Forget grade, grams per tonne and reserves. Among the most closely scrutinized metrics in the gold mining business these days is �barrels per ounce.�

Skyrocketing oil prices coupled with the soaring cost of electricity have sharply tempered what should be festive times for gold miners.

Despite bullion prices that recently topped a record $1,000 (U.S.) an ounce, the escalating cost of powering gold mines has crimped profits for almost the entire industry.

Yesterday, the world's largest gold producer decided to do doing something about it. Barrick Gold Corp. is jumping into the oil business with a $354-million (Canadian) unsolicited takeover bid for Calgary's Cadence Energy Inc.
Barrick Gold's Peter Munk is seen here at the mining giant's AGM in 2006.

�[The oil price] is something that we're very mindful of,� Barrick chief financial officer Jamie Sokalsky said in an interview. �We could sit idly by and not do anything about managing those exposures or we can do things like this.�

Toronto-based Barrick believes Cadence's output of 3,600 barrels a day will serve as a hedge for 25 per cent of its direct oil consumption and a significant portion of its natural gas needs.

Barrick's 27 mining operations consume about 3.5 million barrels of oil a year. Diesel-fuelled generators run many of the company's mines and its giant dump trucks and mining equipment drink up thousands more litres per day. Over all, energy accounts for about a quarter of the company's costs, which ballooned to $393 (U.S.) an ounce in the first quarter of 2008 from $224 an ounce during 2005.

David Haughton, an analyst at BMO Nesbitt Burns, said energy cost exposure has become a major issue for Barrick and most other senior gold producers. The situation is so acute that Mr. Haughton recently reviewed the oil price sensitivity for 300 of the industry's top mines.

Barrick's exposure was better than most. Some miners are faced with a $1 increase in the cost of gold production for every $1 rise in the price of oil. For Barrick, every $10 increase in the price of oil means production costs increase by $4 an ounce. �If Barrick is successful, they'll have their own oil producer generating its own profits, revenues and costs. Those profits will partially offset the cash cost exposure that Barrick has got,� Mr. Haughton said.

Over 70 per cent of Calgary-based Cadence's production is light crude oil, which closely tracks diesel prices. The rest of the production from the company's western Canadian operations is natural gas. Barrick operates a natural gas-fired electricity plant that powers its mines in Nevada.

With reserves of some 18.2 million equivalent barrels, Barrick's all-cash offer of $6 (Canadian) a share values Cadence at $20 per barrel. The bid also trumps a stock and cash offer tabled in May by Daylight Resources Trust that valued Cadence at $5.32 a share.

Barrick has tried to defray rising energy costs before. In addition to its Nevada electricity plant, it has announced plans for a $70-million (U.S.) wind farm in Chile to reduce power costs in that region.