canada's two biggest gold miners fight

Canada's two biggest gold miners fight over mine in Chile. This could get exciting for Kings.
From Kitco

Andy Hoffman

Globe and Mail Update

.In a bold move that underscores the key role large copper deposits will play in senior gold producer's growth plans, Goldcorp Inc. (G-T43.21-0.17-0.39%) is scuppering rival Barrick Gold Corp.'s (ABX-T42.64-0.54-1.25%) $465-million (U.S.) deal to buy control of a major mining project in Chile.

Barrick tabled a last minute $300-million all-cash offer to New Gold Inc. (NGD-T4.550.5313.18%) for its 30-per-cent interest in the El Morro project on Wednesday, according to sources close to the situation, but the smaller miner opted instead for a surprise deal with Goldcorp.

Under that arrangement, Goldcorp will buy a 70-per-cent interest in El Morro from Xstrata PLC by lending $463-million to New Gold, which had a right of first refusal to buy the stake. New Gold will then transfer that stake to Goldcorp in exchange for an additional payment of $50-million. New Gold will retain its 30-per-cent interest in El Morro and will have all of its development and construction costs financed by Goldcorp.

The proposed transaction, which cancels Barrick's deal to buy the 70-per-cent stake from Xstrata announced in October, highlights the new breed of projects for which Canada's two largest gold miners are now ferociously competing.

With the world's large pure gold deposits all but exhausted, and with the price of copper recently hitting 16-month highs of $3.50 per pound, major gold miners like Goldcorp and Barrick are turning to massive copper deposits called porphyries, which also contain significant amounts of gold. El Morro boasts measured and indicated resources of 6.3 billion pounds of copper as well as 8.3 million ounces of gold.

First, we look at it as a gold deposit, but there is nothing wrong with copper. Copper has played a very important part in Goldcorp's success over the years, Chuck Jeannes, Goldcorp's chief executive officer said in an interview.

I'm fairly bullish on copper. I think most people are. I can see higher copper prices over the next few years as the economic recovery kicks in, he added.

Vancouver-based Goldcorp could begin construction on El Morro by the end of year. The most recent feasibility study estimated it will cost $2.5-billion to build the project, but some analysts estimate those costs could rise closer to $3-billion. Mr. Jeannes said Goldcorp expects El Morro will be economically viable even if gold prices were to fall to $800 an ounce and copper dropped below $2.30 a pound.

This is a screamer at $3 copper, he said.

According to a report by TD Newcrest analyst Greg Barnes, 65 per cent of the contained value of El Morro comes from copper when using long-term price estimates of $2 per pound of copper and $900 per ounce of gold.

Goldcorp and Toronto-based Barrick weren't the only mining companies interested in El Morro. Canada's largest base metals miner, Teck Resources Ltd., also considered a bid for the project and Kinross Gold Corp., Canada's third-largest gold producer sniffed around a possible deal as well, according to sources close to the situation. China's largest gold miner, Zijin Mining Group, was among the parties bidding for El Morro when Xstrata put its stake up for sale last year.

The frenzied interest in El Morro is just the latest example of the rising value of large copper/gold porphyries, which many gold producers shunned in the past because of high development costs and volatile base metal prices.

Barrick is developing a massive copper and gold project in Pakistan called Reko Diq that contains more than 11 billion pounds of copper and more than nine million ounces of gold. With the loss of El Morro, Barrick may also speed up development of the $3.5-billion Cerro Casale project in Chile with its partner Kinross. Cerro Casale contains about six billion pounds of copper and more than 20 million ounces of gold.

The largest gold deposits in the world today are tied up with copper ... if you want gold you also have to take copper if you are a big company, said an industry source close to the deal.