Barrick Raising & Spending Billions To Drop Hedging (ABX)

Barrick Gold Corporation (NYSE: ABX) is going to be taking an action which has mixed implications for shares of Barrick versus the overall gold play now that the shiny yellow metal is hitting $1,000.00 an ounce.  The company has engaged a large syndicate of underwriters to raise billions in cash.  This is not to make an acquisition, but rather to remove gold hedging contracts.  With gold hitting $1,000.00 today, it seems that management does not want to leave major upside here in case the gold run-up is just starting.

The underwriting syndicate will be led by RBC Capital Markets, Morgan Stanley, J.P. Morgan Securities Inc. and Scotia Capital Inc.  This is public offering for gross proceeds of approximately $3.0 billion.  This represents 81.2 million common shares of Barrick at a price of $36.95 per share.

Barrick said that intends to use $1.9 billion to eliminate all of its fixed priced gold contracts within the next 12 months and approximately $1.0 billion to eliminate a portion of its floating spot price gold contracts. Raising this cash is showing how much pain out there might be in the company’s past gold hedging.  Barrick will record a $5.6 billion charge against earnings in the third quarter due to a change in the accounting treatment for the contracts.

Barrick called this a strategic decision to gain full leverage to the gold price on all future production.  However, our discussions we have had is that certain contracts were getting underwater and that a huge hedging position from one of the producers might have been what is accounting for the run up in gold to $1,000.00.

Barrick is acting like most gold companies when prices get high as it noted “an increasingly positive outlook on the gold price.”  The company also expects “global monetary and fiscal reflation” to be necessary for years to come and sees “continuing robust gold supply/demand fundamentals.”

For 2010, Barrick expects production to grow to 7.7 million to 8.1 million ounces at lower total cash costs than 2009.  The company noted that as of yesterday its gold sales contracts came to a total of 9.5 million ounces with a mark-to-market position of negative $5.6 billion.

Barrick is a $34+ bllion gold miner and producer, so we are not going to accuse it of catching the top of the market.  In fact, one of our affiliates has a video demonstrating the possibility of $1,200.00 gold.  But there is one thing that has happened before… gold miners (and many commodity producers) have dropped their hedges right at a time when the run-up is getting close to an end.

JON C. OGG