Barrick’s overpriced Equinox acquisition comes back to bite in US$4.2B writedown – by Peter Koven (National Post – February 15, 2013)

The National Post is Canada’s second largest national paper.

TORONTO – Like many of its mining peers, Barrick Gold Corp. has received its comeuppance for a badly overpriced acquisition.

The world’s biggest gold miner took a humiliating US$4.2-billion writedown on Thursday, mostly tied to its struggling Lumwana copper mine in Zambia. The move acknowledged what investors already knew: Barrick paid far too much when it agreed to buy Equinox Minerals Ltd. (Lumwana’s former owner) for $7.3-billion in 2011.

“The operating results at Lumwana have been disappointing since we acquired Equinox,” chief executive Jamie Sokalsky told investors. “They’ve been unacceptable, actually.”

Barrick’s move is the latest in a string of massive asset writedowns that have scarred the mining industry in the past year. It comes one day after Kinross Gold Corp. announced a US$3.1-billion charge on the Tasiast mine, another asset that was acquired for too much money.

The Barrick impairment is typical of the ones seen across the industry. The company made a huge acquisition at the top of an overheated market. When costs rose more than expected and metal prices cooled off, the carrying value of the asset on its balance sheet had to be reduced. Last month, Rio Tinto Ltd. and Cliffs Natural Resources Inc. took writedowns under similar circumstances.

Writedowns in the mining and steel sectors have reached roughly US$50-billion in the past year, according to Bloomberg. Given that so many of the impairments are goodwill-related and are tied to high-priced acquisitions, they serve as a reminder that management teams should not get carried away with expensive M&A when times are good.

The Lumwana writedown reflects the fact that Toronto-based Barrick now assumes higher operating costs over the life of the mine. Given Lumwana’s disappointing performance, Barrick has scrapped its expansion plans at the operation.

Barrick bought Equinox amid a heated takeover battle that lasted more than four months and involved five different companies. While Barrick paid a high price, it knew that Lumwana contained a huge copper resource and figured it could be mined at a competitive cost. Equinox reported cash costs of just US$1.38 a pound in 2010, a very solid number.

For the rest of this article, please go to the National Post website: http://business.financialpost.com/2013/02/14/barricks-overpriced-equinox-acquisition-comes-back-to-bite-in-us4-2b-writedown/