in a gold and copper project in Pakistan called Reko Diq.

5 - The Reko Diq Project

Barrick Gold’s biggest investment project is a $7 billion copper-gold project in Pakistan. The Reko Diq is one of the largest undeveloped copper-gold deposits.

One of the largest undeveloped copper-gold projects in the world, Reko Diq is owned 50% by Barrick, 25% by three federal state-owned enterprises, 15% by the Province of Balochistan on a fully funded basis and 10% by the Province of Balochistan on a free carried basis.

The feasibility study is scheduled for the end of 2024, with the first production expected in 2028, and could operate for at least 40+ years. The target has been reaffirmed on August 1, 2023. The project is divided into two phases.

Phase 1 - Average annual production, starting in 2028 and ending in 2032, will be 430 Cu Mlbs and 280K Au Oz.

Source: Barrick Gold website.

It is an exciting project, but the location is challenging. However, I believe it will succeed because the Balochistan government has everything to gain from this project and a lot to lose if they do not cooperate.

The risk is that the deal can always be forcibly revised later on under any pretext, and this has happened before for Barrick elsewhere.

In 2020, the Acacia mine in Tanzania , now called the North Mara and Bulyanhulu mines.

It follows an announcement by the two sides in October in which they agreed to a payment of $300 million to settle outstanding tax and other disputes, the lifting of an export ban on concentrates and the sharing of future economic benefits from mines.

Also in 2021, the Porgera mine in Papua New Guinea, after losing its "social license":

Ultimately, last April, Barrick was forced to put the mine on care and maintenance, essentially ceasing operations, when the government declined to renew its permit. Since then, Bristow has made countless trips to the island nation to meet with Prime Minister James Marape, including four since December. Earlier this month, the company announced a new binding deal: it will increase Papua New Guinea’s stake in the entity that owns the mine from five per cent to 51 per cent and make Barrick a minority owner in the mine it operates there.

However, the project is advancing...

Conclusion

The Reko Diq project looks like a dangerous gamble for Barrick Gold Corporation. I see two explanations:

First, Barrick is investing in Pakistan, which is not the safest jurisdiction for mining, and I see problems on the horizon.

Pakistan’s military is taking a key role in the development of one of the world’s biggest untapped copper and gold deposits, which is currently stalled by a multi-billion dollar legal wrangle with foreign mining firms, multiple sources familiar with the situation said.

Second, Barrick Gold is banking on a bullish rise in copper prices in 2028. Analysts are bullish long-term. They see a short-term strength outlook and a long-term "generational shift" in copper prices. Not sure what it means.

Along with experiencing a short-term supply shortage, copper is set to undergo a “generational shift” in demand as decarbonization ramps up, according to BNY Mellon Lead Portfolio Manager Al Chu.

Copper is a leading barometer of global economic health due to its wide-ranging usage, including in electrical equipment and industrial machinery — it had a strong start to the year, given a weakening dollar and investor expectations to see a surge in demand after the reopening of the Chinese economy.

I am unconvinced, and I believe no compelling argument supports those projections. A wishful thinking, perhaps.

Nothing can be certain about such a long-term copper outlook, and I do not advocate an investment of $7 billion in Pakistan based on this outlook alone. Furthermore, the risk attached to the region is high.

However, I am giving Mark Bristow the benefit of the doubt.

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