www.barrick.com
Barrick is the world’s pre-eminent gold producer, with a portfolio of 27 operating mines, many advanced exploration and development projects located across five continents, and large land positions on the most prolific and prospective mineral trends.
Barrick Gold fully eliminates hedge book
The world largest gold miner, Barrick Gold Corporation (NYSE: ABX, TSX: ABX) says it now has full leverage to the gold price following the elimination of all of its Gold Hedges. Given the recent acceleration of the gold market rally investors welcomed the potential for price appreciation going forward, Barrick’s stock climbed over 5% in opening trades on the New York Stock Exchange this morning.
The gold price has risen from around $750/ounce twelve months ago driven primarily by growing fears over inflation and specifically the decline of the US Dollar. The greenback's decline has increased the relative appeal of physical assets, particularly gold, to protect against further devaluation.
The company first announced its intentions in September. “Our positive view on the gold price led us to accelerate the elimination of these contracts”, said President and CEO Aaron Regent, “we no longer have any gold price related mark-to-market exposure and will now fully benefit from increases in the gold price".
To fund the elimination of its Gold Hedges, Barrick raised $5.1 billion through the issue of new equity in September ($3.9 billion) and the issue of long-term debt securities ($1.25 billion). This latest move represents the final stage in the company’s de-hedging programme.
In the last two years Barrick progressively eliminated its legacy Gold Hedge positions of 9.5 million ounces at a weighted average gold price of $930 per ounce.
In the commodity markets commercial participants often engage in hedging strategies to protect their current production revenues against future uncertainties. Through a combination of simple futures contracts and more complex OTC (Over The Counter) derivatives, commercial producers like Barrick agree to sell their commodities at a future date at pre-determined fixed price.
Whilst these kinds of hedging strategies can protect the company when the price of its product falls, in strong markets hedging, caps potential profits to the pre-determined level. Additionally the commercial producer, in this case Barrick Gold, incurs increasing associated costs or mark-to-market (MTM) liabilities as prices continue to rise beyond the ‘hedge-price’.
Barrick Gold ended its hedging strategies in two ways, firstly through the purchase of corresponding futures contracts to offset the ‘hedging contract’. Secondly the major gold producer also converted some of their fixed hedging contracts into ‘Floating Contracts’, whereby the loss was fixed at a specified level and Barrick will only incur associated financing charges. The Tier-1 gold miner will then participate in any subsequent increase in the gold price. The obligation related to the Floating Contracts has been reduced to $0.7 billion and has primarily 10-year terms with commercial banks.
