Barrick Announces Plan to Eliminate Gold Hedges

September 10, 2009 by · Leave a Comment
Filed under: Stock Market News 

This is pretty big news in my opinion.  Barrick, being one of the world’s largest gold producers is now going “unhedged”.   If you don’t know what that means then here is short little lesson to help you understand the depth is this article.  Hedging works sort of like the futures market does for agriculture.   Mining is a very capital intensive process and it literally takes years to bring new mines online.  Mining producers need to lock in a price for the material they mine (in this case gold) so when they bring it to market, they get a price that is above the cost of production because of the lag time between digging it up and selling the finished product.

This is where the hedge comes in, they basically sell forward delivery commitments on the gold they are going to produce so they “lock” in the price.   This work great when the price drops below the contract value but in Barrick’s case, it has hurt their profitability because they had hedges that were way below the market price of gold.  Now that they are going “unhedged” and if they gold price continues at these levels, you should see more profits coming from this company among others with all things being equal.  DISCLOSURE: I am not a financial advisor and this article or any articles in this website should not be taken as a recommendation to purchase this or any other securities.  Please talk to a registered financial advisor before making any investment decisions.

News (MSN Money Central):

Barrick Gold Corporation announced today that it has entered into an agreement with a syndicate of underwriters, led by RBC Capital Markets, Morgan Stanley & Co. Incorporated, J.P. Morgan Securities Inc. and Scotia Capital Inc., for a bought deal public offering for gross proceeds of approximately $3.0 billion representing 81.2 million common shares of Barrick at a price of $36.95 per share.

Barrick intends to use $1.9 billion of the net proceeds to eliminate all of its fixed priced (non-participating) gold contracts (the “Gold Hedges”) within the next 12 months and approximately $1.0 billion to eliminate a portion of its floating spot price (fully participating) gold contracts (the “Floating Contracts”). A $5.6 billion charge to earnings will be recorded in the third quarter as a result of a change in accounting treatment for the contracts.

Barrick has made this strategic decision to gain full leverage to the gold price on all future production due to:

– an increasingly positive outlook on the gold price. 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; and

– continuing robust gold supply/demand fundamentals.

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