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A decision by Barrick Gold (ABX-T) to diversify into copper with its $7.3 billion bid for Equinox Minerals (EQN-T) may highlight its narrow range of ways to grow.
The world's largest gold producer has only two obvious choices for growth: change its production strategy, as it did with the Equinox bid, or look for costly mega-deals with intermediate and senior gold producers.
"Barrick is in a bit of unique position in that they are by far the largest producer of bullion in the world," said Dundee Securities mining analyst Paul Burchell.
"So it leaves them in a rather difficult position of trying to grow the business, but recognizing that in order to make it material, it has to be a very large new addition."
For Barrick, which produces around 8 million ounces of gold a year, any takeover target would need annual production of at least 400,000 to 500,000 ounces -- with room to grow.
Canada's No.2 producer, Goldcorp (G-T), in contrast, could boost its annual production of 2.5 million ounces markedly with the takeout of a 250,000-ounce-a-year junior.
"The other gold producers aren't really faced with this big uphill battle in that they're starting from a smaller base," said Burchell. "The larger the company gets, the more difficult it becomes for them to add meaningful projects."
To boost production by 15 percent, Barrick would need to spend well over $10 billion to buy an intermediate producer such as Eldorado Gold (ELD-T) or Yamana Gold (YRI-T).
A mega-merger with Newmont Mining (NEM-N) or Goldcorp would lead to a massive jump in production, but is unlikely considering the premium that Goldcorp gets for its North American assets and Newmont's declining production outlook.
Even near-production juniors like Osisko Mining (OSK-T) and Detour Gold (DGC-T) may be off the table.
"Our focus is more on earlier stage projects, because that's where we think we can add the most value," Barrick Chief Executive Aaron Regent told Reuters in an interview. "But we won't shy away from buying a producing asset either."
With its limited options in gold, analysts say Barrick's production base could be capped at about 9 million ounces, and it may need more copper deals to keep growing.
"We are concerned that over time Barrick will be faced the 'problem' of how to invest its excess cash to grow cash flow per share, with acquisitions slated toward copper," said Haywood Securities mining analyst Kerry Smith in a note to clients. "This possibility suggests that over time Barrick would move toward being a more diversified miner."
The world's top mining firms, Rio Tinto, Vale and BHP Billiton, are all diversified producers, but gold miners like Barrick get a premium on the stock market for their exposure to precious metals.
If its bid for Equinox goes through, Barrick will see its copper production double this year, with copper accounting for about 20 percent of revenue based on current metal prices.
If Barrick becomes known as a copper producer, it could lose its premium, thus eroding shareholder value. The company has lost about $5 billion in market capitalization, or close to 10 percent, since it announced the Equinox deal on Monday.
But some analysts say now could be the ideal time for investors to get into Barrick -- which is unlikely to make any other major acquisitions in the near term.
"It's a bit like flying the airline that just had a crash," said Stifel Nicolaus analyst George Topping. "They've probably jacked up safety."