Oil's rise spurs Barrick to try a radical solution

By Cameron French - Analysis

TORONTO (Reuters) - Barrick Gold Corp's (ABX.TO: Quote, Profile, Research, Stock Buzz) move to cut its oil bill by buying a small oil producer suggests a radical shift in thinking for miners facing soaring costs, and for junior energy companies it may present a whole new source of suitors.

Barrick, which along with other miners has struggled with rising costs for energy and industrial supplies, said on Monday it will bid C$354 million ($350 million) to take over Cadence Energy (CDS.TO: Quote, Profile, Research, Stock Buzz), an acquisition that would allow it to hedge a quarter of its oil consumption at $20 a barrel.

The move represents a longer-term view than simply buying future oil production, and underscores the degree to which the mining industry is suffering under oil prices that topped $144 a barrel on Monday, analysts said.

"This, in the gold sector, is the first of the real clear strategy of 'let's get in there and manage' it as opposed to just going out and hedging," said gold analyst Barry Allan of Research Capital in Toronto.

Barrick, the world's top gold producer, has already made several somewhat unusual moves to control rising costs, including investing $40 million in wind farms in Chile, and signing a $200 million agreement with Yokohama Rubber (5101.T: Quote, Profile, Research, Stock Buzz) to secure supply of oversized truck tires, whose prices have soared amid a worldwide shortage.

But with energy costs representing a quarter to a third of overall mining costs, other larger players may be tempted to follow Barrick's lead, particularly if mining companies' cash flows continue to be padded by strong metals prices.

"The higher the price of gold or oil or the longer the current prices stay at these levels, the more likely other companies will follow suit," said Ian Nakamoto, director of research at MacDougall, MacDougall & MacTier.

Goldcorp (G.TO: Quote, Profile, Research, Stock Buzz), the world's No. 2 gold miner by market capitalization, wouldn't comment on the Barrick offer or energy acquisitions specifically, but spokesman Jeff Wilhoit said the company is always looking for ways to reduce its exposure to high oil prices.