Barrick Gold ends 21 years of gold hedging

(Dorothy Kosich, Mineweb.com) With Tuesday's announcement by Barrick that it was eliminating gold hedges and floating contracts, a 21-year old policy--which transformed the former one-gold mine company into a global gold mining success , but subsequently was derided by analysts, investors and GATA-may finally be put to rest.

As late as 2003, Barrick credited hedging for bring in a total of $2.2 billion in profit. That same year, however, analysts and even the New York Times were complaining the biggest liability to Barrick's stock price was related to its hedging book.

By February 2007, Barrick announced it would eliminate all non-project related hedge contracts, but retain 9.5 million ounces of project-related gold forward sales contracts. The announcement was made by then-CEO Greg Wilkins shortly after Citigroup metals analysts had taken the company to task for not eliminating or aggressively reducing its hedge book.

Citigroup had suggested a move to aggressively reduce the hedgebook would likely drive the gold price higher in the short term; remove a longstanding barrier to ownership for thematic investors; and signal to others that "the last bears have thrown in the towel."

Wilkins responded at the time that the company needed the hedges to help finance its burgeoning project pipeline.

As of September 7, 2009, however, Barrick gold sales contracts-which include both gold hedges and floating contracts have a mark-to-market value of negative $5.6 billion. Barrick finally agreed Tuesday "the gold hedges and floating contracts were adversely impacting the company's appeal to the broader investment community and hence, its share price performance."

On Tuesday, Barrick, now headed by CEO Aaron Regent, announced it had entered into an agreement with a syndicate of underwriters, led by RBC Capital Markets, Morgan Stanley, J.P. Morgan and Scotia Capital, for a bought deal public offering of gross proceeds of US$3 billion representing 81.2 million common shares of Barrick at a price of $36.95 per share.

"The gold hedge book has been a particular concern among our shareholders and the broader market which we believe has obscured the many positive developments within the company," Regent said in a news release Tuesday."As a result of today's decision, we have addressed that concern and maintained our financial flexibility."

Barrick intends to use $1.9 billion of the net proceeds to eliminate all of its fixed price gold contracts within the next 12 months, as well as $1 billion to eliminate a portion of its floating spot price gold contracts. A $5.6 billion charge to earnings will be recorded in the third quarter as a result of the change in the accounting treatment of the hedges.

The company's current gold hedges include 3 million ounces of fixed price contracts where Barrick does not participate in gold price movements. The contracts have a negative mark-to-market position of $1.9 billion as of September 7th. In addition the company has 6.5 million ounces of floating contracts where Barrick fully participates in gold price movements. The current negative $3.7 billion MTM position of the gloating contracts does not change with gold prices. No activity in the gold market is required to settle these floating contracts.

The remaining balance of negative $2.7 billion MTM floating contracts is expected to be repaid or refinanced.

The company said it made the decision to gain full leverage on an increasingly positive outlook on the gold price on all future production. "The company expects global monetary and fiscal reflation will be necessary for years to come, resulting in an increased risk of higher inflation, and a future negative impact on the value of global currencies."

Barrick also cited continuing "robust gold/supply demand fundamentals."

For 2010, Barrick expects gold product to grow to 7.7 million to 8.1 million ounces at lower total cash costs than this year.