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Why copper tarnishes gold miners' valuations

Barrick Gold Corp. is down another buck in early morning trading. Some of that fall has been attributed to concern about the company's strategy, but some of it stems directly from valuation metrics.

Historically, gold producers have traded at a premium to their base metals peers. In a quick analysis, BMO Nesbitt Burns found that using a 10 per cent discount rate, copper miners currently trade at 0.6 times spot price to net present value, while gold stocks trade at 1.2 times.

Because that premium is so hefty, a lot of gold miners are scared to lose to it. BMO analyst David Haughton notes that's why in 2010 Goldcorp bought Andean and Newcrest bought Lihir. More recently, New Gold scooped up Richfield for $550-million to assure investors it was still focused on gold after a string of copper deals.

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Why does this gold premium exist? BMO cites a few factors. Mainly, the gold price is generally forward looking, while base metals prices typically look backward, and gold is viewed as an insurance policy in the market, which adds value.

As for Barrick, the jury is still out as to whether or not its gold premium will start to fall. At this point, analyst David Christie at Scotia Capital isn't worried. "We do not view [less than]30 per cent non- precious metals as an issue for a gold producer to retain its 'gold' multiple," he noted. Besides, Barrick isn't the only company with copper exposure. Scotia estimates that 32 per cent of Yamana's 2011 revenue will come from non-gold sources.

However, the market is nervous because this was a pure copper deal that doubles Barrick's copper exposure. At the end of 2010, Equinox reported copper reserves of 5.7 billion pounds, which will boost Barrick's reserve base to 12.2 billion pounds.

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About the Author
Reporter and Streetwise columnist

Tim Kiladze is a business reporter with The Globe and Mail. Before crossing over to journalism, he worked in equity capital markets at National Bank Financial and in fixed-income sales and trading at RBC Dominion Securities. Tim graduated from Columbia University's Graduate School of Journalism and also earned a Bachelor in Commerce in finance from McGill University. More

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