The idea is so wonderfully simple, it seems incredible in retrospect that it took this long for a mining company to take the oil bull by the horns.
Do high oil prices have you down? Buy an oil company. Of course, it helps if you're the world's largest miner of one of the world's most precious resources.
Canada's Barrick Gold (NYSE: ABX ) has announced a hostile takeover bid for Alberta oil producer Cadence Energy, with a price tag of around $350 million. Cadence Energy produces 3,600 barrels of oil equivalent (BOE) per day, and sports an estimated reserve life of 13.8 years.
With a market capitalization of $43 billion, and estimated 2008 gold production of 7.6 million to 8.1 million ounces of gold, Barrick enjoys a scale of production that makes a move into the oil business a no-brainer. Oil represents about one-quarter of total operating costs for Barrick, so producing its own crude for significantly less than it would pay in the market acts as a long-term hedge against rising input costs. Production from this new asset is expected to supply about one-fourth of the company's oil needs, and a significant portion of natural gas consumption.
Considering the company has a power plant in Nevada and investments in a wind farm in Chile, it's clear Barrick Gold is serious about getting energy costs under control. Barrick is not alone. Competitor Newmont Mining (NYSE: NEM ) is investing some $630 million to build a coal-fired power plant in Nevada, while Goldcorp (NYSE: GG ) is mulling such a move for its Penasquito mine in Mexico. NovaGold Resources (AMEX: NG ) has an entire business unit, NovaGreenPower, dedicated to developing hydroelectric power systems near the company's key mining assets.
Barrick made no bones about this move being in response to investor concern. With even low-cost producers like Kinross Gold (NYSE: KGC ) reporting sizable cost increases last quarter, Fools may want to watch costs closely. Between cost-cutting initiatives like this one from Barrick and the potential for rising costs to bolster prices of the underlying metal, however, I don't think investors in most gold miners need to lose any sleep. For getting ahead of the cost curve with this innovative move, Barrick Gold just earned a nod from this Fool as a rock-solid choice in the gold patch.